Tuesday, January 18

Are your cryptocurrencies safely stored?


Although the demand for cryptocurrencies is on the rise again, few investors appreciate the risks associated with storing their cryptocurrencies.

Most choose to buy cryptocurrencies directly through an exchange and keep these assets in their exchange wallet rather than appointing a broker to run the exchange and a custodian to store the cryptocurrencies.

Exchanges and, by extension, their customers, have been the victims of billions of dollars in theft.

Hackers target users of exchanges with sophisticated spoofing techniques (for example, by using emails for you to reveal confidential information such as passwords) and exploit vulnerabilities in the storage and security systems of the exchanges. main exchanges.

Unfortunately, as the assets held on exchanges increase, so does the threat of hacking. Viewed as ‘honeypots’, exchanges are continually being targeted, leaving users vulnerable.

Cryptocurrency exchange hacks

Source: Fintechnews

A recent exploitation of a Poly Network smart contract (although it is not an exchange platform) per se) provides a stark reminder of this ubiquitous threat. The attack resulted in the theft of digital assets worth more than R8.4 billion (some funds were later returned by hackers).

What alternative storage options do investors have?

Most cryptocurrency exchanges provide investors with the option to transfer their cryptocurrency to an alternative exchange or storage device. This option allows investors to decide which storage solution best suits their needs.

Alternative storage methods include:

Paper wallet: Since cryptocurrency is simply a long chain of information, investors can remove their cryptocurrency from an exchange and record their keys on a piece of paper. The obvious risk associated with this option is that the paper is trivial to copy, can be easily damaged, and becomes unreadable over time.

Hardware Wallets: A hardware wallet is a dedicated device designed to store private cryptocurrency keys. These devices are significantly less vulnerable to external attacks, but require technical knowledge for their effective use. There is also the risk that the device will be lost, stolen or damaged.

Third party custodian: This is the option of outsourcing the storage of cryptocurrencies to a custodian. The client enters into a legal agreement in which they designate the custodian to securely store their digital assets.

Custodians

Custodians of digital assets are similar to companies that provide the physical security used to protect precious metals, except that these vaults exist in the digital realm.

As a result of the continued rise in the value of cryptocurrencies, custodians have seen a sharp increase in demand for their services.

Normally, people would not keep 100,000 rand under their mattress, and they should not be comfortable with large amounts of cryptocurrency stored on insecure devices or in their bedroom closet.

Custodians are sought after for their proven security methods, which are otherwise too technical or too complex for many crypto holders to implement themselves, providing clients with comfort and peace of mind.

Key features include multi-signature storage, strict operating procedures, no single access point, redundant emergency backups, and estate planning.

Cryptographic security options

Source: Jaltech

It doesn’t take a cryptocurrency expert to figure out that an offline storage solution with multi-signature access is by far the most secure form of cryptocurrency storage, offering strong protection and still convenient for transacting. when necessary.

Additionally, for institutional investors, most external custodians offer customized multi-signature solutions that can be tailored based on the institution’s internal requirements.

The best option for a person or institution to store cryptocurrencies will depend on their unique needs and situation, such as:

  • The value of the coins
  • The required access frequency
  • Commercial frequencies
  • Risk appetite and
  • Country specific regulations.

What these investors need to consider is whether it is the best decision to hold their cryptocurrency on an exchange, and if not, what is the best alternative storage solution for them.

Andoni Nicolau is Director of Digital Assets at Alternative Investment Fund Manager Jaltech.


www.moneyweb.co.za

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