How to Safeguard Your Crypto Against the Next FTX-like Disaster

By Peter, Content Writer  |  Wednesday, 08 February 2023, 10:39:13 AM IST

How to Safeguard Your Crypto Against the Next FTX-like Disaster

We all know that the world of cryptocurrency can be a bit daunting, especially when it comes to keeping your assets safe. With bad actors lurking around every corner, it's important to take the necessary steps to protect your investments.

I'll be sharing some of the most effective methods for keeping your backups and recovery phrases safe, using privacy-focused wallets to protect your financial privacy and even discussing the importance of self-custody.

I will also be discussing some of the best wallets and tools available on the market, including the Ledger, Trezor, Bitwarden, TornadoCash, Samourai Bitcoin Wallet and BitLox Hardware Wallet.

Control Your Crypto: Avoid Using Centralized Exchanges

When it comes to handling and investing in digital assets, one of the most important decisions you'll make is where to store them. You can leave them on a centralized exchange, or you can take control of your own assets by self-custodying them. As someone who's been in the crypto game for a while, let me tell you: self-custody is where it's at.

Why? Well, there are a few reasons. Let's dive in.

The Lack of Transparency and Accountability on Centralized Exchanges

First things first, let's talk about the transparency and accountability of centralized exchanges. Or, more accurately, the lack thereof. You see, when you leave your assets on an exchange, you're basically entrusting that exchange with your money. And while some exchanges are more trustworthy than others, there's always a risk that you're dealing with a shady operator.

For example, do you know the true regulatory status of the exchange you're using? Are they registered with the appropriate authorities? Are they operating legally? And what about their debts? Are they in the red? Are they using your assets to keep the lights on? You have no idea, because they're not exactly forthcoming with that information.

And let's not forget the whole "insider trading" thing. You know, where the exchange or its employees use their privileged access to information to make trades before the rest of us plebeians get a chance? It's not exactly unheard of.

So, in short: when you leave your assets on a centralized exchange, you're putting a lot of trust in that exchange. And while some of them are trustworthy, there's always a risk that you're dealing with a shady operator. And that's not a risk I'm willing to take with my money.

The Inability to Access Funds During Exchange Downtime or Maintenance

Okay, so maybe you're not too concerned about the transparency and accountability of centralized exchanges. But there's another issue to consider: the inability to access your funds during exchange downtime or maintenance.

You see, centralized exchanges are basically just websites. And like all websites, they can go down. Sometimes it's planned downtime for maintenance. Sometimes it's an unplanned outage. And sometimes it's just because there's too much traffic (looking at you, Coinbase during a bull run).

Now, you might be thinking: "Well, that's not a big deal. I'll just wait until the exchange comes back online." But here's the thing: what if you need to access your funds during that downtime? What if there's a market crash and you need to sell your assets ASAP? What if there's a buying opportunity and you need to buy more assets ASAP? You're out of luck, because the exchange is down.

And it's not just planned downtime or outages you have to worry about. Sometimes, during periods of high volatility, exchanges can experience what's known as "trading halts". This is when an exchange temporarily suspends trading to prevent market manipulation or protect against a sudden influx of traffic.

Now, you might be thinking: "Well, that's not a big deal. I'll just wait until trading resumes." But here's the thing: what if you need to access your funds during that trading halt? What if there's a market crash and you need to sell your assets ASAP? What if there's a buying opportunity and you need to buy more assets ASAP? You're out of luck, because the exchange is halted.

So, in short: when you leave your assets on a centralized exchange, you're at the mercy of that exchange's downtime and maintenance schedules. And while some outages are planned and necessary, others can be detrimental to your financial well-being. And that's not a risk I'm willing to take with my money.

The Possibility of Exchange Insolvency or Bankruptcy

Alright, so maybe you're not too concerned about the transparency and accountability of centralized exchanges or the inability to access your funds during downtime or maintenance. But there's one more issue to consider: the possibility of exchange insolvency or bankruptcy.

You see, centralized exchanges are businesses. And like all businesses, they can fail. Sometimes it's due to mismanagement or fraud. Sometimes it's due to a lack of liquidity. And sometimes it's due to external factors beyond their control.

Now, you might be thinking: "Well, that's not a big deal. I'll just withdraw my assets before the exchange goes bankrupt." But here's the thing: what if you don't know the exchange is going bankrupt? What if the exchange freezes withdrawals before you have a chance to withdraw your assets? What if the exchange declares bankruptcy and all your assets are frozen or lost? You're out of luck, because the exchange is insolvent.

We can take the example of FTX, Bahamas-based cryptocurrency exchange that began its bankruptcy in November 2022. The collapse of FTX was caused by a liquidity crisis of the company's token, FTT. Prior to its collapse, FTX was the third-largest cryptocurrency exchange by volume and had over one million users. As a result of this event, many of the funds were lost and the ripple effect across the cryptocurrency industry, with the price of Bitcoin falling to its lowest level in two years. Anonymous sources cited by the Wall Street Journal 10 November 2022 stated that FTX had lent $10 billion from customers' accounts to fund Alameda Research earlier in 2022, a move forbidden by FTX's terms of service.

So, in short: when you leave your assets on a centralized exchange, you're at the mercy of that exchange's financial stability. And while some exchanges are financially stable, others can be on the brink of collapse. And that's not a risk I'm willing to take with my money.

Self-custody is the way to go when it comes to handling and investing in digital assets. It may require a bit more work on your part to set up and maintain, but the peace of mind you'll have knowing that your assets are safe and secure is worth it. And let's be real, you don't want to be the person who's kicking themselves for not taking control of their assets when the next FTX happens. So, do yourself a favor and self-custody your assets today.

Practice Self-Custody: Tips for Keeping Backups and Recovery Phrases Secure

So you've taken the plunge and decided to self-custody your digital assets. Congrats, you're well on your way to becoming a crypto-savvy individual. But there's one more important step you need to take: keeping your backups and recovery phrases safe.

You see, the beauty of self-custody is that you're in control of your own assets. But the downside is that you're also responsible for keeping your assets safe. And if your backups or recovery phrases fall into the wrong hands, your assets will be at risk.

Don't worry though, I'm here to help. In this section, I'll be sharing some ideas on how to keep your backups and recovery phrases safe. So let's dive in.

Use a Hardware Wallet to Store Your Cryptocurrency

The first and most obvious idea for keeping your backups and recovery phrases safe is to use a hardware wallet. A hardware wallet is a physical device that stores your private keys offline, away from the prying eyes of hackers and other bad actors.

There are a few advantages to using a hardware wallet over a regular software wallet. For one, hardware wallets are much more secure. Because your private keys are stored offline, they're much less susceptible to hacking and other types of cyber attacks.

Another advantage of hardware wallets is that they're easy to use. Most hardware wallets come with a simple interface that makes it easy to send and receive cryptocurrencies.

There are several hardware wallets on the market, but two of the most popular ones are the Ledger and Trezor. Both of these wallets offer great security and ease of use, so you really can't go wrong with either one.

Use a Password Manager to Securely Store Digital Copies of Backups and Recovery Phrases

Another idea for keeping your backups and recovery phrases safe is to use a password manager. A password manager is a software that allows you to store your passwords and other sensitive information in a secure, encrypted format.

There are a few advantages to using a password manager to store your backups and recovery phrases. For one, password managers are much more secure than storing your backups and recovery phrases in a plain text document. And two, password managers make it easy to store multiple copies of your backups and recovery phrases in different locations.

There are several password managers on the market, but one of the most popular one is Bitwarden. Bitwarden is an open-source password manager that offers great security and ease of use, so you really can't go wrong with it.

Use a Multi-Sig Wallet That Requires Multiple Keys to Access the Recovery Phrase

The last idea for keeping your backups and recovery phrases safe is to use a multi-sig wallet. A multi-sig wallet is a type of wallet that requires multiple keys to access the recovery phrase.

There are a few advantages to using a multi-sig wallet over a regular wallet. For one, multi-sig wallets are much more secure. Because multiple keys are required to access the recovery phrase, it's much more difficult for hackers and other bad actors to steal your assets.

Another advantage of multi-sig wallets is that they offer an added layer of security for businesses and other organizations. For example, if a company uses a multi-sig wallet, multiple employees would need to sign off on a transaction before it can be executed.

There are several multi-sig wallets on the market, such as Electrum, BitGo, and Casa. These wallets offer great security and ease of use, so you really can't go wrong It is worth mentioning that when it comes to multi-sig wallets, it is important to be aware of the number of keys required to access the recovery phrase. Some wallets may require two keys, while others may require three or more. Also, it is important to consider who will be responsible for holding each key.

For example, if you're an individual, you may want to keep one key in a secure location at home, another key on a hardware wallet, and the third key with a trusted friend or family member. This way, if you lose one key or it gets stolen, you can still access your assets with the other two keys.

For a business, it may be a good idea to have different keys held by different departments or individuals within the organization. This way, no single person or department has complete control over the assets.

Keeping your backups and recovery phrases safe is an important step in self-custodying your digital assets. And while there are many ways to do this, using a hardware wallet, a password manager, and a multi-sig wallet are all great options.

It's worth taking the time to research and find the best solution for you. And remember, the most important thing is to always have multiple copies of your backups and recovery phrases in different locations, and to keep them secure.

So, whether you're an individual or an organization, be sure to take the necessary steps to protect your backups and recovery phrases, and your assets will be safe and sound.

Best Self-Custody Privacy-Focused Protocols and Wallets

So you've taken the plunge and decided to self-custody your digital assets. You've also taken the necessary steps to keep your backups and recovery phrases safe. But what about protecting your financial privacy?

You see, when you make transactions on a public blockchain, your balance and transaction history are exposed for all to see. And while this may not seem like a big deal, it can lead to a number of problems. For example, your employer or government may be able to see your financial activity. Or hackers may be able to target you based on your transaction history. And let's not forget about the risk of identity theft.

That's why it's important to use a privacy-focused wallet when self-custodying your digital assets. In this section, I'll be sharing some ideas on how to use privacy crypto wallets to protect your financial privacy. So let's dive in.

TornadoCash - Privacy Solution for Ethereum

The first privacy-focused protocol I want to talk about is TornadoCash.sh. TornadoCash is a privacy-enhancing technology that allows users to make anonymous transactions on the Ethereum blockchain. It's a decentralized platform that uses zero-knowledge proofs to hide the transaction details, such as the sender, receiver, and amount transferred.

One of the key advantages of TornadoCash is that it supports a wide variety of networks and tokens. This means you can use it to make anonymous transactions with any ERC-20 token, not just Ethereum.

When using TornadoCash, it is important to keep in mind a few safety tips. First, make sure you're using a reputable version of the platform. Second, be sure to use a unique address for each transaction to increase your privacy. And third, avoid reusing addresses, as this can decrease your privacy.

Samourai Bitcoin Wallet

The next privacy-focused wallet I want to talk about is the Samourai Bitcoin Wallet. Samourai is one of the leading mobile privacy wallets for Bitcoin. It's branded as "a Bitcoin wallet for the streets" and comes with a number of unique privacy features.

One of the key features of Samourai is its built-in IP-address anonymization. It supports both TOR (The Onion Router) and VPN (Virtual Private Networks) to help hide your IP address. This makes it much more difficult for hackers and other bad actors to track your transactions.

Another great feature of Samourai is that it generates a new public address with every new transaction. This makes it much more difficult for anyone to track your transaction history.

In addition to these features, Samourai also offers alerts that prevent you from using the same address, a Ricochet send feature that sends your transaction through multiple BTC addresses before reaching the destination account, and Stonewall transaction protection that increases the difficulty of linking transaction inputs, outputs, and metadata.

It is important to note that at the moment, Samourai wallet is available only for Android devices. But the iOS version is in the making.

BitLox Hardware Wallet

The last privacy-focused wallet I want to talk about is the BitLox Hardware Wallet. BitLox is a hardware wallet that lets you create up to 100 distinct wallets, including hidden ones with an unlimited number of addresses.

One of the key advantages of BitLox is its packaging to deliver privacy according to individual needs. There are three variations of BitLox wallet: BitLox Advanced, BitLox Ultimate, and BitLox Extreme Privacy Set.

The BitLox Advanced is the standard version that lets you keep up to 100 wallets with countless addresses. The BitLox Ultimate supports the ability to hide up to 50 of your created wallets, and the BitLox Extreme Privacy Set is a complete set of Bitcoin hardware wallet and a military-grade USB vault with the preinstalled Tails operating system with Tor-compatible web tool.

All variations of the wallet come with a 5-year guarantee. At the moment, the wallet supports only Bitcoin, but support for Ethereum and other altcoins is in development.

It's worth noting that when using BitLox, it's important to keep in mind the same safety tips as with any other hardware wallet. Be sure to keep your recovery phrases safe and secure, and don't share them with anyone.

Protecting your financial privacy is an important step in self-custodying your digital assets. And while there are many ways to do this, using a privacy-focused wallet is one of the best options. TornadoCash, Samourai Bitcoin Wallet, and BitLox Hardware Wallet are all great choices for privacy-focused wallets. Each of them offers unique features and advantages, so be sure to research and find the best option for you.

Remember, it's important to take the necessary steps to protect your financial privacy and keep your assets safe. So whether you're an individual or an organization, be sure to use a privacy-focused wallet and stay anonymous on the blockchain.

Well, that's it folks! We've covered a lot of ground in this guide on how to protect your cryptocurrency. From the importance of self-custody to using privacy-focused wallets, we've covered all the key aspects of keeping your digital assets safe and secure.

I hope you found this guide helpful and informative. It's important to remember that the world of cryptocurrency can be a bit overwhelming at times, but with the right tools and knowledge, you can protect your assets and stay ahead of the curve.

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