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By Jonty Sacks & Chris McCormick
A concern for many cryptocurrency investors is the stories associated with cryptocurrency exchange hacks, missing funds, and investors being unable to access their cryptocurrency due to forgotten passwords. In most of these instances, the investors are not to blame and unfortunately won’t be able to retrieve the lost cryptocurrency.
Wallet and exchange attacks have become commonplace, and they appear to be increasing as the cryptocurrency market grows. One doesn’t have to look far to see just how real this threat is. In January this year, a global and well-known cryptocurrency exchange was hacked and had USD 34 million stolen from its exchange wallets. A month earlier, hackers accessed another exchange and made off with USD 150 million and just last week 8000+ Solana wallets were hacked resulting in millions of Dollars being stolen. Sadly, in many of the above cases, the affected investors didn’t get their funds back.
What investors need to be mindful of is the risks associated with cryptocurrency investing as well as the storage options to safeguard their investment.
Breaking down some of the risks:
South African investors face numerous risks when holding cryptocurrencies on a cryptocurrency exchange App or digital wallet on their phone, these include:
Criminality:
The risk of criminals forcing investors to transfer their cryptocurrencies to an anonymous account happens frequently enough that it has its own industry term “a $5 wrench attack” – referring to the fact that if an investor carries large amounts of cryptocurrency on their cell phone an attacker does not need to have sophisticated software to gain access to it, just a threatening physical weapon.
This risk is significant given the country we live in, hence investors should avoid walking around with large amounts of cryptocurrencies stored on their cell phone.
Exchange risk:
Exchanges have been targeted for years by cybercriminals as large volumes of value are stored centrally on their platforms. Thus, by successfully hacking an exchange, criminals have access to billions of Rands of value which can be transferred to an anonymous account and become irrevocable. Within the industry, exchanges are termed “honeypots” as all the honey is stored in one location.
For information about Jaltech’s Cryptocurrency Basket, click here.
Accessibility risk:
Investors often fail to provide their partners, heirs, or financial advisors with the necessary information to locate and access their cryptocurrencies. Therefore, tracing and accessing an investor’s cryptocurrencies upon death can, in many instances, be impossible. An additional risk is that an investor loses, forgets, or incorrectly backs up their password and consequently will never be able to access their cryptocurrencies.
How to protect your cryptocurrency
As covered in a previous article there are a few storage options for investors to choose from:
On-exchange: Investors can keep their cryptocurrency on their cell phones using their cryptocurrency trading apps. For the reasons mentioned above, this is a high-risk approach.
Paper wallet: Investors can remove their cryptocurrency from an exchange and record their keys on a piece of paper. This approach contains risks such as it being easy to copy, being misplaced and becoming illegible/damaged over time.
Hardware wallets: A hardware wallet is a dedicated device (similar to a USB stick) designed to store private cryptocurrency keys. These devices are significantly less vulnerable to external attacks but require technical knowledge to use effectively. There is also a risk that the device can be misplaced, stolen or damaged.
Third-party custodian: This is the option of outsourcing cryptocurrency storage to a company specialising in cryptocurrency custody.
For information about Jaltech’s Cryptocurrency Basket, click here.
Understandably, the ease and convenience of holding cryptocurrency on an exchange are favoured by most investors. However, as history has taught us, these exchanges are frequently targeted by hackers as they centrally hold hundreds of millions of Rands worth of cryptocurrency.
For more conservative investors, third-party custodians generally provide investors with a more dependable and safer way of storing their cryptocurrencies. This type of service is aimed at investors who recognise the long-term value of cryptocurrencies and the risks related to their current storage option but do not want to deal with the technical side of securing their cryptocurrencies themselves.
As they say in precious metals investor circles “if you can’t hold it, you don’t own it”, the same applies in the cryptocurrency space – not your keys, not your crypto. As investors build their cryptocurrency portfolios it would be prudent for them to manage the security of their assets in the best way possible, and to do so with a solution that provides protection from physical and cyber-attacks as well as human error.
- Jonty Sacks & Chris McCormick – Jaltech Fund Managers
Jaltech offers investors exposure to a basket of cryptocurrencies which is selected and managed by a team of cryptocurrency experts.
For information about Jaltech’s Cryptocurrency Basket, click here.
Read also:
- Why I am investing in crypto right now
- If you thought of owning some Bitcoin, maybe you should also consider a few other cryptos too
- CrypTalk ep1 – What is a blockchain? And how crypto regulations have been introduced around the world
