The purpose of this article is to provide the pros and cons of each method of securing your cryptocurrency as well as provide some tips on how to ensure you are not scammed and lose a significant portion of your holdings.
Centralized Exchanges / Wallets – The most common method of securing cryptocurrency today is on centralized exchanges like Coinbase, Binance, Gemini, FTX, and Kraken. Some other entities like Crypto.com, Robinhood, Paypal, Celsius, and BlockFi also hold your private keys and therefore control your cryptocurrency assets.
However, it’s important to introduce a portion of Satoshi Nakamoto’s original bitcoin whitepaper. Here, he describes bitcoin as “A purely peer-to-peer version of electronic cash that would allow online payments to be sent directly from one party to another without going through a financial institution.” Each of the “institutions” stated above would be frowned upon by Satoshi as they are layers of separation between you and your assets. Each level of separation increases the attack surface for hackers to gain access to your cryptocurrency and personal data. Since 2012, $2.66 billion dollars has been stolen from centralized exchanges. In many instances, the victims are still awaiting reparations.
*Source: https://www.hedgewithcrypto.com/cryptocurrency-exchange-hacks/
Centralized Custody: What are the Benefits?
The only real benefit I see with using centralized entities is their user experience is similar to your online broker. However, assuming you get good customer service is short-sighted. Social media is full of posts from people who cannot get the level of support they expect to access their funds, especially during significant market volatility.
If you are new to cryptocurrency or have assets on centralized exchanges or wallets, I recommend you learn all you can about taking custody of your own crypto assets, using a decentralized solution like Sanctuary DEX. The goals of Sanctuary DEX are straightforward; “We Make Cryptocurrency Useful”.
Link: https://sanctuarydex.com/
Decentralized Wallets: What are the Benefits?
- Mitigates the risk of losing funds due to hacking. Centralized exchanges are huge “honey pots” for hackers and $2.66 billion has been lost since 2012.
- Prevention of market manipulation due to wash trades or fake trading.
- Nomics.com has a Transparency Volume metric that grades an exchange’s trading activity. The lower the grade, the more likely they are manipulating asset prices through wash and/or fake trading.
- *Source: https://nomics.com/exchanges
- Nomics.com has a Transparency Volume metric that grades an exchange’s trading activity. The lower the grade, the more likely they are manipulating asset prices through wash and/or fake trading.
- Total access and control over your assets 24 hours a day, year-round, even during bank holidays!
- Pseudo-anonymity of your financial activity. Your personal information is not tied to your cryptocurrency transactions! Only your wallet address is recorded on the blockchain. Centralized exchanges know your wallet addresses and link your personal information. As a result, they could be forced to disclose your activity by regulators.
- Complete portability. While I don’t recommend trying to commit your private keys to memory ONLY, you could travel globally and recreate your wallet at will. You would just need internet access and a software wallet like one of the ones available from Sanctuary DEX. Once created, your wallet and private keys grant you access to any cryptocurrency you control with those keys.
How to Avoid Scams
For mobile users:
- Contact your carrier and request a SIM lock PIN number. This prevents a rogue employee or hacker from cloning your phone and accessing your data. Secure your PIN separately from your private key!
- Use 2-factor authentication (2FA) or biometric identification when available.
- Avoid SMS authentication, if possible, especially if 2FA or biometric ID is available.
- Do not keep much of your cryptocurrency on a “hot” or mobile wallet as these funds should only be used for planned purchases.
- Avoid using public hotspots and never click on attachments or links where you do not know the sender.
For mobile and desktop users:
- Keep your software up to date with the latest security updates as hackers often reverse-engineer updates to identify vulnerabilities in the previous software version.
- Bookmark legitimate web links and avoid clicking links in emails as they may be phishing attacks, sending you to roque websites to steal your login information or private keys.
- Use a secured VPN service where permissible as laws vary by country. Source: https://www.forbes.com/advisor/business/software/why-use-a-vpn/
- Never screenshot or save your private keys in the cloud or in any electronic form! (See #1 above)
- Private keys should be written down on paper and saved in at least two different locations significantly apart from each other.
- NEVER share your private keys with ANYONE! Do not assume your crypto holdings will never become a significant amount financially! (I wonder how many waiters and waitresses retired when their Doge went up over 16,000%!)
The purpose of this article was to provide the pros and cons of each method of securing your cryptocurrency as well as provide some tips on how to ensure you are not scammed and lose a significant portion of your holdings. By no means is this list exhaustive as new scams and levels of protection to combat them are ever-evolving.
Author: Stephen Stubblefield, Sanctuary DEX Technical Advisor