"Not your Keys? Not your Coin."
If all of your crypto is on an exchange, do you really own it?
If your exchange has all of its assets stolen, or if a rogue employee decides to walk away with the company's coffer, how would you get your money back?
The short answer is you won't.
There is little to no protection for a crypto investor whose assets are kept with a third-party company. The FDIC won't protect you from any losses if your exchange goes belly-up. Law enforcement won't likely lift a finger if your off-shore gambling site just decides that they don't want to honor your deposit.
Why is your Crypto in Jeopardy?
There are 3 major dangers that put your coins in peril:
- Mismanagement (by inexperienced startup companies)
- Malice (by crooks)
- Misconduct (by you)
Mismanagement
Everyone in Crypto Is Inexperienced
If you need a great attorney, there are over million to choose from in the US. If you need a great accountant, there are also over a million.
And both of these professions have well established certification processes to ensure the "professionals" know what they're doing. You can make sure your attorney is a member of the state bar association and you can verify that your accountant is a Certified Public Accountant.
However, there isn't a widely recognized certification process for cryptocurrency professionals. Even the highly-regarded "experts" only have a few years of experience working with it and they mostly learned it on the job or by reading whitepapers and blogs. Crypto has really only existed since 2009, when the Genesis Block of Bitcoin was mined.
Everyone in Crypto Loves Risk
And nearly EVERYONE involved in crypto could be categorized as a risk taker. Most people get into crypto because of its potential to reach stratospheric highs for those willing to risk a substantial amount.
A lot of that risk is due to crypto's historical association with criminal activity, its extreme volatility, and because it's a brand new industry that has only existed for a decade. These risks aren't inherent in most other industries.
And all of these factors are compounded on top of the extraordinary amount of risk-taking already associated with technology start-ups.
Crypto Companies are like Tech Startup Companies on Steroids
I've worked with many non-crypto startups and I've seen them sacrifice legal compliance and strong security for the ability to "move fast and break things" as Facebook CEO Mark Zuckerberg so famously put it. Crypto companies take this to a COMPLETELY different level. A lack of security is a major reason why cryptocurrency companies fail.
Mt. Gox
740,000 BTC Stolen
In June 2014, the largest Bitcoin exchange was being run by Mt. Gox, a website originally created to trade "Magic: The Gathering" cards (MTGOX originally stood for "Magic: The Gathering Online eXchange").
That month, Mt. Gox announced that 740,000+ Bitcoin went missing (then only worth $400M, and in 2022 worth almost $30 Billion), likely stolen by hackers. Their customers were never made whole.
Bitfinex
120,000 BTC Stolen
In 2016, almost 120,000 BTC (then worth around $60M USD and now worth more than $4 BILLION) was stolen from Crypto Exchange site Bitfinex. At the time, this represented about 30% of customers' holdings and all customers were forced to take the brunt of the loss.
Customers were "compensated" by being issued Bitfinex's BFX tokens at a rate of 1 token for every dollar lost (30% of each customer's holdings). So if you had $100 of Bitcoin at the time of the breach, you still had $70 worth of (non-stolen) BTC and you were issued 30 BFX tokens for the $30 deficit in value. Within a few months all of those tokens were exchanged for stock in Bitfinex's parent company, iFinex. Apparently trading these tokens for stock was the only way to redeem them for any real value.
If customers were able to hold on to their BTC, they would have seen it appreciate from $600 at the time of the theft to today's price of over $44,000. Instead, they were issued a fraction of their worth in the stock of Bitfinex's shitty company.
Malice
Turkish Crypto Exchange Thodex
$2 Billion USD reportedly stolen by CEO
In April 2021, Faruk Fatih Özer, CEO of the Turkish Crypto Exchange Thodex, reportedly fled to Albania after $2 Billion worth of customers' assets went missing. He is currently on the lam, leaving Thodex's 400,000 customers high and dry.
Wixiplay Casino
Online Casino cheats and doesn't honor Crypto withdrawals
claims Gambling Expert
There are several online casinos out there that offer Cryptocurrency transactions as a method for making deposits. This is one way that they are able to get around US laws like the Unlawful Internet Gambling Enforcement Act (UIGEA), which prevent a US-based bank from making a deposit to an online gambling site.
But for sites like Wixiplay, that's not the only way that they skirt the rules, according to gambling expert, Michael Shackleford (aka the "Wizard of Odds").
Wikiplay had a provably unfair dice game, and to make matters worse, they have been accused of not honoring withdrawal requests. Shackleford's has documented his struggles with getting his crypto withdrawn from their site in the linked video above.
Not every online casino is malicious, but you really have to be cautious if you're going to use crypto to gamble online.
Misconduct
When I say "misconduct," I'm actually speaking about your misconduct. And when I say "your misconduct," I actually mean someone else's notion of what defines misconduct, and whether or not your actions fit that definition.
For example, many people are clamoring for crypto sites to freeze the accounts of ANY Russian national in response for Russia's current war with Ukraine. This includes any Russian player, not just Oligarchs who may be funding the war. This is due to the perception that anyone from Russia is bad, not due to actual wrongdoings.
At the moment, the crypto sites have continued to allow Russian customers to access their funds, but the situation feels like it could change at any moment. We've already seen sites like Poker Stars block players from both playing and making cash (non-crypto) withdrawals.
Silk Road
144,000+ BTC Seized
In 2013, the one of the largest Crypto sites was being run by a 29 year-old named Ross "Dread Pirate Roberts" Ulbricht. He ran the Dark Web site "Silk Road", which had taken in over $80 million in fees.
Ulbricht oversaw over $1 BILLION in transactions through his site, which facilitated the sale of illegal drugs, fake IDs, and many other illicit items. He got caught after bragging on LinkedIn about running a multi-million dollar drug marketplace.
When the site was shut down in 2013, the FBI seized 144,000+ Bitcoin, including 26,000 BTC of Silk Road's customers' balances. That cache of Bitcoin was never returned to Silk Road customers. Due to the nature of the illegal purchases the customers were involved in, I doubt many of those people are going to come forward to stake their claim to their lost coin.
Take your Crypto off the Sites
When you don't have complete control over your money (both crypto and fiatFiat is traditional cash in a well established currency such as the US Dollar. This is opposed to cryptocurrencies, which are digital currencies, supported by a blockchain. ), it's subject to being taken from you, and there are many reasons to believe it will be taken.
I've had money taken away from me by PayPal because someone fraudulently lied to them about an eBay sale that I made and delivered as described.
I know people who have had their Venmo accounts locked because the transaction comments mentioned the word "poker".
I've had my NETELLER account frozen for months because I moved to a different country and they thought I was trying to commit fraud.
If you entrust a large part of your life savings to a company that isn't safeguarded by established practices and regulatory protections, you shouldn't be surprised if you lose access to it all.
So, to prevent yourself from being locked out of your funds due to their crappy management, their interpretation of your actions, or their straight up thievery, you should move your crypto off of exchanges, and interest earning sites.
The best place to keep your crypto is in a crypto wallet. A crypto wallet allows you to receive and send crypto to any recipient, whether it be a church, a hospital, a gambling site, or a marijuana dispensary. When your coins are securely held in a wallet, no one else's incompetency or malice will result in you losing your money, and no one can freeze your account.
You can purchase a hardware wallet made by a trustworthy manufacturer like Trezor or Ledger. In the next few days, we'll teach you how to setup and secure a hardware wallet, so stay tuned!
