Not your keys, not your crypto. If Mt Gox didn’t hammer home that lesson, FTX likely will. The Mt Gox exchange — the first big-name exchange — lost everyone’s funds in 2014, and it was an early lesson that you couldn’t trust central parties.
Which is the whole point of crypto after all!
Unfortunately, a lot of people keeping their crypto on Celsius, FTX, BlockFi, and many more centralised platforms are learning this lesson too late.
But as I’ve always said, you should never trust central parties to store your crypto.
It’s just not safe, and it’s not the crypto ethos either.
And it’s especially important now. Because if the contagion from FTX is indeed widespread, things could deteriorate very fast in all sorts of exchanges, including some here in Australia.
On Thursday, prominent crypto broker Genesis halted withdrawals at its lending unit, after ‘abnormal withdrawal requests which have exceeded our current liquidity’.
Eyes are now on Crypto.com, with its Chief Executive Kris Marszalek saying he will publish proof of the Singapore-based exchange’s reserves ‘within weeks’.
Clearly, risk of contagion is rising.
And while I think this will be good for crypto long term, as it wipes out the bad actors, you don’t want to get caught in the fallout.
So your priority should be to store your crypto in wallets only you control.
This is not that hard to do but does involve you exercising common sense.
For one, correctly backing up your seed phrase is critical.
Remember, your seed phrase acts like your crypto wallet’s master key and can help you access your wallet.
Lose your wallet but have your seed phrase? Recoverable.
Lose your seed phrase but have your wallet? Transferable.
Lose both? Regrettable. All your funds are gone.
You know you need to back up your seed phrase. But what you might not realise is there are many wrong ways to back up your seed phrase.
How can you be sure if you made any mistakes?
Take this five-question quiz to find out.
Five questions to help you protect your crypto
Each question is a test of your backup’s safety. They are:
- Will your backup survive a hacker?
- …a natural disaster?
- …bad memory?
- …spring cleaning?
- …your unexpected death?
If you answer no to any one test, you may want to consider improving your set-up.
Test #1: Will your backup survive a hacker?
Let’s say an attacker has remote access to your device. Are your keys still safe?
The only way you could answer yes to this question is if you never ever typed out or copied your seed phrase on an internet connected device.
You should always store your backup offline.
While the convenience of using a password manager or a text file can be tempting, you can never be sure if your seed phrase is really safe from prying eyes if you store it on an internet-connected computer.
Test #2: Will your backup survive a natural disaster?
Imagine your home is levelled by an earthquake, burned in a fire, or submerged in a flood.
Are your backups still good?
You should always protect your backups from natural disasters.
Practically speaking, that usually means stamping your seed on a fire-resistant metal plate or putting your backup inside of a container that is water, fire, and collision proof (like a heavy duty safe).
Test #3: Will your backup survive bad memory?
Store your backups somewhere that other people can’t access, but don’t outsmart yourself.
If you forget where your backup is, chances are, nobody can help you remember.
Test #4: Will your backup survive spring cleaning?
You should make sure that your backups can’t be mistaken for trash by you or the people around you.
Avoid close ones mistaking your treasure for trash.
Test #5: Will your backup survive your death?
Now here’s a quandary. While you’re alive, nobody else should be able to access your backups.
But when you’re dead, you need somebody to be able to access your backups! Or else they’re gone forever.
So what do you do?
I expect better wallet solutions to be created to this problem over time. But for now, it involves either trusting another person (i.e. your executor) like an adult child or spouse.
Or you can distribute your private keys to several parties so none of them can do anything alone. For example, you may give 12 words to your child and 12 words to your executor/lawyer. Just make sure they can’t collude against you!
In conclusion, just be sure you’re comfortable with any solution you come to.
By the way, I’ve written plenty about cold wallets and wallet set-ups to subscribers of my premium crypto advisory service here.
I’ve also just released a report on why I think Bitcoin [BTC] can hit US$1 million by 2030.
I know, sounds crazy. And the timing couldn’t have been worse.
But I’m a bitcoin optimist.
I believe over the long-term facts usually win out.
And when it comes to bitcoin’s economics, these facts will become clearer in time.
Stay safe and stay informed!
Good investing,
Ryan Dinse
