Tuesday, March 21, 2023 | Sha'ban 28, 1444 H
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How to reduce or avoid crypto risk

Many readers might have come across the word FTX in the past few weeks and linked that to the entire crypto industry. I am writing this column as someone who works in the industry and to point out some facts that might - on the one hand - take credibility away from some crypto players, and on the other hand strengthen the commitment to further develop the industry for those who have good intentions. Because I work for a liquidity provider, market maker, and venture capital firm, I need to clarify that these are my own opinions, and not necessarily the position of the firm I work for.

A quick recap of the facts first. The largest crypto exchange in the world by volumes is Binance. Binance was also one of the early investors in the second largest crypto exchange: FTX. About a month ago, FXT came under fire when the CEO of Binance Changpeng Zhao, commonly known as "CZ", sent out a tweet describing how - in layman terms - Binance was stepping back from supporting and participating in FTX due to some unspecified risk concerns. Within a matter of hours, documents and evidences were released to indeed validate CZ’ concerns. By the end of the day, chaos had already filled the markets, with a massive wave of fear, uncertainty and doubt (FUD).

The next 36 hour were some of the most bizarre hours in the crypto history. Everyone started pulling out their funds from FTX fearing that withdrawals might have been suspended. That generated a spillover of funds from more risky accounts to the less risky ones exposing the lack of risk mitigation in the way FTX was managing the funds of the clients.

So, if you are catching up with the story, now, you might have heard that centralized exchanges are more risky than decentralized exchanges in crypto. To a certain extent, that’s really true because when you put your crypto on a centralized exchange, you are not really owning the funds, but you are entrusting the centralized exchange with your tokens. Generally speaking, centralized crypto exchanges are supposed to be safer than decentralized exchanges because of the regulatory guidelines that they are supposed to follow. In the case of FTX however, the malpractices were obvious, and the funds of the clients were jeopardized.

On the contrary, decentralized exchanges are entirely in your hands when it comes to protecting your funds. That is because your cryptocurrencies are linked to the access keys that the exchange gives to you when you create your wallet. The obvious risk is that you might lose the keys to your decentralized wallet.

In that case, there is nothing much that you can do to recover your cryptocurrencies.

Another safe option to keep your cryptocurrencies is to use a cold storage wallet. This is a hardware device that you connect to your computer to access your wallets. If you lose the device, you can buy another one and recover your funds using the same key words that were given to you when you creating the wallet.

Having your cryptocurrencies on a cold storage wallet keep them safe but does not provide you with the flexibility that you need if you want to trade regularly. A mix of all safekeeping could be a rational thing to do.

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