Cryptocurrencies have become a $1 trillion asset class over the past decade, drawing interest among businesses, consumers, investors – and thieves. The digital-native and immutable nature of crypto transactions makes cryptocurrencies riskier than conventional financial assets, making it essential to adopt security best practices.
In this guide, you’ll learn how to choose the right platforms, adopt a security mindset, and manage risk to reduce the risk of becoming a security breach or scam victim.
Choose the Right Platforms
Most people use crypto exchanges to buy, hold, and sell cryptocurrencies or other tokens. But unlike stock brokers, these exchanges have little oversight. As a result, from Mt. Gox in 2014 to FTX in 2022, crypto traders and investors have lost billions of dollars by holding assets on insecure or untrustworthy platforms. Due diligence is critical.
Trustworthy exchanges share several attributes:
- Transparency – Crypto exchanges are scarcely regulated, making transparency essential for trust. Look for exchanges that publish their assets and liabilities (e.g., Coinbase) or offer a proof-of-reserve mechanism to prove their solvency.
- Insurance – Crypto exchanges don’t have FDIC insurance, but a handful have insurance against loss from hacks. For instance, Coinbase, Robinhood, Gemini, and Crypto.com have varying insurance against theft or damage-related losses.
- Reputation – Crypto is still relatively new, but some exchanges have a longer track record than others. For instance, Coinbase and Binance have been around much longer than many of the newer exchanges, making them potentially more trustworthy.
The safest place to hold crypto assets is offline in cold storage. Unlike “hot” wallets, cold wallets aren’t connected to the internet, limiting their exposure to online theft. Of course, storing crypto offline introduces the risk of physical loss. For example, if there’s a fire or you misplace a hardware wallet, it may be impossible to recover the funds.
Adopt Security Best Practices
Many security issues arise from users rather than platforms. For example, if you use a compromised password, the most secure platform in the world can’t prevent a hacker from transferring funds out of your account. Worse, exchange insurance policies won’t reimburse you for those losses because they’re squarely on your shoulders.
Some best practices for protecting your account include:
- Password Managers – Password managers can help you set strong and unique passwords for your online accounts. That way, if one account is compromised, hackers can’t use the same password to access many accounts. As a bonus, you don’t have to remember a hundred unique passwords!
- Multi-Factor Authentication – Multi-factor authentication prevents hackers from using a password alone to access your account. Instead, a security code is sent to an authenticator app or smartphone as a secondary security measure before approving a sign-in and allowing access to the account.
- Hardware Keys – Hardware keys are highly effective because you need to possess the key, meaning hackers cannot simply trick you into handing over the password or intercept an SMS code using a SIM swap to gain access to your account.
In addition to these best practices, you may also want to consider carrying crypto insurance. For example, Breach’s Crypto Shield product provides insurance for individuals, covering electronic theft, physical theft, loss or destruction of private keys, and unauthorized crypto transfers.
Be Aware of Scams & Fraud Schemes
Crypto scams have been on the rise over the past few years. Between 2021 and mid-2022, more than 46,000 people reported losing over $1 billion in crypto scams – more than any other payment method. And that doesn’t include the hundreds of thousands of people that may have experienced a crime without reporting it!
Bogus investment opportunities account for most scams, but romance scams, business imposters, and government imposters round out the list. Unlike most conventional monetary scams, people ages 20 and 49 were over three times more likely than older-age groups to lose money, with people in their 30s hit the hardest.
Some red flags to watch out for include:
- Guaranteed Profits or Big Returns – No reputable investment advisor guarantees profits or promises significant returns. Think twice before investing in the product if someone advertises a guaranteed return or outlandish profit.
- Pressure to Act Quickly – Many scammers create a sense of urgency, pressuring you to make immediate decisions. No matter what someone offering you a crypto deal may say about timeliness, stop and take a breath to consider the risks. If you don’t have enough time to research the opportunity, pass.
- Lack of Regulatory Compliance – Platforms that don’t comply with licensing or other regulatory guidelines often lack transparency and accountability. In particular, verifying a platform has sufficient assets is difficult without regular third-party audits.
Manage Risks with Diversification
Crypto is a nascent asset class that’s lightly regulated and highly volatile, meaning some losses are unavoidable. However, diversifying exposure across crypto assets can minimize the impact of a protocol hack or a sharp drop in a token’s value. And diversifying into other asset classes can further protect against a broader decline across crypto assets.
Some strategies to diversify risk include:
- Use Different Platforms – Don’t keep all of your capital on a single crypto exchange or DeFi protocol. By diversifying across platforms, you’ll be less affected if a single platform goes under. But, of course, do your due diligence on each platform beforehand.
- Invest Beyond Crypto – Crypto assets can help diversify any financial portfolio, but you can further reduce risk by diversifying into stocks, bonds, real estate, and other conventional assets.
- Always Have a Plan – Crypto assets are notoriously volatile, so it pays to have a plan for when the market goes sideways. For example, investors tend to sell when an investment falls sharply and fail to get in when it rebounds, resulting in unnecessary losses.
The Bottom Line
Cryptocurrencies are inherently riskier than conventional financial assets thanks to their digital-native and immutable nature. Fortunately, you can avoid many of these risks by adopting the common-sense security best practices discussed above. These efforts can reduce the odds of falling victim to thieves or scammers.
If you trade crypto assets, ZenLedger can help you aggregate transactions across wallets and exchanges, compute your overall capital gain or loss, and generate the tax paperwork you need to file.