Earlier this year, a Canadian cryptocurrency exchange – named Quadriga – could no longer access their user’s funds as the exchange’s CEO, Gerald Cotten, mysteriously passed away in Dec 2018 while traveling in India. Cotten was proved to be misappropriating customer funds, and this has led to speculation that he faked his death. But on the whole, there are major lessons to be taken away from this entire episode, so let’s dig right in.
By now, if you’ve been in cryptocurrency for a while and hold sizeable holdings, you should ideally have your own personal cold wallet in the form of a Ledger, Trezor, ColdCard, or any other legitimate product. If you don’t, you will end up regretting it at some time or the other. Storing coins on an exchange is extremely risky. As a rule of thumb, if you own more crypto than the cost of a Ledger Nano S (roughly $99), you need to have a cold storage wallet.
Cryptocurrency exchanges perform a plethora of functions today. They not only facilitate trade through their own orderbooks, but they also perform settlement, clearance, and custody. The traditional financial market has large entities that perform one of each of these activities, so it won’t be surprising to see institutions like these show up for crypto.
Given the responsibilities an exchange is forced to handle, it seems right to move security out of their ballpark and into yours. Yes, funds for trading are still an exchange’s ballpark. But long term holdings should be solely in your possession. Never keep more money on an exchange than you are okay with losing. Why, you ask? Simply because the back-end technological infrastructure of cryptocurrency is nothing compared to vastly resource-rich traditional financial institutions that have been operating for decades and centuries.
Quadriga taught us that we can’t trust anyone in crypto. For years it functioned as one of Canada’s top exchanges, and overnight it crashed. Cotten died in December 2018, but this news reached stakeholders in February 2019. Furthermore, this highlights the poor security practices of Quadriga. The cold storage key was in the possession of merely one person. This was a security disaster waiting to happen.
The ethos of Bitcoin was always about self-reliance and eradicating the need for trust. You secure your own coins, and you pay a transaction fee and a dilution fee (block rewards) to allow the network to stay secure. This should be the ethos each and every decentralization enthusiast strives for; unfortunately, it isn’t.
If you want to be able to use Bitcoin the way it is meant to, you must be willing to learn the bare minimum of technology use. You need not know how to code and run a script, but you do need to know how Bitcoin and other cryptos work. Laziness will be the death of your wealth if you allow it to overcome strong operation security measures.