Bitcoin security lessons from the FTX collapse
The company had it all: A $32 billion valuation, celebrity endorsements, and a sponsorship of a pro basketball arena.
And when it was over, bitcoin investors and the public could only watch as the house of cards came crashing down. Investors around the world panicked as they tried to withdraw their investment, sometimes in vain.
There are a number of reasons why the collapse of juggernaut crypto exchange FTX was tragic for investors and the industry, but this is arguably the most astounding part of all: we’ve seen this all before. In time, FTX will join the likes of Mt. Gox and Quadriga on a growing list of failed exchanges since the early days of bitcoin.
In the coming months, many onlookers will point to FTX’s downfall as proof that bitcoin isn’t here to stay, which couldn’t be further from the truth. Today, we have excellent tools in place to help individuals of all walks of life secure their bitcoin for good.
Not your keys, not your coins
Up to now, bitcoin adoption has coincided with widespread reliance on third parties for securing funds. Investors have stored bitcoin with custodians, exchanges, and lending platforms often at their peril.
It’s an easy trap to fall into. Leaving your funds in the care of a trusted party is a normal convention in the legacy financial system, but bitcoin was designed with a different approach to property rights. If you don’t hold the keys to your bitcoin, it isn’t truly yours.
To protect your bitcoin in the future, don’t settle for an IOU. Routinely withdraw bitcoin into your self-custody and encourage others to do the same. This step is crucial and helps further bitcoin adoption as a decentralized network. At Casa, we will continue doing everything we can to make self-custody easy.
Be proactive — don’t wait for warning signs
In a perfect world, if an exchange were in trouble, you’d have ample time to withdraw your bitcoin. But unfortunately, you typically won’t know if an exchange is becoming insolvent or dealing with security risks.
It’s also a common practice for vulnerable entities to reassure customers that their assets are safe when, in fact, that’s not the case. This was observed with FTX when their CEO Sam Bankman-Fried tweeted that the company was fine. Within a week, the company filed for bankruptcy.
Security is a discipline in which you can’t take information at face value. Especially with bitcoin, you need to advocate for your wealth because third parties won’t always be there to back you up.
Proof of reserves has potential
When you’re first exploring bitcoin, buying bitcoin seems like magic. You tap a few buttons to move money from your bank account, complete an order, and ta-da, bitcoin is at your fingertips.
The inner workings of exchanges are a mystery to most of us, but there is a lot that takes place behind the scenes, even at reputable ones. Running a bitcoin exchange is complicated. Exchanges work to ensure their platform remains stable, coordinate liquidity among providers, and prevent fraud, and that’s just the beginning.
There have been several exchanges that have struggled to stay afloat. Others have engaged in criminal activity, and a few companies have folded under mysterious circumstances. What happened at FTX remains to be seen.
Bitcoin is predicated on accountability and transparency. Transactions are public and securing bitcoin is up to you. Customers should expect more from exchanges.
In the last few days, industry leaders have called for exchanges to voluntarily provide public proof of reserves, a type of audit that verifies an exchange’s supply at a given time. Kraken is one example of an exchange who has adopted this practice.
Like other audits, proof of reserves simply provides a momentary snapshot of an exchange’s reserves, so this practice is not a complete solution for ensuring complete and total transparency in real time. The financial situation at any entity can unravel quickly, and an audit is still a form of trust. That said, exchanges play a vital role in onboarding investors to bitcoin. We encourage our members to verify independently as much as possible and seek out exchanges who take a proactive approach to security and transparency.
Above all, remember that withdrawing your bitcoin to a wallet you control is far stronger proof than any third party can provide to you.
Though the magnitude of the FTX collapse is unprecedented, failing exchanges and financial institutions is a tale as old as time. It’s hard to prevent instances like this from happening, but you can stop them from happening to you.
At Casa, we help bitcoin investors secure their wealth by giving them all the tools they need to hold their keys safely without having to rely on third parties. Want to secure your investment? Book a call to get started today.