One of the most difficult challenges in crypto investing is convincing investors that it is safe. Safety is critical because cryptocurrencies are bearer assets — self-custodial assets that can be traded with others without a centralized third party while being sufficiently liquid, fungible, and portable. There are additional challenges beginners might face, including:
The learning curve for cryptocurrency can be steep.
Most investment advisors and brokerages do not yet support cryptocurrency investing, forcing beginners to validate investment opportunities and manage assets independently.
The volatile nature of the space may cause FOMO (fear of missing out) in opportunistic investors, leading them to relax their guard regarding trusting platforms and "helpful hands."
As more decentralized applications(dApps) emerge, opportunities for bad actors to manipulate these protocols or exploit security flaws to siphon or steal funds increase.
According to a February 2023 report from Chainalysis, a crypto forensics firm that tracks illicit activity on blockchains, 2022 was the most successful year in crypto hacking history, with $3.8 billion stolen from cryptocurrency businesses.
Eight security risks posed by custodial crypto wallets
Although online wallets and crypto exchanges are convenient for managing digital assets, they pose significant security risks. From the threat of hacking and phishing attacks to regulatory compliance concerns, we outline the critical vulnerabilities beginners face with custodial wallets.
Hacking attacks: Online platforms are vulnerable to cyberattacks and security breaches. If a wallet or exchange is compromised, users will lose funds stored in the exchange's hot wallet.
Phishing attacks: Crypto users may become victims of phishing scams in which they unknowingly provide their login credentials or private keys to fraudulent websites or emails masquerading as legitimate platforms.
Social engineering: Attackers may use social engineering techniques to trick users or employees into disclosing sensitive information such as passwords or private keys.
Lack of transparency: Some hot wallet providers do not provide sufficient clarity about their operations, raising concerns about their security and legitimacy.
Insider threats: Employees with insider access to the platform may abuse their privileges, potentially misappropriating "stored" customer funds.
Risks of regulatory and compliance violations: Online wallet providers and crypto exchanges fall under various regulations, and noncompliance may result in legal issues or shutdowns. In such a scenario, customers must move elsewhere or risk losing their funds.
Lack of control over private keys: Many online wallets and exchanges do not give users direct access to their private keys. Users face a total loss if the platform encounters a problem and abruptly shuts down.
Software vulnerabilities: Hackers can gain unauthorized access by exploiting bugs or vulnerabilities in the platform's software. Service attacks can temporarily disrupt online platforms' services, potentially causing users inconvenience or financial loss.
Exchanges are also vulnerable to market risks such as price manipulation, flash crashes, and other types of market volatility, which can affect their operations. Therefore, we strongly recommend using hardware wallets for storing your crypto assets.
What are hardware wallets?
Hardware wallets include various devices, from a simple USB drive to intricately designed smart cards, outfitted with specialized security and accessibility features for storing cryptocurrency without internet access. This type of wallet protects the user's assets by generating and storing the wallet's private keys offline. This means that the keys are not exposed to hackers or malware. In addition to security, hardware wallets also offer several other benefits
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