Cryptocurrencies have undergone a remarkable journey: evolving from a niche concept to now being seriously considered as an asset class, captivating the world with their potential for innovation and disruption. While the market’s volatility in the wake of industry-shaking events can undoubtedly be unnerving, it’s imperative to recognize this as a characteristic common to markets in emerging technologies.
We need only hark back to the dot-com bubble bursting to serve as a telling reminder that over the course of history, even in the face of temporary setbacks, the underlying potential and long-term value of truly revolutionary technologies is what has allowed them to prevail.
This progress, coupled with the underlying benefits of blockchain technology and not speculation, has given rise to an undeniable upward trend in the value of the industry that will sow the seeds for its long-term prosperity.
However, with this upward trajectory and increasing valuation comes a manifold increase in the risks threatening one’s crypto holdings. As the industry matures and an ever-increasing number of interested parties have entered the fray, we have seen increased scrutiny of many of the challenges present, one of them being safe storage for digital assets.
The challenges of secure crypto storage
Many of the people who engage with the crypto space do so to trade, presumably, in hopes of making a lofty return on their investments. This is especially true in developed economies. In emerging markets, the use case for a decentralized store of value is very real.
Nevertheless, the most common entry point to crypto are exchanges, and as a result, there are a large number of individuals who keep their holdings living on exchanges, regardless of if they are engaged in regular day-to-day trading activities.
These platforms, while undoubtedly equipped with a variety of security measures, are purpose-built for trading and not for the long-term secure storage of one’s crypto. One need only search the term “crypto exchange hack” to unearth a litany of reasons as to why, in the past, this has not been the safest option for keeping one’s crypto out of harm’s way.
This is not to suggest that there is no alternative. Recent months have also brought an unprecedented amount of attention to hardware wallets, or cold storage solutions, i.e. physical devices that allow the storage of private keys offline, thus significantly mitigating the potential risk of online attacks.
However, there is one significant risk to doing so, namely, cold wallets are incredibly vulnerable to loss, theft or damage. While most will have some sort of backup for their private keys, this often takes the simplistic form of a piece of paper, which is perhaps even more vulnerable to the very same risks that we run into when using a wallet in the first place.
While not relating to a cold wallet specifically, when it comes to the pitfalls of storing one’s digital currency physically, one cannot help but think of the guy who lost his laptop containing 8,000 Bitcoin to a dump back in 2013, highlighting just how perilous an enterprise this can be.
Crypto’s psychological barriers
So what then, are we supposed to do with our crypto savings? We should do precisely what we do with our fiat savings: Put them into a bank, and a regulated one at that.
However, there is a psychological barrier existing in the cryptosphere that inherently opposes the traditional banking system. Bitcoin was birthed in the wake of the financial crisis of 2008, and accordingly, it is an industry that has long taken umbrage with the idea of trusting in these very same institutions.
It is helpful to bear in mind that the crypto industry is wholly different from what it was at the time of its inception. When e-commerce platforms such as eBay and Amazon started to come to prominence in the late 1990s, there was much skepticism surrounding the requirement of uploading one’s card details to the internet, with many of the related concerns — trust, security, hacks, etc. — similar to those felt by early crypto adopters today.
As the industry matured, players such as PayPal entered the fray and were able to ensure trust and usability. This allowed the industry to prosper, even in the face of the dot-com bubble bursting. Arguably, this setback perhaps even benefitted the industry in the long term, as it ushered in a new era of regulation and prompted an upsurge in compliant stakeholders.
If we apply this sentiment to the evolution of crypto, then the collapse of FTX is similar in some ways to the bursting of our dot-com bubble. We are already seeing the race to regulation in the wake of this collapse and it is only a matter of time before we see more and more compliant, regulated, custodians step in to not only safeguard against a repeat of this situation but further, educate the general public on the risks and best practices involved in holding cryptocurrencies.
Traditional banks have historically been averse to adopting and adapting to crypto. However, such institutions can serve as a catalyst for mainstream adoption, ensuring trust in the industry.
From the basic secure storage of digital assets to more nuanced offerings akin to traditional banks, there is a wealth of opportunities for both existing and emerging crypto banking providers to circumvent many of the problems currently faced by those looking for storage solutions.
This can vastly improve upon the benefits of keeping one’s crypto locked up in a hardware wallet, and it can do so without sacrificing security as one must when keeping their holdings on an exchange. From actual physical vaults for the secure storage of one’s currencies to leveraging blockchain technology to provide transparency, immutability, and security to customers, crypto banks can effectively assuage the current woes with crypto storage, without having to take on the additional risk of “storing your money under your mattress.”
With regulatory action coming in hard and fast against a number of institutions, there has never been more of a need for alternative secure storage solutions for our digital assets. While many have turned to cold storage solutions, for the industry to truly mature we need an alternative. One that is not liable to get lost in a dump for eternity and that can safeguard our assets in a safe, secure, and regulated way.
Bitcoin is first and foremost a store of value, but for those who are medium to long-term in their investment appetite, it is a savings instrument. If you have a medium-term view of Bitcoin, you understand that it is finite, decentralized and secure. However, being able to make cross-border payments, convert them into fiat, spend those funds with cards or QR codes on demand, and at the convenience of the holder, is also incredibly helpful and valuable. Crypto banking merges security with usability.
The most important benefit of crypto banking is security. While many believe in “not your keys, not your crypto,” there is a glaring lack of consideration from these idealists for the barrage of problems that this mentality brings. The treasure trove of crypto that has been lost due to mistakes of self-custody far exceeds that ever lost to third-party custodians. Moreover, the technical knowledge required for self-custody is inaccessible to the average individual and the risks involved are unjustifiably high.
We have had hundreds of years to try out different approaches to safeguarding our wealth, and there are some pretty compelling reasons as to why the vast majority of us have come to the decision NOT to do so inside the walls of our homes. In the case of crypto, this is perhaps even more true.
With the immutable nature of blockchain technology, should one’s private keys be compromised, should one lose their hardware wallet in some tragic twist of fate, or even in the extreme case should someone suffer an untimely death, there really is no getting the money back. Keeping constant care of your crypto is not the safe option. Putting it into a regulated crypto bank is.