Crypto Ownership

The issue of crypto ownership has come to light with Coinbase CEO Brian Armstrong clarifying in a tweet about fears that one of the world’s largest exchanges Coinbase was facing bankruptcy.

On Tuesday evening, Coinbase CEO Brian Armstrong tweeted a clarification. “We have no risk of bankruptcy,” he wrote, blaming the disclosure on a Securities and Exchange Commission rule while noting that it wasn’t yet clear how a bankruptcy judge might treat custodians crypto assets.

Risk assets, which include cryptocurrencies, are in a bear market. Cyclical bear markets are short term usually lasting months. Then there is a consolidation period as prices establish support and eventually move higher. But secular bear markets can last up to 10 years.

The first quarter of 2022 has been extremely challenging for investors with risk assets underperforming, including cryptos. 

Crypto Ownership

The world’s largest cryptocurrency exchange listed on NASDAQ racked up a $430 million net loss in the first quarter. Frankly, it is mind-boggling how an exchange, which doesn’t make investments in heavy plant and machinery and needs few factors of production, managed to clock a $430 million net loss in the first quarter. Coinbase is nothing more than an exchange, its commission charges are ridiculously high, and it offers one of the worst customer services. If you are calling from outside the US it doesn’t even have a dedicated customer service phone number.

Perhaps the SEC, which has almost doubled its crypto regulation staff in response to protecting investors, can investigate how slippery middleman Armstrong’s Coinbase lost $430 million in the first quarter of 2022.

How would a hypothetical bankruptcy impact investors, and what type of crypto ownership would best protect investors in this so-called unlikely scenario?

Crypto ownership can take two forms, investors can either have self custody or third-party non-custodian of cryptocurrencies

So crypto ownership in the form of self custody is the equivalent of an investor stacking cash or gold under their mattress. In other words, self-custody crypto ownership is when you hold the private key for your wallet. Put simply, you are the only one who can prove ownership of your funds and access your holdings. But more power over your cryptocurrencies also means greater responsibility and risk. So with self custody, it’s your key, your coin, and only you have access to the account. There is no counterparty risk with self custody crypto ownership. 

But there are also some disadvantages to consider with self custody crypto ownership

The risk of stacking cash under the mattress or gold at home is that your home is burgled. Similarly, having complete control over your wallet means that if your account is hacked you could lose everything. Moreover, if you forget the private key to your wallet, or you lose access to your physical device (cold wallet) or forget the private key, your crypto will most likely be gone forever.

So who are some of the self custody providers making their services available for retail clients?

The main self custody providers include, Casa, and Gemini.

The disadvantage of self custody is that if you lose your key, you lose access to your coins. Moreover, your crypto assets are not insured and as explained above, if you are hacked, you can say goodbye to your holdings forever.

If you decide to opt for self custody crypto ownership how can you best secure your crypto wallet?

Crypto wallets are divided mainly into two types, hot wallets and cold wallets. Hot wallets use keys (a type of cryptography, like a password). They are created or stored on a connected device and are considered less secure compared to cold wallets. For example, a private key could be installed onto your internet phone. But the risk here is that your connected device could be stolen or hacked. 

So a cold wallet is a more secure cryptocurrency storage solution because it is disconnected from the Internet. They are also called Hardware wallets and use a physical medium, typically in the shape of a USB stick. 

A self custody cold wallet is viewed as the most secure type of wallet because it would require hackers to have access to your device and the associated PIN/Password

There are many cold wallets on the market, so here is the list of the 5 best crypto cold wallet storage devices available today. 

For most people who don’t want the responsibility of managing their private keys and are concerned about their account being hacked or just forgetting their private key, third-party non-custodian of cryptocurrencies are their preferred method of crypto ownership.

Cryptocurrency exchanges are an example of third-party non-custodian crypto ownership.

From the investor’s point of view, it is similar to having a checking account with a bank. So when an investor opens an account, they will need to undergo know-your-customer and anti-money laundering checks.

All centralized cryptocurrency exchanges take care of their customers’ crypto custody

The advantage of non-custodian crypto ownership is that the custodian takes care of everything. Easier access for beginners is another. Moreover, custodians have insurance on assets they manage, and in some cases the crypto investor earns interest from the crypto they deposit by staking or lending through the third-party custodian.

What is the disadvantage of non-custodian crypto ownership? 

The custodian controls your coins. So it can freeze your assets, block your access to your wallet, or limit withdrawals. Moreover, there is third-party risk: A custodian can be hacked or go bankrupt, and fees can add up.

So whatever method of crypto ownership you decide is best for you, eventually when the bear market ends, cryptos with utility could outperform.

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