Unlike government-printed money, most cryptocurrencies only exist on the distributed ledger. Distributed, in this case, means spread out or dispersed, while a ledger is a book that keeps records of financial transactions. In a nutshell, a distributed ledger, for example, the Bitcoin blockchain, means that thousands of different computers are recording identical financial transactions simultaneously.
Most cryptocurrencies on a blockchain are immutable. Immutable refers to the fact that recorded transactions cannot be erased or manipulated and are available forever.
On the flip side, banks’ data is centralised, which means that financial data can be erased or modified, as the bank owns the data. The risk of having centralised data implies that people’s money may be subject to state coercion, domination and control. A power outage or a technical glitch can make people’s money inaccessible.
Bitcoin, unlike banks, is censorship-resistant. Governments worldwide need to unite and turn off power grids to kill Bitcoin. Anyone with a solar panel would still be able to keep Bitcoin alive.
One of the reasons the European Union sees cryptocurrencies as a threat is because it can’t control them, and Governments fear anything they can’t control.
One can do this through exchanges like Coinbase, Binance and Crypto.com. As the word implies, one uses an exchange to convert Government-issued money into any cryptocurrency one would like to buy, and vice-versa whenever one wants to sell. Exchanges offer the possibility to convert from one cryptocurrency to another.
One should buy cryptocurrencies for what they do and their contribution to the human race rather than as a speculative asset. Unfortunately, many people get burnt as they think they can become instant millionaires by investing or trading crypto. Anyway, that’s another story.
Exchanges are similar to banks. They’re centralised and subject to the same threats banks and other financial institutions face.
Clients could lose all of their assets if a cryptocurrency exchange were hacked or filed for bankruptcy.
The global economy is showing tangible signs that we’re entering a recession. A recession brings about unintended consequences like foreclosures, bankruptcies and unemployment.
Coinbase, one of the largest and most well-known exchanges, issued two stark warnings in the past few weeks. The first warning was in May. In its 2022 first-quarter regulatory filing, Coinbase stated:
"custodially held crypto assets may be considered to be the property of a bankruptcy estate, in the event of a bankruptcy, the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings and such customers could be treated as our general unsecured creditors."
The disclosure generated panic in the crypto circles, citing that the recession and the abyssal performance of all cryptocurrencies may force Coinbase into bankruptcy and cause customers to lose their cryptos.
The alarm moved Coinbase into issuing a public statement to calm their clients. However, the statement is far from convincing.
On the 14th of June, Coinbase CEO and Cofounder Brian Armstrong informed Coinbase employees that the company would be downsizing its workforce by 18% or 1,100 employees.
Coinbase joined a chorus of other exchanges that plan to reduce their workforce. Gemini Trust said it would be laying off 10%, Crypto.com 5% (260 employees), and BlockFi around 20%.
We’ll be seeing more layoffs as most economies enter a recession. Unfortunately, the layoffs will affect other sectors, including financial services, hospitality, construction, etc., not just crypto.
How do you protect your crypto?
“Not your keys, not your coins” is a famous saying in the crypto community.
Like money, it’s better to have it in your hands than to have money at the bank. A bank may block access to your money anytime it wants for the slightest reason. The same applies to crypto on exchanges since exchanges are centralised.
Unlike money that can exist physically as cash or as a numeric representation in the bank, cryptocurrencies only exist on the blockchain.
Most cryptocurrencies like Bitcoin use cryptography to secure transactions. Bitcoin, for example, uses two sets of alphanumeric phrases. One is the public key, and the other is the private key. The public key or wallet address is like an email address you can share with others to receive emails, or in this case, Bitcoin.
To transmit a transaction, i.e. to send Bitcoin from one wallet to another, you need the private key. The private key is like the password of your email account and should never be shared. Anyone with a private key can send Bitcoin to another address.
Exchanges only provide public keys, and they don’t share private keys. The clients’ cryptocurrencies are at the mercy of the exchange.
Why shouldn’t you risk losing everything?
The best solution would be to transfer your cryptocurrencies offline onto a paper wallet or a hardware wallet like a Ledger or Trezor wallet. If you don’t have one, you should strongly consider buying one, especially considering the current economic circumstances.
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