Many investors want to dive into the crypto market, but are anxious about hacks, privacy breaches and other risks
Knowing how to check for security risks and select the safest crypto exchange is important for both new and veteran investors
Read our guide below for how you can invest in crypto with confidence
By: Michael Spiar, Senior Content Writer
Anxious about dipping your toes into the cryptocurrency market? You’re not alone. In fact, up until very recently I was right there with you. After all, to the casual observer, cryptos are a lot like the Wild Wild West. Let’s go through the list:
Bank robberies (i.e., hacks)? Check.
Little to no insurance? Check.
Little to no regulation? Check.
Can investors trust their exchange to keep their assets safe? Mostly yes, but high-profile hacks like the ones on Mt. Gox and Bitfinex, or collapses like Quadriga raise doubts. As more exchanges require in-depth identity verification (know-your-client, or KYC) checks, can investors trust them to keep their data safe from identity theft?
To the uninitiated, very little about the world of bitcoin and Ethereum seems safe.
My (former) outsider’s view of the crypto world. via GIPHY
However, as a writer, however, my job is to dive into a topic and learn as much about it as I can before I turn around and publish blogs like this one. And in doing so, I’ve learned a lot about the industry and was able to put many of my fears to rest.
So rather than just invite you to start investing in cryptos on the stock exchange through Blockstation’s platform…
...I thought I’d walk you through my research to help put your mind at ease as well.
Do I have to do a KYC?
In a word, yes. As much as I’m not keen on sharing two pieces of government ID and other sensitive information, financial institutions cannot open an account for your without it. They do this to help ensure that the markets operate safely and fairly with known, trusted actors - no money laundering or other criminal activity allowed.
Privacy in the digital age is complicated, which means you want to look into how each exchange stores your data, who they share it with, who has access to it, and how long it’s stored. It’s a complicated and specialized bit of business, and hard for any institution to take on as an in-house project.
That’s why many industry players will partner with a dedicated specialist in the field - and Blockstation is no exception.
As a non-techie, me diving into whether or not something is digitally secure feels a lot like talking to a mechanic about my car:
My best advice is to determine what your concerns are and come up with a list of questions. Mine included:
How is the data protected?
Who has access to the data?
How can the data be accessed (e.g., via secure VPN)
How long is the data stored for?
How often do the organizations with access to the data test and update their security measures?
What finally convinced me to go through my KYC was the fact that not only did I receive answers to my questions, but those answers were patient, timely and transparent.
Is your crypto exchange licensed?
One thing that struck me is how many governments around the world are moving to regulate cryptocurrencies - and in the process, requiring that crypto exchanges follow the same procedures and protocols as traditional financial institutions.
In other words, start with picking an exchange that has a government-issued license to do what it does. There are a few tiers of licensing (all of which involve a KYC component), including:
Money Service Business (MSB)
The MSB license is the easiest to acquire, and it applies to businesses that transmit or convert money. Generally speaking, MSBs need to comply with legislation designed to prevent money laundering and terrorist financing and must voluntarily report suspicious activity to regulators.
The BitMart exchange is one example, indicating that its operators taking investor protection seriously.
Brokers are empowered to make trades on behalf of clients. Therefore, they have to demonstrate financial stability and strict internal governance to minimize the risk of clients losing money due to mismanagement.
Some exchanges, like Coinbase, have a broker license. At the same time, this is a very centralized approach that technically - TECHNICALLY - allows the exchange to unfairly manipulate the market through prioritizing or front-running certain orders. More recently, traditional brokers like Fidelity Investments have moved to open a cryptocurrency trading desk, facilitating crypto trades for clients without operating a full exchange.
Trusts are similar to banks, are subject to audits, and operate under more stringent reporting requirements to ensure proper management of client funds. It’s a difficult designation to obtain, and a good indicator that the institution is earnest about protecting investors.
ItBit and Gemini are two crypto exchanges with a trust license.
Stock exchanges are the most heavily regulated - and protected - way to trade securities. They are fundamentally decentralized, with the exchange, regulators, brokers, and depository splitting the responsibility to monitor, buy, sell, and settle investor transactions.
The Jamaica Stock Exchange, powered by Blockstation, is the first in the world to list cryptocurrencies like bitcoin and Ethereum. Did I mention that investors can sign up to start investing?
Is money in your crypto exchange secure?
Get them! They stole our bitcoin! I knew I should have used an anonymous bitcoin wallet. via GIPHY
The answer to this question revolves around how your money is stored. The two options are:
A hot wallet is a digital storage system for your cryptocurrency that is connected to the internet. Hot wallets mean easy, fast access to your money for payments and transfers, and many crypto exchanges offer them to clients. However, because they are online, they are more vulnerable to hacks. Treat your hot wallet like your physical wallet and only use it to store small amounts of money, and for goodness’ sake, protect your private key!
In contrast, cold storage vaults are never connected to the internet - hackers simply can’t get in. The most secure cold vaults have multi-signature access, meaning multiple parties need to provide their authorization before moving any funds. Cold vaults come in many forms including USB keys held by individual investors, or secure computer memory maintained by a broker or MSB, and are ideal for storing large amounts of money.
The Jamaica Stock Exchange is one option that, through its network of licensed brokers, maintains 100% cold storage with multi-sig access, meaning investors can rest assured that their funds are secure.
Can my crypto be insured?
Your crypto insurance policy hard at work. via GIPHY
Hackers don’t quit, which means even the most diligent financial institution can’t reduce its risk to zero - so you’re going to need insurance as a backstop.
And for that, you can’t beat the Jamaica Stock Exchange. As the JSE is a fully compliant institution working in concert with regulators, licensed brokers and a secure depository, Blockstation was able to arrange for 100% coverage on all crypto assets stored in its brokers’ cold vaults.
Other exchanges purchase insurance (Coinbase has a policy for $255 million) or reserve a portion of their trading fees to provide their own coverage (like Bitfinex). So far in the crypto world, 100% coverage is rare.
What about identity theft?
I learned that, unfortunately, it’s a risk for absolutely everybody whether your trade cryptocurrency or not. We live in an online world, pay for items with credit cards over our mobile devices, sign up for newsletters on sketchy websites…
Heck, even Equifax - one of the giants of credit reports - got hacked a few years back, compromising the personal information of nearly 150 million Americans. Despite this, it continues to be one of the first companies consumers turn to for an annual check. (I happen to be one of them.)
That said, identity theft is mercifully rare. You can buy identity theft insurance as an add-on to your residential policy from most insurers, but a quick Google search shows that it typically costs more than it covers.
After digging through the facts, my conclusion about internet privacy issues is that the best insurance is to simply be smart about my personal info - and that means making sure I only share it with licensed institutions.
The safest way to invest in crypto
With any luck you feel comfortable enough with the crypto world that you’ve moved from high-stakes questions like “how do I do it safely?” to more mundane ones like “should I invest in Ethereum?” At Blockstation, our mission is to increase that comfort for investors everywhere.
Trading on the Blockstation platform through a regulated stock exchange is now live and accepting investors. So, are you ready to dive in? What do you look for in a crypto exchange? Let us know on social media using the hashtag #Blockstationsafety
And in the meantime: