With the recent closures and bankruptcies of some cryptocurrency centralized exchanges and investment funds, there has been a lot of fear among investors in the industry.
Once a company files for bankruptcy, any funds or coins that customers have in their accounts can get locked up in a legal battle for their assets. In many cases, creditors of these companies will get paid first with available funds while customers may be the last ones to get paid.
A lot of people might view this fear as a reason why crypto like Bitcoin and Ethereum are doomed to fail, but is this really any worse than what can happen to your money in a checking account, savings account or even a brokerage fund?
This article is going to discuss this type of information so you can have clear knowledge about potential risks using various financial institutions and steps you can take to safeguard your money from potential losses.
Cryptocurrency Exchange Closures
Celsius, Three Arrows Capital and Voyager Digital have all recently gone insolvent and filed for bankruptcy. This is obviously not good news for investors that had funds with those companies. Accounts and withdrawals have been frozen, so customers can’t get their money out.
There’s a reason why this happens when a company files for bankruptcy, and this type of problem isn’t limited to the crypto industry. Bankruptcy initiates a legal process that will either attempt to fix the financial problems with a company to allow them to continue operations, or it will control it’s liquidations to attempt to make creditors and investors whole.
The problem occurs when you have a liquidate a company and there isn’t enough money left to pay off all of the debts. These matters can be complicated even more when some people get paid back before others. In a lot of cases, creditors of a company will get paid back first. Customers with funds held by the company may have to split the remaining money, which can often leave them settling for pennies on the dollar.
Frozen Customer Funds
When thousands or even millions of dollars gets frozen, it can create major fear and panic. Anyone that experiences a seizure of their money in this manner knows how much of a nightmare it can cause. It doesn’t matter if you needed that money to pay your mortgage or to buy groceries. You simply won’t get it back until a court approves a settlement payment.
Does this mean that there is a fundamental problem with the cryptocurrency industry that causes your money to be unsafe? While it would be helpful if the FDIC could insurance crypto investment accounts like they do bank accounts, the real problem isn’t actually with crypto companies. The US government really needs to step in to provide regulation. This is necessary so that customers can feel as safe with money on crypto exchange as they do with it in their checking account.
This doesn’t mean that you should be afraid of using crypto though. Make sure you continue reading to see how bank accounts can differ and even some protective measures that you can enact that will actually make your Bitcoin safer than cash in your pocket or in a bank.
When you deposit money into your Bank of America account, you feel warm and cozy about your money being safe. You get to see the FDIC statements telling you that your money is insured, and you feel like it will always be there when you need it, so you build your whole life around your checking account.
In a lot of cases, there’s never a problem with using a bank. In some ways, it’s the same exact thing as saying that you have a perfect marriage and then you get blindsided with divorce papers at work. Banks are never a problem until they are.
The same way crypto funds can end up frozen, this can also happen with your bank for a wide variety of reasons. In fact, the government that tells you they’re insuring your money can actually end up being the ones that seize it from you! Unfortunately, people find this out the hard way and almost never take precautious against it happening. Sometimes it truly is a mistake, but you are left to figure out how to live without access to your money for years until a case is resolved.
If money isn’t ultimately safe on a crypto exchange like CoinBase or Binance and it’s not even technically safe with your bank, is there any way to actually safeguard your money? In some ways cash can be considered safe because it can’t be frozen with the click of a button by your bank, a court or even the government. However, physical currency can still be seized by police or even stolen relatively easily.
The #1 reason why cryptocurrency like Bitcoin has become popular is because it actually does over a major advantage over storing riches at a bank or as physical currency. With crypto, you can actually take true ownership of your money . It can never get frozen or locked. The only way it can be stolen or seized is if you actually let someone else get your device or your recovery passphrase. As long as you protect those two things, your money can be 100% safe.
I’m talking about crypto hardware wallets. With one of these devices, you can generate a wallet address to send your crypto coins to, from the centralized exchanges like CoinBase.
Is can be a common misconception about how hardware wallets actually work. The wallet that you buy is a physical device, somewhat like a USB thumb drive. You don’t store coins on the physical device though. When you send Bitcoin, Ethereum, Dogecoin, Solana or any other crypto to a hardware wallet, you’re taking custody of your coins. You own the wallet address that has those coins on the blockchain and that device controls the access to those coins.
Once tokens are moved from an exchange to a wallet, the exchange no longer has your money or your crypto in their accounts. If they go bankrupt and freeze accounts, it doesn’t touch your hardware wallet. Likewise, you get the same protection against hackers too. If Coinbase or Binance gets hacked and funds are stolen from customer accounts (which has happened before), your wallet can’t be touched.
With crypto sent to your hardware wallet, there are only two possible ways to access those coins:
- Using the physical wallet device, connected to a computer
- Buying a new device and recovering your wallet using your 24 word keyphrase
Protect your device and your 24 word recovery password. Either of those can be used to access your funds. As long as nobody can get those two things, there is no way that your money can be touched. This is the power of cryptocurrency and Bitcoin. You simply have to know about it so you don’t leave a large amount of money on an exchange.