With the recent horror stories of people losing money (sometimes hundreds, thousands, or more) due to up-and-coming cryptocurrency exchanges being hacked, you might be a bit weary to put your money into any of them. However, before you throw the opportunity out the window, it’s important that you look at all your options. After all, cryptocurrency happens to be one of the fastest growing industries in the world right now, and if you make the right investment, it could certainly pay off.
But, as with any investment, you’ll need to do your research before you put down any cash. And, when it comes to cryptocurrency, there are a lot of aspects you’ll want to research.
The first thing you’ll want to look into when deciding whether a cryptocurrency exchange deserves your money is the growth potential of that exchange. While doing your research, you also need to be certain on where your information is coming from. Clearly, the start-up itself is going to be confident in its ability to grow and become a profitable endeavor for its investors. So, while you should start your research by looking into the start-up’s plan and practices, you should also get information from a third-party reputable source to determine if the start-up is worth your money.
Of course, you don’t necessarily have to invest in a start-up. In fact, there are plenty of much more established cryptocurrency exchanges that might allow you to invest more confidently. But, at the end of the day, whether an exchange is established or not, isn’t it still susceptible to mass hacking or failure? The short answer is by all means “yes”.
How can I minimize the risk?
There is no such thing as a zero-risk investment. Any money you invest into anything has the potential of losing value or, in many cases, being flat-out taken from your possession. However, the world of cryptocurrency recognized this issue some time back, and they made a huge step forward to help investors minimize their risk.
Before you invest in an exchange, you should look for one that is insured, but this may not mean exactly what you think.
When some people hear that an exchange is insured, they assume that means that, if something were to happen, they’d get back the fiat value of their investment, or the investment amount they originally held in the same currency. But that’s not the case.
When an exchange is insured, it means it is backed by a global insurance broker and underwritten by one or more underwriters. That’s all good news, but the part that many people do not know about is that this insurance does not guarantee their individual investment per-say. Rather than offering insurance in a way that they will pay you any losses resulting from a disruption or failure (i.e., the exchange offering the user insurance), the company itself is insured. This means, in the event of a hacking attack, the insurance contract will prevent the company from becoming insolvent. At the end of the day, this means the customer will still hold the same investment as if the attack never happened.
Which exchanges have insurance?
Most exchanges that are insured will widely advertise it as it is certainly a selling point to potential investors. One of the most popular is Coinbase, which details its insurance protocols in-depth for users to examine at any time. Some things to note though (and these apply to most every exchange out there) include:
- As stated above, an exchange does not individually insure its clients. Rather, the company itself is secured. In the event of employee theft or a breach of physical or cyber security, Coinbase’s insurance policy will pay to cover any and all customer funds.
- The insurance does not apply on an individual basis, meaning if just your account suffers a breach, Coinbase’s policy will in no way protect you.
Of course, just in case you’re wondering, since cryptocurrency is not backed by the government, exchanges do not have to follow the FDIC reporting regulations or the Securities Investor Protection Corporation procedures.
Here’s a short overview of some of the most trusted exchanges that have insurance:
- Coinbase: “If Coinbase were to suffer a breach of its online storage, the insurance policy would pay out to cover any customer funds lost as a result.”
- Circle: “[We are covered from] loss from theft from online hacking of our systems, physical theft through breaches of our cold storage locations, and employee theft and fraud. We maintain insurance to cover 100% of the BTC value under management.”
- Gemini: “We are heavily capitalized to protect the Digital Assets that you store with us. In addition, we are insured by a top-tier insurance company to protect you from internal malfeasance.”
- Xapo: Xapo was insured by a third-party company until 2016. For reasons stated here, they have chosen not to renew that policy. However, they claim: “If our hot wallet got hacked Xapo would cover the loss for its customers in full.”
Here are some final points of consideration for any exchange you’re interested in investing with. First, be sure to ask the exchange directly about their insurance policy if they claim to have one. Second, consider that (unless your currency will be replaced by the same currency, i.e., Bitcoin for Bitcoin) you will most likely lose money.
Lastly, be certain that any exchange you invest into is transparent with their practices. Look for recommendations online and, when in doubt, ask questions.