Since reaching its all-time high of $68,789.63, Bitcoin and other cryptocurrencies have experienced a downturn for more than a year. This could be due to the halving cycle, a possible global recession, or several exchange incidents that have occurred recently. In fact, since early 2022, there has been a mass exodus from centralized platforms.
While market prices may eventually recover, trust may be difficult to regain. From November 2021 to 2022, cryptocurrency losses have increased from $7.4 billion to over $12 billion. Many of these losses resulted from trusting centralized exchanges (CEXs), a mistake that has been costly for some investors. Nearly 500 BTC have left these platforms, representing a 15% drop from the average balance of around 2.7 million in 2021, and a 45% decrease since March 2020, according to Glassnode.
The phrase "not your keys, not your coins" has been around for years, emphasizing the importance of owning one's private keys to protect their cryptocurrency assets. Many people have lost money in the past due to hacks, scams, or exchanges that went bankrupt. Have these incidents finally taught people a valuable lesson?
Finally, the question remains: where have all these coins gone?
Some of the centralized exchange failures of 2022 are considered the worst we've seen so far. We're talking of nine-figure losses in the Top 10 most popular exchanges worldwide. While some of them didn't have any issues, who says something similar can't happen in the next few months?
From interest-bearing platforms to CEXs, here are the most worrying incidents in 2022 alone (from least to most catastrophic):
Note: These numbers are approximations showing that companies lost at least* that amount. Losses can be inaccurate because everything is interconnected (one company's losses affect another) and they're estimated in cryptocurrencies (which always change prices).
Before jumping to conclusions, there's another list you should watch. The worst DeFi incidents in 2022.
As you can see, 2022 hasn't been a good year for either DeFi or CeFi. However:
That means that you only lose on the price of the particular project that was attacked. If you also hold other assets in your non-custodial wallet, they're safe, unaffected, and available. On the other hand, if the exchange that holds your coins collapses, you will lose your entire portfolio.
Giving up your keys is the opposite of why crypto was invented. And the way CEXs "manage" your assets isn't nearly as safe as the marketing suggests. Here's why.
Centralized exchanges are custodial platforms, meaning that the company owns your account (If you don't believe it, try finding the private keys of your exchange's wallet.) That includes your legal information, account features, and cryptocurrencies. In exchange, you can trade hundreds of coins at low cost and high speed, along with extras such as debit cards and lending services.
How exactly exchanges hold your crypto is different for every company. Typically:
As for for-profit businesses, CEXs want to make their services available for as many trading clients as possible. This comes down to liquidity management, which is challenging due to market crashes, cyberattacks, and other unpredictable events. Whenever these threaten liquidity, exchanges tend to suspend their services and financial promises until they restore liquidity. In this case, the secured creditors typically get made whole before the unsecured creditors.
Not only do they hold your crypto, but you have no control over how long they hold it. Hence the mass exodus to self-custody exchanges.
It's not that investors "panic sold" on a bear market. Because if people did sell, exchanges should have more Bitcoin, not less. Those coins didn't "vanish."
They were sent to non-custodial wallets, also called self-custody wallets.
How are they different from exchange wallets? Software-wise they're almost the same. It's about who controls the keys.
When you create a non-custodial wallet (or cold wallet), typically you first see a list of 12-24 words called "seed phrase." This list is an alternative code to your private key, which is an alphanumeric code that's hidden in the settings and is meant to be secret. The public key is the address you share with others when sending cryptocurrency.
(If you want to know why public keys are safe to share and private ones aren't, check our article on common encryption methods.)
Let's say you lose your device. You can use another one, download the app, and enter the private key (or seed phrase) to recover your account balance. Because no one knows your secret key, nobody can access your wallet. How does that compare to exchanges?
Let's say you let another person use this wallet, but you keep your private key secret. That means the other person can use the wallet like it's theirs: deposit, send, receive crypto. But you can still access it because of the private keys, meaning that you could use the person's balance however you want.
That's what CEX custodial wallets are. Except it's also like using the same device. You can't access the wallet if the exchange website is down.
According to Glassnode, exchanges have consistently lost their BTC balance since January 2020. In spite of recent events, the drop is as steep as 45% below March 2020.
And here's where most of it has gone:
Celsius, 3AC, and FTX may be bad news for other exchanges, but definitely not for non-custodial providers. One of them, Trezor, has reported a 300%+ sales revenue increase since FTX failed. The rate is still increasing, and as other CEXs become more restrictive, Trezor will make even more revenue.
For someone who never heard about them, it might sound opportunistic. But Trezor has been around for years as a trusted hardware (wallet) provider. Your private keys aren't kept by the company, but rather on the device that you buy (Trezor One for ~$72 and Trezor T for $255).
One difference from its direct competitor is that you won't need a phone to access the wallet (although you can connect it). Trezor devices have a screen where you can set your address and start receiving payments.
The incidents of November 2022 have also benefited Ledger with an all-time high in sales. That's about 7x more sales than the average week since the fall of FTX (with +5M in total). Already before the "exodus" started, Ledger was as, if not more, popular than Trezor.
Some reasons for this are that:
On one occasion, cyberattackers breached Ledger's client's records. But all they found were postal codes, names, email addresses, and phone numbers. There were no funds to steal because Ledger doesn't keep custody of your coins.
Even if they did, they would probably use a multi-sig like Gnosis Safe.
Multi-signature wallets are multi-user wallets with decentralized asset management. That means that if five people are members of a multi-sig wallet, you can't spend those funds unless a majority of people authorize it.
Here's how a Gnosis "Safe" works:
Let's say a thief gets access to the Gnosis Safe wallet. Maybe they stole your phone or discovered your seed phrase. The thief still can't do anything if any action needs approval from other members. You know everyone's wallet activity because you immediately get a notification to confirm.
While there's no physical device, it might be safer than hardware wallets. It's why there's over 1.6M ETH stored on Gnosis Safe contracts. Depending on market prices and including ERC-20 tokens, that's 30M to 100M USD.
Gnosis Safe also leverages the dApp ecosystem of its own EVM blockchain, Gnosis Chain.
"If we can have a way to allow people to hold their own assets in their own custody securely and easily, that 99% of the general population can do it, centralized exchanges will not exist or probably don't need to exist, which is great.” - Changpeng Zhao
The last person you would expect to think such a thing is the owner of the largest, most successful CEX. But the Binance CEO knows that traditional exchanges won't be necessary as self-custody wallets popularize. So far, their biggest selling point is the on and off-ramps that allow crypto-fiat conversions.
While decentralized exchanges don't have those yet, it's quickly becoming irrelevant for two reasons. More and more businesses accept crypto for goods and services, and there's a digital economy in DeFi that's independent of traditional finance. And self-custody wallets are closely tied to DeFi apps.
Just like there's a sales boom on non-custodial wallets, DeFi may see huge increases in traffic and TVL. Potentially, the return of 2020's DeFi summer.
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Disclaimer:Please note that nothing on this website constitutes financial advice. Whilst every effort has been made to ensure that the information provided on this website is accurate, individuals must not rely on this information to make a financial or investment decision. Before making any decision, we strongly recommend you consult a qualified professional who should take into account your specific investment objectives, financial situation and individual needs.
Max is a European based crypto specialist, marketer, and all-around writer. He brings an original and practical approach for timeless blockchain knowledge such as: in-depth guides on crypto 101, blockchain analysis, dApp reviews, and DeFi risk management. Max also wrote for news outlets, saas entrepreneurs, crypto exchanges, fintech B2B agencies, Metaverse game studios, trading coaches, and Web3 leaders like Enjin.
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