When there is an opportunity to make money, there will be interest. The more money that is made through cryptocurrency trading, the more fintech startups with a crypto focus will attract funds. Over the last few years, it really seemed like crypto was the fastest way to get rich. Of course, if there’s ever a promise of getting rich quickly, there will be people ready to exploit the possibility.

Almost every investor or trader has encountered scammers, hackers, and thieves, either directly or indirectly. Today, we are going to find out if those people are an actual threat to your assets. We will also learn about ways to make sure your crypto stays safe.

Safety of Blockchain Systems: How Can Crypto Be Hacked?
=======================================================

The first step to finding out how crypto can be hacked is understanding how blockchain technology operates and how it safeguards user funds. There’s a concept in crypto called the “blockchain trilemma.” It refers to the fact that it is very hard (if not impossible) for a blockchain to simultaneously reach optimal levels of three key factors – scalability, security, and decentralization. 

Most cryptos, blockchain-powered apps, and NFTs choose security and decentralization. They boast top-of-the-line security features that ensure that once blocks have been added to the chain database, they cannot be tampered with, altered, reversed, or hacked. To put it bluntly, while blockchains are almost perfectly secured, there have been instances in the past when hackers managed to take advantage of security shortcomings.

51% Attack on Blockchain
------------------------

So, how can cryptocurrency be hacked? There is a possibility that an attacker or a group of attackers gain control over a blockchain by consolidating its computational power (hash rate). If the malicious actors control more than 50% of the hash rate, they can introduce a modified blockchain, completing the so-called 51% attack. This enables them to make adjustments to transactions yet to be confirmed before they unleash their attack.

How can Bitcoins be hacked after such actions? Well, let’s imagine a scenario where you decide to send 2 BTC to a friend. Before the transaction is confirmed six times, it is fair game to the hackers. They can easily reverse the transaction to steal the tokens. They will be transferred to a different address, and the adjusted blockchain will make it difficult to trace your funds.

We recently did a more detailed analysis of the 51% attack and the theory behind it, so click this Exolix blog link [HERE](https://exolix.com/blog/what-is-a-51-attack-and-why-does-it-need-to-be-detected) to read about it. If you don’t want to read the entire blog post, the short story is that it is borderline impossible to hack bigger cryptos. So, if you are wondering something along the lines of “Can Bitcoin blockchain be hacked in a 51% attack?” the answer is “no.” There is a possibility, but it is minuscule. Even in theory, it is almost impossible to take over at least 50% of the BTC hash rate.

Main Types of Crypto Hacks
--------------------------

Brace yourself for a shocking revelation – not only can cryptos be hacked, but there are multiple ways this can happen. Let’s examine the main types of hacks that have occurred in the past:

1.  Wallet hacks. Crypto wallets contain the keys to your crypto. Most people choose mobile/web apps to store their keys, and the sad thing is that apps get hacked all the time. We strongly advise you to stick to cold (offline) wallets.
    
2.  Exchange hacks. Why wonder, “Can cryptocurrencies be hacked?” when entire exchanges can be hacked? Since these kinds of platforms have robust reverses to ensure solvency, they are a very tempting target for hackers. If you do not store your keys on a specific site, then you are totally safe from this type of attack.
    
3.  Bridge hacks. In crypto, a bridge is something that helps traders convert their crypto funds from one blockchain to another. Similarly to exchanges, bridges are attractive because they hold plenty of funds at any given point in time. A good example of a bridge hack was when Harmony’s Horizon Bridge was exploited for $100 million.
    

Ways to Protect Your Crypto Assets
----------------------------------

A crucial way to protect your funds is by using cold wallets. You have to understand that aside from the very unlikely 51% attack, the only real way your money can get stolen is if your keys are compromised. Take extra steps to keep them safe by choosing non-custodial cold wallets.

While Bitcoin can be hacked theoretically, it is safer for you to stick to the better-known cryptos. Smaller projects are more vulnerable to the above-mentioned attacks and are more likely to attract hacker attention in general.

In addition to using cold wallets and choosing BTC or other top cryptos, you should also swap your current exchange for a safer one. At the time of writing, these are the most secure options:

*   Bybit
    
*   Binance
    
*   Huobi
    

Notice how we didn’t include Exolix in the list? That would have been highly unprofessional! Even though our site is indeed safe and can hang with the best of them.

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The first step to finding out how crypto can be hacked is understanding how blockchain technology operates and how it safeguards user funds.

Can Cryptocurrencies Like Bitcoin Be Hacked? | Exolix

With Big Money Comes Big Risk: Can Bitcoin Be Hacked?

Crypto is hot right now. Everyone knows that. However, not everybody is aware of the fact that the crypto custody option market is experiencing analogous growth.

What Are Proof of Reserves? 
----------------------------

Let’s begin with the definition of PoR and set out some key information. In regular banking or business, reserves are the revenue a firm sets aside as a reserve in case of a potential loss. They get audited from time to time to ensure solvency.

In crypto, there is a similar kind of review known as Proof of Reserves (PoR). It is defined as a fully independent audit carried out by an outside party to confirm that the project/firm/entity that is being examined has sufficient reserve funds to support the balances of all depositors.

With PoR, an exchange or a crypto custodian can prove to the public that they have enough funds to swap, withdraw, or convert at any given point in time. With the increased trust it brings from the public, a company that successfully undergoes a PoR audit can quickly attract new clients. The positive impact is beyond that because it also helps retain current clients along with other shifts. It might not result in exponential growth right away, but it certainly lays the foundation for this kind of boost.

What Is Proof of Reserves and How It Works
------------------------------------------

The second step in understanding how Proof of Reserves works is to make sure you have a basic grasp of the process itself. It is not really complicated, since this kind of audit, in most cases, can only go two ways: either there is sufficient solvency, or there isn’t. The audited exchange either has enough funds to meet long-term debts and other cryptocurrency obligations, or it does not.

The only exception to the above is fractional-reserve banking. With this system, only a portion of the crypto funds is kept as a reserve, and the rest is lent to borrowers.

### Main Steps of the Process

To make it easier for you, let’s break the process down into three steps:

*   Step 1: Proof of liabilities. In accounting, a liability is a future financial obligation to other entities or people based on past transactions or events. So, liabilities here are presented in the form of the outstanding crypto balances owed to the users. In this step, financial health is calculated based on the sum of all client balances, fraction factor hash, and the root of a [Hash/Merkle tree](https://en.wikipedia.org/wiki/Merkle_tree).
    
*   Step 2: Proof of reserves. This is where the sum of all account balances is calculated. The audit program that they run during this step is very nifty – it does not have to examine the entire blockchain; it utilizes a time- and resource-saving precompiler instead.
    
*   Step 3: Proof of solvency. The final step involves confirming that all software was run in an environment with a sufficient level of trustworthiness. At the end of the audit, you will be presented with two options – either liabilities (future financial obligations) exceed liabilities, or they don’t. If they do, then the audited platform is in bad shape and poses high risks to users, shareholders, and the company itself.
    

Carrying Out a Proof of Reserves Audit
--------------------------------------

The first thing to establish is that it is always a third party that carries out the audit. When auditing a platform, you can’t have ties with them: not directly or indirectly. Here are the steps that an auditor takes during the process:

1.  A third-party auditor or auditing company takes a snapshot of the platform’s balances. All depersonalized, of course. The balances are then fitted into a hash tree containing key custodial data.
    
2.  Individual contributions from clients are gathered. It is done using their unique signatures.
    
3.  The final step is confirming that the cryptocurrency assets of the clients are in full-reserve status, meaning that indicated crypto balances are, at the very least, equal to those fetched from the hash tree data.
    

Upsides of Conducting This Type of Audit
----------------------------------------

You now know what PoR entails and how it is carried out. Now, it is high time for you to learn about the main advantages of this audit method. Audited companies will enjoy the following benefits:

*   Simple method of restoring faith. Even if an exchange’s reputation took a hit, most users are willing to look the other way if everything is in order on the financial side of things.
    
*   Opportunities to improve. An audit can expose issues with your recordkeeping systems or any other internal issues that have the potential to affect the business adversely and should be addressed in time. When you fix them, you are on the path to improving quality for customers.
    

The biggest benefits to users include:

*   Great way to confirm your cryptocurrency assets are safe. Mismanagement of funds is a huge issue in the field of digital money. PoR audit confirms that the funds aren’t being used to generate additional profit for the company.
    
*   Easier to choose a platform to entrust your money to. With a reliable PoR practice, the exchange will look more attractive, so it will be easier for you to make a final decision.
    
*   Ability to monitor actual records of your crypto transactions. Not only that but it can be done in a quick and convenient way.

Optimized-Frame 48095765 (1).png

Proof of Reserves (PoR) is defined as a fully independent audit carried out by an outside party to confirm that the project/firm/entity that is being examined has sufficient reserve funds to support the balances of all depositors.

Proof of Reserves: Discovering the Main Purpose of PoR

Almost every other article from the Exolix blog starts with something along the lines of “with the interest in crypto reaching a new high..” Indeed, crypto is hot right now. Everyone knows that. However, not everybody is aware of the fact that the crypto custody option market is experiencing analogous growth.

In technical analysis, the term “ascending triangle pattern” is used to refer to a certain chart pattern. It presents itself when there are price moves that allow for a straight, horizontal line to be drawn alongside the SHs (swing highs) and an upwards-sloping trend line to be drawn along the SLs (swing lows). These lines form a triangle. Experienced market analysts are frequently on the lookout for breakouts from such formations. It must be noted that a breakout can happen to either the downside or the upside.

Triangular patterns usually fall into the continuation patterns category since the price will normally break out in an analogous way to the trend that was present before the triangle pattern began to take form.

Most people use this triangle as a pattern that shows a distinct point of entry, take-profit point, or stop-loss level. Of course, with a broader understanding of this pattern, you will also be able to convert this knowledge into revenue when you exchange across the cryptocurrency market.

What Is an Ascending Triangle Pattern? What Can It Help You with?
-----------------------------------------------------------------

As mentioned before, this pattern normally falls into the continuation pattern category, which means that it is significant if it shows up within a downtrend or an uptrend. When the breakout from the triangular shape happens, brokers are usually inclined to start buying or selling the asset in a very aggressive fashion, based on which way the price went.

Increasing the amount of stock helps to confirm the breakout as it signifies increased interest as the price escapes the pattern. It takes two or more SHs and SLs to form the trend lines of this pattern. The more trend line touches there are, the more dependable the predictions are.

At its most basic, this pattern shows that purchasers might not be able to break out of the supply line (represented by the horizontal line/resistance line). That leads to lows becoming higher – for instance, stocks might sell at higher price targets during an upward trend that keeps on touching the trend line up top. With the lows getting higher and higher, the trendline rises to reach the breakout point (the point located at the top of the triangle), which will create a type of trend reversal.

Identifying the Pattern
-----------------------

While the question of how to find ascending triangle pattern formations can be subjective, we really think that there is an objective answer to it: you have to watch out for steady resistance levels and rising trend lines. The levels show where prices reach their high point (a horizontal line that forms the top of the triangle). The line becomes the hypotenuse of the triangle, and it rises upwards as prices begin to reach higher lows.

How to Trade Ascending Triangle Pattern
---------------------------------------

Trading this pattern is not that difficult, actually. Here are the steps you need to take:

1.  Recognize the uptrend;
    
2.  Pay close attention to when candlesticks start to consolidate as the triangular pattern emerges;
    
3.  Utilize a measuring technique to calculate a profit target if you know how to calculate ascending triangle pattern;
    
4.  After witnessing a solid break above the supply line, you can enter a long position, setting a stop-loss level at the recent SL and take-profit level at the profit target you calculated previously.
    

Main Pros and Cons of the Pattern
---------------------------------

Now with a better understanding of what an ascending triangle is, we can examine its greatest strengths and weaknesses. Before conducting further research and adding this instrument to your technical analysis tool belt, let’s list the pros and cons:

Pros

Cons

It is very simple to find this pattern on any chart; be it cryptocurrency trading or Forex, it’s very easy to pinpoint.

Fake-outs (or [false/fake breakouts](https://priceaction.com/price-action-university/strategies/false-break-out/)) occur commonly. This is when the bounds are slightly penetrated, but the full-blown breakout never comes into existence. That is an ascending triangle pattern probability that might interfere with reasonable market projections.

This pattern gives you a clearly defined target level if you do some calculations. Knowing the max height of the triangle, you can project profit targets.

Sideways movement. There is a very real possibility that the asset’s price will move sideways for a fairly long time. There is also a possibility it will move lower.

As a medium-term pattern, ascending triangle presents trading enthusiasts with an option to perform transactions within the triangle, but there is also a bigger picture - deals must be filtered in the [trend’s main direction](https://tradingstrategyguides.com/ascending-triangle-pattern/).

Different Types of Triangles
----------------------------

If you plan on diving deeper into the subject beyond the Exolix write-up right here, you’ll find more intricacies to this pattern. One of the more interesting things is that there exist two similar triangle-shaped patterns: symmetrical triangles and descending triangles.

*   A symmetrical triangle is a pattern where the slopes of highs and lows meet to form a triangular shape. This pattern signifies a point where the market is producing higher lows and lower highs. Neither people selling assets nor people buying assets are pushing the price level strong enough for a clear-cut trend to emerge. With what an ascending triangle pattern can show, you will find that a symmetrical triangle is less reliable. Here, we don’t really know in which direction a breakout will occur. We are not even sure if it’s going to occur at all.
    
*   A descending triangle is a pattern that is the opposite of the ascending one. Here, several lower highs create the upper line, the support line. Based on this pattern, you can predict with a fair amount of certainty that the price is about to go in a certain direction. In most cases, it simply breaks the upper line to continue its fall, so it might make sense for you to swap.

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In technical analysis, the term “ascending triangle pattern” is used to refer to a certain chart pattern. It presents itself when there are price moves that allow for a straight, horizontal line to be drawn alongside the SHs (swing highs) and an upwards-sloping trend line to be drawn along the SLs (swing lows). 

What Is an Ascending Triangle Pattern? Understanding the Basics

The Merkle tree is named after its creator, Ralph Merkle, a well-known computer scientist who made significant contributions to the invention of public-key technology and introduced the tree in his 1987 work called "A Digital Signature Based on a Conventional Encryption Function." He is also the creator of cryptographic hashing.

What is a Merkle Tree? 
-----------------------

Merkle Tree Definition is quite simple, despite being modeled on an actual tree, which can turn out to be quite complicated. The Merkle tree is a numeric hash-based structure that combines transaction summaries from an entire block. It is a decentralized technique for rapidly verifying data accuracy. Merkle trees are widely utilized for encrypting data on a blockchain efficiently and reliably based on their properties. Merkle trees are widely applied in P2P (peer-to-peer) networks due to the necessity for data to be exchanged and independently verified. 

What Is a Merkle Tree in Blockchain?
------------------------------------

So, how do Merkle trees work? A Merkle tree adds up transactions in a single block and produces a unique digital identifier of the full collection of operations, enabling the user to check if it contains any transaction in the block.

A Merkle tree was specifically developed to split enormous amounts of data into many smaller portions so that all operations could be verified quickly. The tree sums up every blockchain entry, generating a tiny fingerprint of such a specific group, allowing users to easily check the presence of individual transactions inside a block.

Merkle Trees Explained
----------------------

Merkle trees are formed by continuously hashing node pairings until one last hash is left, which is called the Root Hash or otherwise the Merkle Root. They are created from the bottom-up, with transaction IDs, which are hashes of transactions made.

*   Every non-leaf element becomes a hash of the hash before it, and each leaf node is, therefore, a hash of transaction entries.
    
*   A Merkle tree is utilized in cryptocurrency to securely divide the block's data and guarantee that it isn't lost, corrupted, or manipulated. This data management solution allows users to verify certain transactions without having to download the full terabyte-sized blockchain. It is a trustworthy, safe, and cryptographic way of administering the blockchain.
    

Merkle Tree Advantages
----------------------

While a Merkle tree is used to validate transactions, there are several advantages for blockchain networks and cryptocurrency platforms, including everything from effective validation to easy detection of potential tampering.

1.  ### Increased Processing Speed
    

Because the transactions on the block are distributed among the validators, every validator processes a transaction at the same moment. This procedure is far more effective than one in which every transaction is checked consecutively.

2.  ### Data Validation Process That Is Effective
    

Transaction security may be easily checked in a matter of minutes. Due to the data architecture, relatively little memory is used throughout the verification process, and the required computing power is significantly reduced.

Since blockchains contain a significant number of blocks, every one of which might include thousands of transactions, verifying the data presents two main issues: memory space and processing power.

Without Merkle trees, each node on the chain would have to store a full transaction copy of everything that had happened on the blockchain since its inception. When confirming a transaction, a node would be required to evaluate each entry to guarantee that its records perfectly matched the network records. As a result, the machine used to authenticate the data would have required significantly more computing power to verify the entries to ensure there had been no alterations.

The Merkle tree offers a great solution to the problem by lowering the quantity of data required for verification purposes. They hash each item in the ledger, essentially isolating the data from the proof that backs it up. You can employ a Merkle tree to verify a transaction ID without having every individual transaction ID in a whole block of transactions. A Merkle tree is a method to show that something exists in a dataset without being required to download the complete set. As a result, transaction validation requires less computer power.

###    3. Prevention of Possible Tampering

The hash architecture makes it easy for cryptocurrency miners to know whether or not transactions have been tampered with.

The Merkle root is used to create a unique hash code for every block. The hash for every previous transaction block is used to connect one block to the next on the blockchain. When one transaction is altered, the hash of that transaction also changes. As a consequence of this alteration, the block becomes incorrect since it makes its way up toward the Merkle Root and modifies its value. This results in a change in the hash of the subsequent block, rendering the remainder of the blockchain invalid. So, the Merkle tree produces an incorruptible record of transactions for every single block.

Hence, double spending can be avoided. If a user attempts to double-spend their cryptocurrency, a hash for that transaction is also produced. If that hash matches any of the current blockchain entries, the transaction is denied.

How Are Merkle Trees Used in Bitcoin?
-------------------------------------

In the absence of the Merkle tree, for instance, each node will be required to maintain transaction copies that were made in the blockchain. The volume of data to be processed would be inconceivable.

To validate a prior transaction, a node would be required to connect to the network and obtain copies of the record from its peers. To guarantee that both its own and network data are the same, the node must check each input item by item. If there are differences between the entries, the network's security could be compromised.

Given that you require real data to validate it, every cryptocurrency verification request necessitates sending absurdly large packages over the network. The machine used for validating would require a considerable amount of processing power to analyze the ledgers to validate transaction information. To overcome such an issue, Merkle trees are used.

Summary
-------

Without Merkle trees, blockchains and cryptocurrencies would almost certainly never thrive. If there were no viable alternative, the volume of computing power and storage would be prohibitively costly to run. It's interesting to see how an ancient notion is still used in modern technologies. This is one of the key reasons why this technology works so well. The Merkle tree is a critical basic component of any blockchain technology that makes it function successfully.

Optimized-Merkle tree.png

The Merkle tree is named after its creator, Ralph Merkle, a well-known computer scientist who made significant contributions to the invention of public-key technology and introduced the tree in his 1987 work called "A Digital Signature Based on a Conventional Encryption Function." He is also the creator of cryptographic hashing.

What Is a Merkle Tree & What Is Its Role in Blockchain?

When you hold a long position in a cryptocurrency, your next step is usually aimed at closing it at exactly the right moment, regardless of the technical aspects. You may decide to sell it for fiat currency, convert it, or swap it. To do this, you typically go to a crypto exchange like Exolix. But if you have a bearish outlook on the price, you may wish to go further.

How to Short a Cryptocurrency
-----------------------------

Most investors are familiar with the idea of selling short in the conventional financial markets, but an option to short-sell a cryptocurrency has not been available until recently. Short selling a cryptocurrency, like shorting equities, helps traders benefit from price declines. Shorting cryptocurrency typically involves borrowing coins from a broker and selling them. Once the value of the coin decreases, you buy it back and return it to the broker. The financial gain is the price differential. 

Shorting cryptocurrency can be risky, yet it can also be incredibly profitable for investors who successfully forecast price fluctuations.

Advantages of Cryptocurrency Shorting
-------------------------------------

Cryptocurrency shorting has its pros and cons. On the positive side, selling short allows you to benefit from a price decrease. So, if you believe the market value of a cryptocurrency will decline, you may sell it short and profit when it does.

Shorting could also let you hedge against potential losses. When you're concerned about something like a market collapse, shorting against an outstanding long portfolio could help mitigate some losses.

Disadvantages of Cryptocurrency Shorting
----------------------------------------

Shorting is a risky tactic because there is no limit to how much you may end up losing if the market starts to climb. You might become trapped in scenarios such as a [bear trap](https://www.investopedia.com/terms/b/beartrap.asp#:~:text=Key%20Takeaways,futures%2C%20bonds%2C%20and%20currencies.) or a [short squeeze](https://www.investopedia.com/terms/s/shortsqueeze.asp), with the potential to lose a significant amount of money. Shorting also needs precise timing, discipline, and risk management. To generate profits, you must be correct not only about the general price movement but also about the timing of your transactions. This technique is not suitable for everyone.

Short selling usually involves a margin account with a broker or an exchange, which some traders may find difficult to get. It is critical to thoroughly consider these factors before deciding to adopt this kind of strategy.

You may short cryptocurrencies in a variety of ways, depending on the degree of risk you might want to accept and your skills. 

How to Short Any Crypto: Popular Instruments and Methods
--------------------------------------------------------

### 1\. Trading on Margin

Crypto margin trading is among the simplest methods to short cryptocurrency. This sort of trading is permitted by many brokers and exchanges, as margin trades enable traders to borrow money from a broker to carry out their transactions. A margin implies leveraging or money borrowed, which can boost gains or aggravate losses. These days multiple cryptocurrency exchanges support margin trading, with Binance, OKX, and Kraken being notable examples.

### 2\. Crypto Futures

Like many other assets, cryptocurrency does have a futures market. Under the future contract concept, a buyer agrees to a transaction in the asset under a contract that defines at what moment in the future and at what price the investment will be transferred. 

When traders take long positions by purchasing futures contracts, they are wagering that the value of the asset will climb, allowing them to get a bargain on it later. If they sell futures contracts, it indicates a bearish view and a bet that the price of the asset will fall. One can sell cryptocurrency short by trading contracts that gamble on the cryptocurrency's value falling.

  

Most traders choose Bitcoin or Ethereum futures contracts because they offer the most liquidity for trading. This is currently accessible on a multitude of platforms. Bitcoin futures are traded on the [Chicago Mercantile Exchange (CME)](https://www.cmegroup.com/markets/cryptocurrencies/bitcoin/bitcoin.html), the world's largest trading platform for derivatives, as well as on various cryptocurrency exchanges. Bitcoin futures may be traded on large exchanges such as Kraken, Bybit, and BitMEX, as well as through popular brokerages.

### 3\. Prediction Markets

One more option for selling cryptocurrency short is to use prediction markets, where you can speculate on the outcome of certain events. Prediction markets in cryptocurrency are comparable to those in conventional assets. Investors can customize a specific outcome and gamble on the result.

You may, for example, forecast that a cryptocurrency will fall by a specific number or percent, and if anybody accepts your bet, you'll benefit if it happens. Gnosis and Augur are two popular cryptocurrency prediction markets.

### 4\. CFD (Contract for Difference)

A contract for difference (CFD) is a financial instrument that gives a payout depending on the price difference between the open and closing prices. Cryptocurrency CFDs, like cryptocurrency futures, are wagers on the cryptocurrency's price. You are short-selling a cryptocurrency when you buy a CFD expecting that values will fall. As contracts for difference are settled in fiat currency, investors are not required to hold or store cryptocurrencies. 

CFDs typically use longer settlement periods than cryptocurrency futures. Furthermore, for certain CFD markets in cryptocurrency, traders may commit to a contract that is based on the value of a cryptocurrency or its performance relative to a fiat currency or another cryptocurrency.

### 5\. Binary Options, How to Buy/Short Crypto

Traders may also short cryptocurrency using put and call options. If you want to sell the currency short, you will buy a put option. This means that you want to sell the currency at current prices, even if it drops later.

Some international exchanges provide access to binary options, but the risks and costs are substantial. One benefit of trading binary options over futures is that you can limit your downside by only buying put options. As a result, your losses are restricted to the cost of the put options. OKX and [Deribit](https://www.deribit.com/options/BTC) are two popular options trading platforms.

Summary
-------

Shorting cryptocurrency may be a profitable trading strategy. When used effectively, experienced traders may profit from the volatile cryptocurrency market. Prices are growing tremendously and dropping as current regulations tighten and countless new coins emerge. However, because of the higher risk, newbies are advised to avoid high-leverage short-selling strategies.

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Shorting cryptocurrency may be a profitable trading strategy. When used effectively, experienced traders may profit from the volatile cryptocurrency market.

How to Short Crypto: Profit During Crashes and Retracements

Let’s start with a definition. To fully comprehend the term, you should first have a thorough understanding of financial asset custody. Custodians are the entities that provide a variety of financial services in conventional financial markets. The primary job of custodial service providers within conventional capital markets is asset safekeeping.

Custodians may function as vaults, storing clients’ assets in both digital and physical forms and charging a fee for this service. Furthermore, custodians use their market knowledge to facilitate and expedite the settlement of client trades. But what does crypto custody mean? In the context of cryptocurrency, it is almost the same, as there are commonalities with conventional financial industry custodians. Still, there are a few specifics to cryptocurrency custody that you need to be aware of.

What Is a Cryptocurrency Custodian?
-----------------------------------

Institutional cryptocurrency custodial solutions are similar to those of conventional capital markets custodians, but with one significant difference; custody solutions for cryptocurrency are primarily concerned with taking responsibility for and protecting clients’ digital currencies, not physical assets. Secure key management is fundamental to the successful storage and processing of crypto data when it comes to storage solutions.

How Does Crypto Custody Work? Public Keys and Private Keys
----------------------------------------------------------

If we delve deeply into any cryptocurrency wallet, we will discover how the keys are used. In reality, any solution that provides you with custody of cryptocurrency, such as a crypto wallet, does not actually keep your coins.

The private keys are held for you by the cryptocurrency custody provider of your choice. Custody solutions may also assist you in properly managing your cryptocurrency by providing private key access. Private keys are random binary numbers that aid in transaction encryption and decryption. The private keys are used to validate a transaction.

Public keys are essentially long numeric strings that are linked to a certain wallet or custodial solution. They act as the user’s wallet address and should be linked with the appropriate private key when the user executes transactions, such as buy/sell, transfer, convert, or swap.

Cryptocurrency Custody Options: What Is a Crypto Custodial Wallet?
------------------------------------------------------------------

With a thorough understanding of the fundamentals of cryptocurrency custody, it is now time to focus on various categories of solutions. What sorts of custody solutions are available for cryptocurrency? Below are the three most frequent forms of crypto custody services available to both individuals and institutions. A crypto custodial wallet is a sort of cryptocurrency wallet in which the private keys of the wallet are stored by a third-party service provider called a custodian.

1.  ### Self-Custody Wallets
    

Self-custody cryptocurrency solutions mean you keep the private keys to the crypto assets yourself, using hardware, software, or paper. Self-custody wallets are some of the most popular alternatives for individual cryptocurrency custodial solutions. You safeguard your crypto assets using the hardware, software, or paper wallets that suit your needs. 

The benefits of self-custody systems include increased security and control over your assets. However, you must take full responsibility for your asset, as well as the risks of theft and loss.

2.  ### Exchange Wallets
    

Another popular approach for cryptocurrency custody involves using wallets on an exchange, such as [Exolix](https://exolix.com/). An exchange wallet is a means by which investors and traders make it easier for themselves to exchange, administer and store private and public keys. Users have simple access to their public and private keys through an electronic wallet.

These systems are appropriate for institutional cryptocurrency custody, in which the exchange is responsible for using private keys. Although exchange wallets provide significant simplicity and convenience of access for maintaining cryptocurrency custody, they also pose some risks to counterparties.

3.  ### Third-Party Custodial Wallets
    

Third-party custodians are another solution for cryptocurrency custody providers. Third-party custodians are service companies that store crypto assets for their clients. Third-party custodians provide the option of implementing custom-defined functions and controls for governing asset management.

Third-party custody solutions provide superior institutional-grade security as well as insurance for enterprise crypto custody. Standardized schemes with strictly delineated rules and procedures for handling crypto assets do provide a potential benefit. Furthermore, third-party custodians provide greater flexibility and security but at a higher cost.

Is Cryptocurrency Custody Safe?
-------------------------------

Cryptocurrency custody is not 100% safe, as there always is a risk of hacking or data leakage, but it may be considered “sufficiently safe” because all necessary precautions are taken.

Whenever you use cryptocurrency custody, you are entrusting your money to a system designed and managed by someone else. Because these individuals can make errors or be outwitted by an attacker, any system can only be as safe and secure as the people who create and maintain it.

Having mentioned this, numerous crypto custody systems are created and managed by industry specialists who are fully familiar with the technical and physical issues associated with protecting assets. To eliminate any uncertainty, several custodians offer insurance plans for your assets if particular concerns exist.

Types of Cryptocurrency Wallets
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*   A wallet constantly linked to the Web is referred to as “hot storage.” Exchanges, for instance, always offer hot wallets that let users withdraw cash promptly.
    
*   Warm storage refers to a wallet that is located on a network interface but still functions without it.
    
*   A cold storage wallet is a device that is not linked to the internet. Transfers are usually undertaken in an “air-gapped” manner, in which transaction authorization occurs on a distinct, offline server rather than on the internet-connected host.
    

Additional Security Precautions
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Two-factor Authentication (2FA) is a method of ensuring that accounts are secured by more than just a password and require a random number or a device to enable access.

Businesses frequently employ address whitelisting to guarantee that cash is only sent to previously approved addresses. This necessitates a hacker having access both to the wallet and the system that keeps this list.

A multi-signature (multi-sig) wallet requires permission via several keys to have access to money and transmit transactions.

To guard against physical assaults, these keys and/or users should be distributed geographically.

The private keys required to begin transactions are better kept cold. The phrase “cold storage” applies to offline storage that prevents transactions from being performed remotely via the internet.

Whenever someone attempts to move funds into a crypto vault, there is a built-in, predefined delay. This is sometimes referred to as a “timelock.” It prevents the cryptocurrency from being transferred for a set period.

Individuals may employ these security features without the assistance of a custody provider, but like with many things in the world, having a professional handle them can be beneficial.

Furthermore, many cryptocurrency custody providers are audited regularly and will pay consultants to try to breach their networks to find and address such weaknesses preemptively.

The Expense of Cryptocurrency Custody
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Cryptocurrency custody companies charge for the safeguarding of cryptocurrency in the same manner that banks do for specific checking accounts.

Self-custody users do not pay a fee, but they do spend money on wallets and storage that ensure the private keys are secure.

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Custodians are the entities that provide a variety of financial services in conventional financial markets. The primary job of custodial service providers within conventional capital markets is asset safekeeping.

What Is Cryptocurrency Custody and How Does It Work? | Exolix

What Is Cryptocurrency Custody and How Does It Work?

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