If you speak to any investor who physically invests in cryptocurrency then one of their biggest concerns will be the “custodian issues around securely storing crypto”. This relates to the theft or loss of an investor’s cryptocurrency assets which is a real and significant problem within the cryptocurrency ecosystem.
One of the major benefits of utilizing a crypto hedge fund is this custodian risk is shifted from personal investors across to the hedge fund to manage. Not only does the investor no longer need to manager this risk, but by shifting this to the hedge fund, the investor can leverage off the funds leading capabilities in processes, systems, technology and people which are deployed to secure these assets. This is the case because the leading global cryptocurrency hedge funds have assets under management of anywhere between USD100m up to USD1B and the vast amount of these assets are made up of cryptocurrencies.
Now, there is a misconception that when cryptocurrencies are stolen this is because the blockchain is hacked. This isn’t the case as the majority of the reports are based around cryptocurrency being stolen or scammed out of investors. The key areas where crypto is stolen or lost include:
- When investors leave their crypto on cryptocurrency exchanges there has been instances where the exchange has been hacked and crypto stolen.
- When investors download cryptocurrency to their wallets sometimes malicious code on their computer has exposed their cryptocurrency to hackers
- Investors have also downloaded cryptocurrency to a thumb drive or into paper copies and this has been stolen.
- There have been reported instances where investors have lost the devices (computers, wallets, thumbdrives, paper) which their crypto has been saved on. This results in the cryptocurrency be lost in the “Digital Space” which means it sits on the blockchain dormant for indefinitely.
- One of the largest areas that relates to cryptocurrency theft is phishing or scams where investors are tricked in sending cryptocurrencies or making available the private keys of cryptocurrencies to scammers who then steal those cryptocurrencies.
The above custodian risks are basically mitigated by the leading cryptocurrency hedge funds. There will always be a small amount of risk associated with holding physical cryptocurrency but in general the leading hedge funds are the safest custodians in the ecosystem.