As interest in Crypto explodes, the need for risk management increases

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The crypto investment thesis shared by many seems to be that the market operates in four-year cycles. Obviously, 2018 and 2019 were the bear market. While the early part of 2020 is also bearish, that has clearly turned around with Bitcoin (BTC) now nearing its highest ever.

If the four-year cycle is true, 2021 will be similar to 2017 and traders may experience astronomical gains once again. This sharp rise in prices has attracted institutional and retail capital. Unfortunately, many of these newcomers may not be fully aware of all the dangers inherent in a decentralized environment. There are many great aspects of cryptocurrency but there can be no doubt that it is indeed the Wild West of finance.

In order for these new entrants to the market to remain confident about investing in a new frontier, they cannot lose money for want of reasons. By this, I mean bad actors’ events like exchange hacks, rug pulls, and wallet losses. Therefore, it is essential for the industry to implement risk management procedures to greatly reduce the chance of the above type of incidents occurring.

Reduce the risk of rug removal

For those unfamiliar with the terminology, rug removal refers to a con that starts with new ticket bathing, creating buzz through various social media, Uniswap listings, and then liquidity spraying. Once the retail crowd exchanges their ETH for the freshly minted coin, the project developers drain the liquidity pool, which essentially leaves the new investors holding the bag, a completely free bag. worth.

In 2020 alone, millions of dollars have been stolen through rugs, thanks in part to the increase in decentralized funding (DeFi). As is often the case, when there is a rapidly growing area, bad actors are likely drawn to the prospect of making a quick buck. Perhaps the best-known rug pulled off this year when major developer SUSHI pulled liquidity after a huge dip in the ticket price and swapped its SUSHI tickets for Ethereum.

Before investors decide to exchange their ETH for any newly minted coin, they need to make sure the liquidity is locked up. In essence, locked liquidity means that the movement of the pool pass is restricted by a time-based function, which makes it impossible for project owners to drain liquidity and harm investors. One way to achieve this is by having new projects that raise funds through submissions that opt ​​for locked liquidity protocols offered by LID Protocol. The smart contracts used by LID will reliably lock liquidity injected into Uniswap. Projects that decide to go this route will be certified by LID, which would act as a kind of honor badge that the crypto community can trust.

Prevent exchange hacks

In addition to reducing the risk of rug removal, exchange hacks must be prevented at all costs. Many of the most prominent exchanges, such as Binance, Bithumb, Cryptopia and Bitfinex, have all been hacked for serious sums of money. While many of these exchanges claim to be safe, do they really?

Almost all exchanges now require 2FA and SMS authentication. Unfortunately, that is not enough. Crypto AML’s 2018 CipherTrace Q4 report noted that attackers often “port” phone numbers in order to receive SMS text messages used in many 2FA systems. A possible solution is three-factor authentication (3FA). To access the network, exchange workers should be required to use a validation app on their phone, a certificate on their computer to access the corporate VPN, and a password. This way, if criminals fake an exchange worker’s password or break it with brute force, they still don’t enter.

Another possible solution is by having exchanges operate through a peer-to-peer exchange. For example, the Arwen exchange operates over tier-2 peer-to-peer exchange, which allows users to self-hold their coins when trading on a central exchange. The solution eliminates the risk of having coins sitting in a central exchange while trading target hackers.


Cryptocurrency is slowly but surely becoming a legitimate financial market. And while the technology has been improving at an impressive rate, many investors are still waiting on the sidelines in case they become victims of one of the many scams that seem to be running rampant across the industry. Fortunately, many insightful entrepreneurial minds have been working on ways to reduce these types of incidents that include liquidity locking to prevent rug pulls and require additional account verification to prevent phishing attacks that result inevitably to hacks. Given that 2021 is set to be a special year, I have no doubt that additional risk mitigation measures are bound to be implemented in the coming months.

Matt Chambers

Matt Chambers is a full-time cryptocurrency trader and blogger. Prior to joining the industry in 2017, Matt was a proprietary trader focused on exploiting arbitration opportunities. In his spare time, Matt enjoys traveling the world and sampling local craft beer.

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Disclaimer: Opinions expressed in The Daily Hodl are not investment advice. Investors should do their due diligence before making any high-risk investments in Bitcoin, cryptocurrency or digital assets. You are advised that your transfers and trades are at your own risk, and that any losses you may incur are your responsibility. The Daily Hodl does not recommend buying or selling any cryptocurrencies or digital assets, nor is the Daily Hodl an investment adviser. Note that The Daily Hodl is involved in affiliate marketing.