Cryptocurrencies have taken the world by storm, and rightly so, considering they have fetched profits for many investors and traders. Some of them have suffered losses as well. What keeps the crypto industry growing is the fact that evolving regulatory standards back it. The ecosystem is taking measures to develop robust security practices to prevent hacks and losses of funds. The current challenge to the growth of crypto investment largely pertains to trust within the space. Regulations are insufficient, and reports about security breaches have made more rounds than their potential prospects. This article addresses any hesitations of any interested investor before starting their crypto trading journey.
The Importance of Trust in Crypto Trading
Crypto trading is relatively new. It seeks growth and adoption to match the status of traditional trading mechanisms. However, trust forms the most fundamental aspect of getting started with crypto trading and taking it forward for a long time. Simply put, trust is paramount to the adoption and growth of cryptocurrencies and crypto trading.
Crypto security remains at the core of everything at a time when malicious actors are attempting to breach the safety net of the ecosystem. The absence of trust is rather deconstructive to the growth and adoption of cryptos and crypto trading. Its consequences are:
- Hesitation and reluctance
- Increased volatility
- Negative perception
For starters, investors begin to hesitate before getting involved in crypto trading. They perceive that anything that sounds bad will taste bad, for their funds are at risk of getting lost in the system. Investors earn a major portion of their income from investments. Lack of trust in crypto trading can increase investors’ hesitation and reluctance.
Next, increased volatility. It ideally depends on the ecosystem’s liquidity level, which is formed by the availability of funds. Investors are the main source of funds that are pumped into the ecosystem. Thereby boosting liquidity in it. Lack of trust in the sphere keeps investors away, keeping liquidity to its lowest level. This creates a surge in volatility in the crypto market.
Finally, a lack of trust creates a negative perception of the entire crypto ecosystem. This can be compared to the traditional stock market, wherein a single report about an ongoing scam brings down stock prices. Any word that hints at the prevailing villainous prospects of crypto trading keeps investors away from practicing it.
Building trust in crypto trading requires crypto security best practices and unambiguous regulatory standards.
Security Practices for Building Trust
Security practices often differ based on the type of exchanges one is referring to. Centralized and Decentralized exchanges provide you with the ultimate security but with a slightly different approach.
Centralized Exchanges
Centralized Exchanges act as custodians of user funds. Users deposit their funds into an account held by the exchange platform. Users trust the platform to handle their funds diligently, fairly, and securely. CEXs execute transactions only when they can match buyers and sellers. Essential security practices employed by CEXs are related to secure storage, user account security, and transparency and audits.
- Secure storage recommends adapting cold storage or hardware storage, which is also known as offline storage. It helps prevent online attacks as storage is done off the Internet. One of the mainly adopted methods is multi-signature wallets, which require two or more wallet keys to unlock funds or withdraw funds.
- User account security includes 2-factor Authentication and strong passwords. These align with what one sees on social media or email platforms. However, it can go on to implement security features like address whitelisting and biometric authentication.
- Transparency and audits are done regularly to ensure users that their funds are intact. Audits are conducted by independent firms, and reports are published for the crypto users.
Decentralized Exchanges
DEXs, or Decentralized Exchanges, can comparatively eliminate risk. They allow users to use their self-hosted wallets and link them to the platform. DEXs also differ from CEX in that they enable traders to transfer funds without any intermediary.
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One question arises: Is crypto safe to invest in DEXs? Yes, provided all due measures are taken. This includes choosing the right wallet and applying best practices for private key management.
There are multiple wallets in the market, but they all stand to their reputation. The ones that do are often convenient to link and integrate with platforms. Private key management can be done using hot storage or cold storage. It is imperative to manage private keys as they grant access to funds and the operation of withdrawing funds at the right time.
The Evolving Regulatory Landscape
Relevant authorities set up regulations. They reflect their trust and confidence in the market and its products. Non-regulatory compliance is seen as a crime and a factor that increases investors’ hesitation. The central banks of respective countries regulate fiat currencies. Hence, they have the status of being legitimate. Similarly, cryptocurrencies seek the same status by authorities to gain the trust of investors.
Crypto regulations are still evolving. They have so far come to the point that the US hosts Spot Bitcoin ETF and Spot Ether ETF at the press time. Moreover, there is speculation that more crypto ETFs will enter the market.
Areas that are addressed by regulatory authorities are anti-money laundering and know-your-customer standards. Consumer protection measures and oversight of activities are next on the list. The core objective is to make sure that crypto trading is not being misused and that investors’ funds are secure. It extends to keeping investors’ data safe from getting leaked to the black market.
The benefits of regulating crypto trading are:
- Entry of traditional investors in large numbers.
- Higher stability and security of the crypto market.
- Sustainable growth and maturity of the crypto ecosystem.
The regulatory landscape of cryptocurrencies continues to evolve. It will only mature with time and the involvement of investors.
Parameters to be Taken by Exchanges for Security
Details must be mentioned upfront instead of hidden or revealed at the time of settlement or execution. Let’s dive into the essential parameters that top crypto exchanges should consider for security, which is transparency with their fees, transactions, and regulations.
- Compliance with industry security standards refers to matching relevant standards like ISO 27001 or SOC 2. Measures or certifications by a large number of exchanges instill a sense of confidence and uniformity among investors.
- Bug bounty programs can be rolled out during development. This helps to identify potential areas of leak. Winners are decided based on the level of serious gas they have identified.
- Regular penetration testing addresses areas of security weakness. Performing it once in a lifetime is a serious threat, so periodic checkups are highly recommended.
- Finally, there are incident response plans. These plans reflect measures that the exchange platform will take when something happens, such as what it will do if a phishing attack compromises the network.
At the end of all of it, the objective is to restore users’ confidence and minimize the damage to the native platform and the industry.
Conclusion
Trust is extremely important in crypto trading, and it is built on two core pillars: security practices and regulatory standards. Although DEXs and CEXs follow slightly different approaches, they ultimately work to keep users and their funds safe. The crypto trading landscape is still evolving regarding security and regulatory compliance. Basic parameters are in place to ensure a seamless experience. A trader must choose the right crypto exchange based on the security measurement provided by the platform.
FAQs
What is the most trusted crypto?
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Some of the most trusted cryptos are BTC, ETH, USDT, DOGE, and SHIB. They are classified as most trusted based on their existence in the market and market cap. Plus, USDT is a stablecoin that is pegged to the US Dollar at 1:1.
What do you do if a fake crypto exchange has scammed you?
The first step of response is to freeze credits and bank accounts to avoid fraudulent deductions. Next, report the scam to the exchange platform and the respective finance authority responsible for Crypro regulation in your country. One can also file reports with local police departments.
How to identify fake crypto exchanges?
There are Government sites that report fake crypto exchanges. The Department of Financial Protection & Innovation is one of them. Users can alternatively check for the crypto exchange platform by surfing forum discussions and social media interactions. Websites typically mention their regulatory compliance and approval, serving as the primary source.