Exchanges are not a safe place to store your bitcoin

Posted by BitDirect on September 08, 2023

It’s reckoned that anywhere between four and six million bitcoins (BTC) have been lost forever because of forgotten passwords, lost hard drives and misplaced wallets.

Then there are those who have fallen for phishing scams or lost coins to exchange hacks.

“Exchanges are not a safe place to store your bitcoin,” says Andrew Field, co-founder of BitDirect, which has developed a pioneering method of securely storing BTC.

“There are way too many examples of exchanges being compromised, going back to the infamous 2014 hack of Mt Gox, which at one time accounted for 70% of all BTC transactions in the world. But there have been dozens of similar security breaches since then.”

BitDirect is a South African solution to a global problem. It allows investors to manage their cryptocurrency investments in some familiar and not-so-familiar ways. One of the innovations is ‘shared custody’, where the owner and an advisor (or nominated person) can share custody over the digital keys needed to transact or transfer BTC. This does not mean that the advisor can run off with the BTC, as multiple signatures (known as a 2-of-3 multi-sig) are needed before any movement can occur.

Another innovation is the ability for advisors to customise BTC management fees for each client, which are charged at an annual percentage rate, paid in BTC, and accrued daily. This potentially opens a huge market for advisors to earn recurring income through shared custody services. It’s not only advisors who can earn these fees.

“Anyone who wants to act as an advisor and manage an additional backup private key on behalf of friends and family [can do so],” says Field.

To onboard, you need to register first as an advisor at BitDirect, where you will be asked for your name, email, and phone number. You will need to buy a hardware wallet such as Trezor or Ledger and then register that device with BitDirect and enable two-factor authentication (requiring you to enter a time-sensitive code delivered to your cellphone) before gaining access to your wallet. A BitDirect wallet is automatically created once the registration link has been sent to the customer and they have registered their hardware device.

BitDirect is the product of two years of research and development by Field and co-founder Oliver Shepherd.

Field is a former investment banker with HSBC in London, where he was involved in converting European clients from manual to electronic trading systems. He first bought BTC in 2013 when it was priced at around $400, and that’s when the lights went on.

“I started to study BTC, and it dawned on me that this was the future of money. But I also realised there were serious security concerns around the custody and movement of BTC, and that was when we decided to come up with a solution that would solve these issues in a way that we believe is a world first.”

One benefit of BitDirect is the ability to move BTC via a third-party wallet provider, such as Electrum, without any direct involvement from BitDirect.

If something were to happen to BitDirect, the advisor and the client hold two of three keys and so have access to the funds via Electrum. BitDirect only holds a single key, so it never has direct access to client funds.

“One of the most remarkable aspects of the platform is that investors can log in to BitDirect and restore a new hardware device if they lose their hardware wallet and seed phrase (a 12- or 24-word phrase required to access a digital wallet). BitDirect and the investor’s advisor will co-sign a transaction to move the funds to a new hardware device, ensuring that investors never lose their BTC,” adds Field.

“We recognised a global problem and need for a secure and reliable storage solution that could protect investors’ funds from the countless scams, exchange hacks, confiscation and freezing of funds that are taking place more and more frequently in the cryptocurrency industry.

“We launched this product at a time when the need for secure BTC storage is more critical than ever. With the collapse of crypto exchanges like FTX, where many investors lost their money as their cryptocurrency could not be attributed to them, we see BitDirect as a game-changer for the South African financial and tech markets.”

Unlike other storage solutions, advisors can’t enter a third-party address to send clients’ funds elsewhere. The advisor can only approve or deny transactions, process fees, and help restore a new hardware device with BitDirect in the event of a loss, explains Shepherd.

Additionally, investors can move their funds through the BitDirect platform, and their nominated person will co-sign the transaction. BitDirect will co-sign the transaction to transfer the funds to either an external wallet or a new advisor if the nominated person loses access to the hardware device and recovery seed.

Many people are reluctant to invest in cryptocurrencies because they do not understand the technology or fear the security aspects of ownership.

“That’s why we’ve created a platform that is easy to use and easily accessible to everyone. We want to empower South Africans to take advantage of this technology and all the advantages that come with it,” adds Field.