What is a banking attack in the cryptocurrency market and how does it work?

The history of banking dates back to the advent of banks. This situation affects banking systems and other financial services that provide similar services. Cryptocurrency exchanges offer services similar to those offered by traditional banking systems, so they are not immune to the problem.

The widespread lack of exchange regulation makes it important to understand what cryptobanks are and how to protect against them. So what are bank foreclosures and how can you protect yourself from their harmful effects? You will soon know.

What is a bank run?

A bank run occurs when customers withdraw their money from a financial institution for fear of losing it if the institution goes out of business. As more people withdraw their funds, the greater the likelihood that the institution will be unable to continue processing withdrawals, especially if the financial institution’s reserves are insufficient to cover withdrawal requests.

Bank runs have occurred in various aspects of finance over time, but we rarely hear about them in traditional finance recently, as measures have been taken to curb such cases. Banks also usually have insurance and reserves to protect against any unfortunate events that could cause them to lose their customers’ funds.

A bank run occurs when customers collectively withdraw their funds from banks in the belief that the bank is at risk of bankruptcy. It starts from a widespread fear that a financial system or institution is at risk of bankruptcy, usually caused by a series of events. Customers then start withdrawing their money almost simultaneously, increasing the likelihood that the financial institution will go bankrupt.

Recent events in the crypto world have made bank runs a little more pronounced. Many crypto investors started withdrawing their money due to fear, uncertainty and doubt about crypto exchanges and cryptocurrencies, which was primarily caused by the FTX crash.

After the crash of FTX, many crypto investors started withdrawing their money from various exchanges out of fear that other crypto or exchanges would crash and they would suffer the same fate as many FTX customers. Panic withdrawals have affected cryptocurrency prices.

The bank run affected many exchanges, causing a big name like BlockFi to stop processing withdrawal requests and eventually file for bankruptcy. Other exchanges have also seen an increase in withdrawal requests.

For cryptocurrencies to survive and gain the trust of their users, they must adopt practices that ensure the safety of their customers’ funds, even in the event of bankruptcy. Such a practice could be the strict separation of customer funds from the company’s general fund or, at the very least, evidence that there is a protection of each customer’s deposits.

4 ways to protect yourself from the negative effects of bank failures

Here are the steps you can take to ensure your funds are safe in the event of a banking crisis.

1. Use exchanges that have proof of reserve.

Providing proof of reserve has become a serious issue since the crash of FTX. Some big players, such as Binance and Bybit, responded positively to the idea and started offering proof of reserve.

Proof of reserve shows users a snapshot of a cryptocurrency exchange’s resources and financial backing, allowing them to make better decisions when choosing an exchange to trade.

As much as you would expect reputable exchanges to be able to provide some form of trust and protection, the FTX bankruptcy case and the ensuing trouble has made people discover that using a reputable broker is not enough to be safe during trouble of bankruptcy. Instead, users now want to be sure that the exchange they use is well audited and has measures in place to protect them in the event of bankruptcy.

Providing proof of reserve becomes necessary to increase customers’ confidence in an exchange, as they want to be sure that their funds are backed by tangible assets.

2. Diversification of investments

Diversifying your investment into different cryptocurrency assets can be a good way to mitigate the negative impact of a cryptocurrency’s loss in value. You can also diversify your funds across various reputable exchanges to ensure you don’t lose your entire investment in the event of a bank run.

Investing in assets other than cryptocurrency is another way to diversify your positions. The Forex market, the stock market, the real estate industry and many other industries offer investment opportunities, although they are not as volatile as crypto.

3. Using a cold wallet

Using a cold storage device to store your cryptocurrencies is one of the most reliable ways to protect against bank withdrawals. A cold wallet is an offline device where you can store bitcoins and other cryptocurrencies. The device is not connected to the Internet and usually not connected to an exchange. Thus, it protects you from unauthorized access, hacking and other vulnerabilities that you may face with online exchanges, including bank withdrawals.

bitcoin token and usb stick

When it comes to storing your cryptocurrencies, cold wallets offer better security than hot wallets or web wallets. Since the cryptocurrency industry is still going through security reforms and restructuring that would make it as secure as traditional financial institutions, backing up your cryptocurrencies to a self-hosted offline wallet or without a guard may be the best option .

4. Follow cryptocurrency and stock market news

Checking the news about the crypto you are investing in and the platform you are investing in will allow you to stay informed of the latest developments. It can be beneficial to be one of the first people to receive information about a crisis or an impending crisis in a cryptocurrency exchange, because you can withdraw your money faster before withdrawals are suspended.

Always take safety precautions

You cannot control if or when a bank run will occur. However, you can protect yourself to a large extent from its effects by using the measures we have explained in this article. A bank operation can be so intense that an exchange can lose all value and be forced to shut down, resulting in the loss of user funds.

Since the cryptocurrency industry is still in its infancy, you should take practical steps to ensure that your funds are safe and not completely dependent on your cryptocurrency or online wallet.

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