Letter #17: Not Your Keys, Not Your Coins - The Demise of Africrypt
Bitcoin businesses are thriving and new and experienced investors alike are becoming wealthy at a staggering pace. After all, even in the midst of Bitcoin’s current downturn its price is up over 250% in the past twelve months alone. However, white hat participants are not the only people finding success in Bitcoin’s uptrend. Cryptocurrency scams and those who perpetrate them are also getting rich. CipherTrace, a blockchain analytics firm specializing in tracking global crypto crimes, estimates that crypto scams worldwide netted nearly $450 million U.S. dollars in just the first four months of 2021. That number may soon grow exponentially though if the latest reports about the disappearance of coins entrusted to a South African crypto investment firm are true.
Africrypt - Too Good to be True?
Africrypt was founded in 2019 by brothers Ameer and Raees Cajee, and quickly grew from a one-man operation run out of a bedroom to one of the most successful trading firms in all of South Africa. The firm promised substantial returns to investors and took in a significant amount of money. While the exact amount of the firm’s assets under management is unknown, estimates range from $100 million U.S. dollars, as sourced from the firm’s own press release, all the way up to $4 billion U.S. dollars if the claims that the firm managed over 69,000 Bitcoin are true.
The trouble for Africrypt began early in April 2021 when Africrypt’s employees lost access to the back-end platforms used to support business operations. Seven days later, Ameer Cajee, the firm’s Chief Operating Officer, notified investors and clients that the business had ceased operating due to a hack that had compromised all systems and the funds held within the firm’s accounts.
Was Africrypt truly hacked or did the Cajee brothers make off with billions in what may be the largest cryptocurrency scam in history? Perhaps only the Cajee brothers themselves know the truth, and, as can be expected, they are denying any involvement in the direct loss of the funds. The Bitcoin were traced leaving the firm’s wallets and then traveled through a variety of Bitcoin mixers in order to make them more difficult to identify. However, that in and of itself may not be the smoking gun that some hope that it is. The thieves responsible, whether the Cajee brothers or external hackers, would be incentivized to use any means possible to try and conceal the theft.
Crypto Banking: Get More Bitcoin for your Bitcoin
Crypto banking and lending is a flourishing business. Arcane Research estimates that over $24 billion U.S. dollars worth of crypto was used as collateral within the lending market in the fourth quarter of 2020. The true value of cryptocurrency held by crypto banks, custodians, and investment firms is likely significantly larger.
In some ways, it makes sense that certain people would be willing to entrust their Bitcoin to third parties. The traditional banking and financial systems have been around for hundreds of years and people the world over are used to entrusting their assets to third parties for safe keeping. Bitcoin, after all, can seem difficult to manage for those who aren’t willing to put the work in to learn how.
Many crypto banks and investment firms also sweeten the deal for investors by offering substantial returns to those who store their cryptocurrency on the platforms. As examples, companies like Nexo, Celsius Network, and Crypto.com are offering 5 - 10% or more to retail users who deposit their cryptocurrency into those companies’ wallets. And hedge and quant funds are in many cases able to offer even higher returns to accredited and institutional investors able to participate in those investment vehicles. With all the wealth moving around within the Bitcoin space, is it any wonder that investors were willing to entrust a significant amount of money to Africrypt and the Cajee brothers?
Dude, Where’s My Bitcoin?
Bitcoin is a work of art. It is free from control by any individual, government, or company. It offers users sovereignty over their own money. And it’s nearly impossible to steal as long as the user protects the private key that grants access to their Bitcoin wallet.
A private key is a variable in cryptography that is used to decrypt messages or other information meant for a specific recipient. In the context of Bitcoin, a private key is used to access the wallet, or public address on the blockchain, where your Bitcoin is recorded. Bitcoin cannot be moved without accessing the private key used to secure it. In essence, you can rest assured that your Bitcoin are safe and secure while you alone have access to your private key and don’t lose it. It’s from that ethos that the commonly used phrase, “not your keys, not your coins”, derives:
While there might be monetary benefits associated with the transfer of your Bitcoin to a third-party crypto bank as we discussed above, it is not without significant risk. The vast majority of those companies provide zero access to the private keys securing your Bitcoin and you are at their mercy to protect your assets from unauthorized access and to return the assets to you when you want to make a withdrawal. For better or for worse, cryptocurrency companies are largely unregulated. If the company holding your Bitcoin gets hacked or if one of their employees runs off with your deposits, you may find that you’re completely out of luck when it comes to recouping your losses.
To Be or Not To Be Your Own Bank
The decision to entrust one’s assets only to oneself or to send them to a third party is a highly personal one. If you choose to entrust your Bitcoin to a third party, spend a significant amount of time researching the company, its business model, and the safeguards it has in place to protect assets and reduce risk from both external and internal parties. Ten percent or fifty percent gains are nice, but one hundred percent losses are devastating.
If you decide to custody your Bitcoin and “be your own bank”, do your research and find the method that will work best to keep your private key and resident funds away from anyone you don’t trust to access your wealth. Will you use a hardware wallet, software wallet, or paper wallet? Will you store it in your attic, in your backyard, or in a safety deposit box? Will you have multiple private keys or just one? Whatever you do, remember that your private key is only as secure as you make it.
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This is not financial advice. This newsletter and related content are for informational purposes only. Cryptocurrencies and digital assets can be risky. Always do your own research before making any sort of investment.