How many billions of dollars worth of crypto have gone "missing" from exchanges, one way or another? Is anyone keeping count?
I'm sure someone is, though the details of accounting would be tricky - do you count the value deposited, value when it's actually missing, or value when it's discovered widely that it's missing (with a large gap, often, between #2 and #3, depending on how many shenanigans the place losing coins goes through to hide the loss)?
Because to a casual observer, this looks like the riskiest, most insecure, most fraud-prone "asset class" ever invented.
With great risk comes great opportunity...
I'll certainly grant that the risks involve with cryptocurrencies are
different than many other classes of asset, but "The riskiest, most insecure, most fraud-prone..." - eh. I'm not sure I'd go there. That's an awful lot of absolute statements.
However, quite a bit of the risk is from people who take assets designed for direct person-to-person exchange, and then put them in third party run exchanges,
and leave them there. Without any clue what those exchanges are really doing, or how well secured they are. Cryptocurrencies aren't designed for that use case, and it turns out, they break badly when you do that. There's nothing wrong with putting the assets in an exchange to exchange them/trade them/etc, but leaving them there for the long term, empirically, is certainly risky. So don't do that.
Why do people use crypto-exchanges in the first place? The word "exchange" makes me think of a stock exchange, but it sounds like in this particular case this hot/cold storage was being used more like a traditional bank. If the latter, then why? Are the owners of those coins not confident in managing their own wallets that they put them in a third party's hands?
In general, the exchanges
should be used for trading between various asset classes (cash, various cryptocurrencies, etc), with the results pulled out, but people tend to get lazy and leave them there - and, empirically, an awful lot of people do that. I think it's stupid, personally, but... well, I'm not exposed to risk from third party exchanges running God knows what software stack at some poorly secured cloud provider.
Even mining pools tended to use a hot/cold storage system, though. It's simple risk management - for the same reason most people don't carry
all their cash on them at any given point in time, a pool or exchange will likely have a reasonably large amount present, and the hot wallet value is at risk. You need some liquid funds on hand for paying out when people transfer back to their private wallets, but not all of it, and having all of it online is more likely to result in losses than having some of it offline.
And then, for your cold storage, well, you still need to balance the risks. Password protecting a personal wallet is one such risk - what are the risks of having your wallet stolen by malware or something, versus the risks of you forgetting the password? I can't answer that for other people, but I'll suggest it largely depends on what your overall "cyber" risks are. If you're a gamer who mines on your gaming rig and pirates lots of video games, maybe keeping the hot wallet on that system isn't such a good idea.
In terms of losing the wallet, there are quite a few options to make very durable wallets (printing them, punching out metal cards, etc), and you can store it many places - again, look at the risk factors for your specific use case.
Exactly. They heard crypto was going up (or think they can make money trading the swings when it is going down), so they decided to buy some either happens in person or on exchanges, but then didn't bother to learn enough about the technology to actually set up a wallet of their own.
If someone tells me to "Short Tesla" and I'll make a gazillion, and I do it without understanding, it's still my fault for losing money there...
Cryptocurrencies are not stocks. If anything they are closer to some weird hybrid between a currency and a commodity. Anyone buying them to get rich, especially folks who don't take the time to understand the technology behind them enough to actually use them, is unlikely to have a good time.
I've come to describe them as "Synthetic digital commodities." It's the most accurate description I've yet found - they act more like a commodity than a currency, they're purely synthetic, and they exist only in a digital realm. However, I'd also argue that during a pure gold standard era, you're not using a currency, but a commodity - just one conveniently broken up for exchange.