Whether to purchase cryptocurrency as a long-term holding often is the biggest decision an investor taken with digital assets has to make, but where to store crypto like bitcoin can change into essentially the most consequential.
Following the wildfires earlier this 12 months in California, social media posts began appearing with claims of bitcoin losses, with some users showing metal plates intended to guard seed phrases burnt up and illegible or describing the complexity of recovering crypto keys stored in a security deposit box in a bank impacted by the fires. While inconceivable to confirm individual claims about fires consuming hard drives, laptops and other storage devices containing so-called hard and cold storage crypto wallets and seed phrases, what is definite is that bitcoin self-custody presents a novel set of security issues. And people risks are growing.
Holders of crypto typically use some type of what might be called a “wallet,” and there are just a few most important features – whether that wallet is connected to the web, and the way much control is directly embedded within the wallet for trades and transfers. There may be also the underlying issue of whether a crypto investor uses a 3rd party for custody in any respect, or maintains total custody and trading control over their holdings.
The usual third-party platform “hot wallet” – consider an offering from a Coinbase or Blockchain.com – is always connected to the web. Cold storage and “cold wallets,” then again, include hardware devices (like a USB stick) that holds private keys offline, and even only a seed phrase (a master recovery code, a set of 12 to 24 words used to get well access to a crypto wallet) on paper/metal. Hardware wallets or offline backups of seed phrases might be used to access crypto when connected to the web through one other device.
With third-party custodial options, there are steps to assist owners remain vigilant against the threat posed by cybercriminals who can gain access to an internet-connected platform, including using two-factor authentication, and powerful passwords. The U.S. Marshals Service inside the Department of Justice, which is liable for asset forfeiture from U.S. law enforcement, uses Coinbase Prime to supply custody for its seized digital assets.
Many crypto bulls prefer to self-custody digital assets like bitcoin for a number of the same reasons they’re taken with cryptocurrencies to start with: lack of religion in some types of institutional control. Custodial wallets from crypto brokers trade convenience for the chance of exchange hacks, shutdowns, or fraud, as within the case of the high-profile implosion of FTX. And the wildfires are only one example in a recent string of worldwide events that raise more questions on shifts within the crypto custody debate. There may be the continuing conflict within the Middle East and Russia-Ukraine war, which has led crypto bulls from overseas to re-think their approach to self-custody.
Nick Neuman, co-founder and CEO of self-custody company Casa, said physical risks on the planet like a natural disaster are a chance to revisit how bitcoin security works, and the common security lapses folded into most peoples’ practices. “Most individuals secure their bitcoin with one private key. If that secret is on a single device or written down on paper as a seed phrase, it is a single point of failure. When you lose that key, your bitcoin is gone,” he said.
It needs to be obvious that keeping seed phrases on paper offers the bottom level of protection against fire, yet it is not uncommon practice, Neuman said. Slipping these pieces of paper into fireproof bags or safes offer some protection, but not much, and even going the additional steps to have the seed phrases on “indestructible” metal storage plates presents just a few failure points. For one, they may prove to be not so indestructible, and second, they might be inconceivable to locate amid the rubble.Â
“Logically, given the placement of the fires in California and the stories being shared on X, it’s highly likely bitcoin was lost,” said Neuman. “A few of them are pretty convincing,” he said.
Casa performs annual stress tests on seed phrase backups.
Some self-custody services, like Casa, offer multi-signature setups that reduce the risks of single-point failure. A multi-key crypto “vault” can include cell phone keys, multiple hardware keys, and a recovery key that an organization likes Casa holds on an owner’s behalf.
The multi-sig custody approach allows an owner to carry a majority of keys while a trusted partner holds a minority of keys. John Haar, managing director at Swan Bitcoin, says that in such a setup, the owner would wish to lose all of the physical devices and all copies of the seed phrases at the identical time. So long as the owner can access at the least one device or one seed phrase, they’d give you the option to get well their bitcoin. This approach should significantly limit the potential for all the devices to be lost in an event like a natural disaster, Haar said.
“You may spread these keys across multiple regions and even countries, and you would like any three of the five keys to approve a bitcoin transaction,” Neuman said of Casa’s five-key approach.
Jordan Baltazor, chief administrative officer at Fortress Trust, a regulated crypto custodian, says best practices that we use in other areas of private life should apply to cryptocurrency. For one, diversification of storage approach and weighing of risks. Digital assets aren’t any different, he says, relating to backing up personal and sensitive data on the cloud to make sure data against loss or corruption.
Firms including Coinbase and Jack Dorsey’s Block offer products that attempt to merge a few of these ideas, making a safer version of a crypto wallet that is still convenient to make use of. There may be Coinbase Vault, which incorporates enhanced security steps before a user can access crypto holdings for trading. And there’s Coinbase Wallet and Block’s Bitkey, which have mobile apps that work like a standard wallet making moving bitcoin around easy, but with the flexibility to pair with hardware wallets and added security more commonly related to cold storage.
Bitkey hardware requires multiple authorizations for transactions for added security, just like “multi-sig wallets.” Bitkey also offers recovery tools so one among the most important risks of self-custody — losing codes or phrases needed to get well a chilly wallet — is less of a problem.
Solutions like Dorsey’s may help to unravel the strain between convenience and security; at minimum, they underline that this tension exists and can likely be something of a roadblock to more widespread crypto adoption. Beyond the risks on the market in the shape of wildfires, all types of natural disasters, and wars, bitcoin self-custody might be vulnerable to the most important personal risk of all: unexpected death of the bitcoin owner. There may be arguably nothing more complicated than inheritance relating to unlocking the crypto chain of custody.
Coinbase requires probate court documents and specific will designations before releasing funds from custody, while physical wallets offer little to no support, potentially leaving all that digital value stuck on a personal key. Bitkey rolled out its inheritance solution in February for what a Bitkey executive called, “type of a multibillion-dollar problem waiting to occur.”
“Individuals who have a cloth investment in bitcoin absolutely have to be considering in another way about tips on how to protect it,” Neuman said. He says that after disasters just like the California wildfires, or when exchanges go bust like FTX, the industry does see more crypto holders taking motion to maneuver to safer storage setups. “I suppose it’s human nature to attend until ‘bad things occur’ to spur motion to enhance your personal personal situation,” he said. “But I feel people can be higher off in the event that they were more proactive. Otherwise, they risk having that ‘bad thing’ occur to them, after which it’s too late,” he said.
