Since the FTX collapse, crypto-currency investors have been reminded of the importance of storing coins in self-guarding wallets. But self-guarding can be intimidating, so we’ve put together a best practice guide to keeping coins safe and on-chain.
Crypto community reacts to FTX collapse
The FTX crisis has left many crypto-currency users wondering how to store their crypto assets.
Before its sudden collapse last week, FTX had a reputation for stability and respectability. FTX and its main figurehead Sam Bankman-Fried were projecting an image of strength by buying stadium naming rights, making large donations to U.S. politicians and acquiring crypto-currency companies struggling with liquidity issues. Even crypto veterans were fooled into thinking that it was relatively safe.
As a reasonably paranoid long-term crypto user, even I held more on FTX than I have on any other CEX in history at times – thinking it “safer” than the old iterations of exchanges.
After two blowups this year that I would’ve never bet on – maybe I’m just getting old and naive 🙂
– Cobie (@cobie) November 9, 2022
Now that FTX has collapsed, the industry is dealing with the fallout. A few major crypto-currency companies, including Tether and Kraken, were quick to announce that they were not affected by the FTX blowout; nevertheless, they may have exposure to companies that were. Crypto-currency exchange Gemini paused its Gemini Earn program after lending platform Genesis Global Capital said it was suspending redemptions and new loans due to the market turmoil caused by FTX.
It’s not yet clear how far the FTX contagion will spread, but in the meantime, crypto-currency users should seriously consider holding their assets in self-custody. Unlike custodial wallets, self-custody wallets don’t require trusting a third party like Coinbase; no one but you can access your funds. However, you are solely responsible: if you lose your private keys, you have no recourse. This guide provides an overview of self-guarding options to help crypto-currency users keep their funds safe.
Cold and hot wallets
Self-holding portfolios come in many forms, but it is important to first distinguish between cold and hot portfolios.
The term “hot wallet“Hot wallet” refers to wallets that remain connected to the Internet. Crypto-currency users typically connect to hot wallets for their on-chain activity. They can be connected to DeFi applications, NFT marketplaces and other web applications3. They usually come in the form of browser plugins such as MetaMask and Keplr. A hot wallet is like a physical wallet in your pocket: it holds small amounts of money for everyday spending, but it’s not a good idea to put all your savings in it.
There are different types of cold wallets, but the most popular are Ledger and Trezor hardware wallets. Cold wallets differ from hot wallets in that they are disconnected from the Internet when you are not using them, which makes them much safer. However, cold wallets tend to be less convenient for everyday use, so it’s useful to have one or two hot wallets for your blockchain activity.
Hardware wallet setup
Ledger and Trezor are the industry leaders in cold storage. Trezor offers two models: the Trezor Model T for €213 and the Trezor Model One for €67. Ledger also offers two different products: the Ledger Nano X, for €160, and the Ledger Nano S Plus, for €85. All four wallets support a range of different blockchains, crypto-currencies and NFTs (although you’ll need a third-party app to display NFTs if you’re using Trezor). Take the time to see which one best meets your needs.
Hardware wallets are expensive compared to most crypto wallets (which tend to be free), but since cold storage is universally recognized as the safest way to store crypto currency, anyone serious about keeping their funds safe indefinitely would be well advised to have one. Think of it as the cost of security.
Once you have decided which wallet to buy, order one directly from the manufacturer. It is very important not to buy a used cold storage wallet because there is no way to tell if it has been tampered with.
Once you have received your hardware wallet and set it up, you need to write your boot phrase. A passphrase is a string of 12 to 24 random words that can be used to recover your account if you lose your hardware wallet or PIN.
Carefully write down your boot phrase on a piece of paper and keep it in a safe place.
Do not use a digital camera to do this; storing your boot phrase should always be an entirely analog process. It is essential to never Enter your passphrase anywhere on your computer, mobile device or cloud services. Devices are susceptible to hacking, unauthorized screenshots, and keystroke monitoring. Also, don’t take pictures of your boot phrase, as they can be compromised as well.
From there, the security of your boot phrase in the physical world is entirely up to you. Some people prefer to take advantage of the physical security of a bank by storing their seed phrase in a safe deposit box.
While keeping your seed phrase on a piece of paper is acceptable, some crypto-currency users prefer to use fireproof methods, such as etching the seed phrase into metal. Be sure to treat each copy with the utmost care and discretion – you don’t want anyone to stumble across it.
Finally, being the ultimate custodian of your money requires discretion. The fewer people who know about your wallet, the safer it is.
Making your own cold wallet
If you want to get your coins off the exchange and you’re worried that ordering a hardware wallet will take too long, you can try another solution: set up one of your Internet devices as a custom cold wallet.
To do this, you’ll need to get an old cell phone (without a SIM card) or an old computer. Again, it’s best not to buy one from someone you don’t know – use your own old device if possible or, at worst, get one from a trusted friend or family member. Factory reset the device to make it as clean as possible. Connect the device to a home WiFi connection (not to a public place network) and install a browser-based Ethereum wallet, preferably MetaMask. Write down the boot phrase.
Create a second MetaMask account on a device you use regularly. Note this boot phrase as well. Save this second MetaMask address to the account you created on your “home” device.cold storage“. Next, make sure that your new “cold storage“forget the WiFi password (or place it out of network range), and turn it off.
By doing this, you will effectively create a secure offline hardware wallet. You will still need to occasionally connect to the Internet to send funds from your MetaMask wallet.”cold“to your wallet”hot“, but it’s at least an option for setting up a wallet with very little interaction with the Internet. MetaMask and Ethereum themselves are unlikely to be hacked, and if you only interact with your MetaMask account “hot“, there is no reason for your MetaMask “cold“be hacked by malicious smart contracts.
That said, this is only a temporary solution. Such a hardware device “tailor-made” does not offer the same degree of security as a Ledger or Trezor device. In reality, this method should only be used as a stopgap until you can get a hardware wallet specifically designed for the task.
Self-directed custody may seem daunting at first, but the time and effort are worth it. Regardless of what centralized firms do with their clients’ funds, self-directed portfolios offer users a way to safely store and access their assets under their own responsibility without fear of facing an insolvency crisis, withdrawal freeze, or legal proceedings. That said, you should also consider the points of failure in the portfolio management system.ssets you decide to store. Storing USDT or USDC in cold storage will do nothing to protect their value if Tether or Circle were to fail. While self-directed wallets place the onus on users to keep their crypto assets safe, they also grant them full ownership of their assets, which is one of the fundamental tenets of the crypto movement itself. As recent events have shown, there is good reason to follow the words of crypto’s favorite mantra: “not your keys, not your coins“.