The FTX pandemic is getting worse. What You Need to Know to Protect Your Cryptocurrency
Since FTX’s demise, crypto investors have stressed the need of keeping their assets in private, cold storage. However, we recognize the inherent risks associated with self-custody and have compiled a set of recommendations for safeguarding and maintaining the integrity of your cryptocurrency.
Reactions of the Crypto Community to the FTX Crash
After the FTX hack, many cryptocurrency owners were left wondering where they should keep their funds.
Until last week, when it suddenly collapsed, FTX was widely regarded as a stable and respectable exchange. By purchasing naming rights to stadiums, lavishly giving to U.S. politicians, and acquiring cryptocurrency firms with cash flow problems, FTX and its primary figurehead Sam Bankman-Fried presented themselves as formidable. Even seasoned crypto experts were misled into thinking it was safe.
The aftermath of FTX’s demise is being felt throughout the business world. Although Tether and Kraken, two of the largest cryptocurrency exchanges, quickly issued statements saying they were unaffected by the FTX explosion, it is still possible that they have exposure to firms who were affected. In response to the market volatility generated by FTX, cryptocurrency exchange Gemini has halted its Gemini Earn program. This follows a similar move by lending platform Genesis Global Capital, which announced it will halt redemptions and new loans.
Crypto users should strongly consider self-custody until it becomes known how far the FTX infection will go. Self-custodial wallets, in contrast to custodial wallets, put you in control of your own cash and don’t rely on a trusted third party like Coinbase. Unfortunately, this puts the burden of security squarely on your shoulders; if you misplace your private keys, you’ll be completely out of luck. Users of cryptocurrencies will benefit from this article because it provides an overview of self-custody choices.
Wallets, Both Chilly and Hot
There are many varieties of self-custodial wallets, but the initial distinction between cold and hot wallets is crucial.
In this context, “hot wallet” refers to a digital currency wallet that is constantly online. Most on-chain crypto transactions occur when users connect to what are known as “hot wallets.” Connectivity to DeFi apps, NFT markets, and other Web3 apps is possible. MetaMask and Keplr are two examples of such add-ons for web browsers. Keep your daily spending money in a “hot wallet,” but don’t put your retirement fund there.
There are many varieties of cold wallets available, with Ledger and Trezor being the most widely used. Cold wallets differ from hot wallets in that they are removed from the Internet when you don’t use them, which makes them far more secure. However, cold wallets aren’t as user-friendly as hot wallets, so it’s advisable to keep at least one hot wallet handy for any on-chain transactions you do.
Setting Up a Hardware Wallet
When it comes to offline cryptocurrency storage, market leaders Ledger and Trezor stand out. You can choose between the $213 Trezor Model T or the $67 Trezor Model One. There are two devices available from Ledger; the Ledger Nano X costs $160, while the Ledger Nano S Plus can be purchased for $85. These four wallets are compatible with a wide variety of blockchains, cryptocurrencies, and NFTs (though you’ll need a separate software in the case of Trezor). Do some research to find out which option is best for you.
Even though hardware wallets are more expensive than standard cryptocurrency wallets (which are typically free), someone who is truly committed to keeping their cash safe for the long term would be wise to invest in one. You should look at it as the price of safety.
When you’ve decided on a wallet, it’s best to get it straight from the maker. You should never buy a used cold storage wallet because you have no idea if it has been compromised.
Once you’ve received and activated your hardware wallet, the next step is to jot down your seed phrase. If you lose your hardware wallet or your PIN, you can restore access to your account by entering a “seed phrase,” which is a string of 12–24 random words.
Put your seed phrase in writing and put it away in a secure location.
You should never use a computer or other digital equipment to store your seed word; instead, use a completely analogue method. Seed phrases should never be entered into any digital or mobile device or cloud storage. Hackers, snoops, and keyloggers can easily get access to and take advantage of your device. Don’t even think about snapping a pic of your seed phrase, because that could be used against you.
From there on out, it is entirely up to you to guard your seed phrase in the real world. Some people choose to keep their seed word in a bank’s safety deposit box for further peace of mind.
Some crypto users like to engrave their seed phrase into metal to protect it from fire (if you’re not ready to go to this expenditure, you might store your gadget in a fireproof security bag). However, maintaining your seed phrase on paper is perfectly OK. It’s wise to have a backup copy in case the worst happens and you lose your original. After all, you can’t plan for everything. Do not let anyone stumble onto any of the copies; handle them with the utmost care and prudence.
Being the last person with access to your funds requires secrecy. Your financial security improves with a decrease in the number of people who have access to your wallet’s location.
Creating Your Own I.D.-Protected Wallet
To avoid waiting for a hardware wallet to arrive in the mail, you can use a personal computer, smartphone, or other Internet-connected device as a makeshift “cold wallet” to store your cryptocurrency offline.
An outdated mobile phone or PC devoid of a SIM card would suffice for this purpose. Use an old one you already have if you have one, or borrow one from a friend or family member you trust if you have to. You may make the smartphone as pristine as new by doing a factory reset. Install an Ethereum browser wallet, ideally MetaMask, and link the device to a private WiFi network at home (not a public one). Take note of the germ of an idea.
Install MetaMask on another device you use frequently. Get the phrase down on paper as well. Write down that second MetaMask address for the cold storage wallet you’ve set up. Then, either forget the WIFI password or put your new cold wallet gadget where it can’t access the Internet.
Doing so amounts to building a secure offline hardware wallet. To transfer funds from your “cold” MetaMask wallet to your “hot” one, you will still need to connect to the Internet on occasion, but this is at least one method for setting up a wallet that has minimal online interaction requirements. If you exclusively use your “hot” MetaMask account, there’s no reason for your “cold” MetaMask to be exploited by malevolent smart contracts, therefore the odds of MetaMask or Ethereum being hacked are low.
However, it should be noted that this is merely a stopgap measure. If you want the same level of protection as something like a Ledger or Trezor, you should go elsewhere than a “custom created” hardware device. A more permanent solution would be to get a hardware wallet designed for this purpose; in the meanwhile, you may use this method.
Concluding Remarks
Self-custody can be scary at first, but it’s worth it in the end. Users can keep their assets safe and in their own custody with self-custody wallets, regardless of what centralized corporations do with their money during an insolvency crisis, withdrawal freeze, or legal process. However, you should also think about the potential weak spots in the assets you choose to store. If both Tether and Circle were to suddenly collapse, the value of any USDT or USDC held in cold storage would be completely worthless. Self-custody wallets put the onus on the user to ensure the security of their cryptocurrency holdings; however, this also gives the user full control over their holdings, which is a central principle of the cryptocurrency movement. Current events have demonstrated the wisdom of the crypto community’s favorite mantra: “not your keys, not your coins.”
At the time of writing, I held BTC, ETH, ADA, TRX and other cryptocurrencies.