The recent bankruptcy of cryptocurrency exchange FTX has sent shockwaves throughout the industry, prompting many investors to turn to self-custody and hard wallets to store their digital assets. While these devices offer unparalleled security for crypto holdings, experts warn that they pose significant risks for the average user.
According to Hugh Brooks, director of security operations at blockchain security firm CertiK, “There is a significant user-experience problem in crypto—and a lot of that has to do with self-custody and key management.” Brooks believes that the difficulty of holding cryptocurrency in a personal wallet leaves no room for error. If a user loses their private key and 12-word recovery phrase, their cryptocurrency is lost forever.
Despite these risks, companies that supply devices for self-custody, such as Ledger, are profiting from the mayhem in the industry. Ledger sold 1 million devices between June 2022 and February 2023, according to its CEO and Chairman Pascal Gauthier. This is despite the bad market and regulatory headwinds, with Ledger selling around 5 million units in the previous eight years on the market.
The FTX bankruptcy has also prompted a surge in demand for hard wallets, with many investors seeking to secure their assets against future exchange collapses. According to Gauthier, “Ledger had its most successful month in history in November.” However, the surge in demand for hard wallets has also led to supply chain issues, with some models experiencing shipping delays and stock shortages.
These hard wallets are convenient and enable quick trading, but they don’t typically appeal to first-time investors who frequently buy cryptocurrencies on major exchanges and may choose to preserve their holdings on those platforms, where they can easily log in with a username and password.
The fall of various other crypto firms like Celsius, BlockFi, Voyager digital and Three Arrows Capital before FTX implosion has also highlighted the need for greater regulation in the cryptocurrency industry. Experts argue that if your money is held by a centralized entity, it is not truly yours. To make it yours, you must self-custody it, which means putting it in a cold wallet. However, this self-custody model poses significant risks for inexperienced investors.
In October 2022, Todayq news reported a report published by Straits Research where it concluded that the worldwide hardware wallet industry, estimated to be worth $245 million in 2021, will increase to more than $1.7 billion by 2030.
Hard wallets also gained traction in the face of growing cyber thefts, According to Chainalysis, $1.9 billion in cryptocurrency was stolen by cybercriminals in the first seven months of the year, representing a 60% increase from the previous year, with much of the stolen funds originating from internet wallets or blockchains that are connected to the internet.
As the cryptocurrency market continues to grow and mature, experts believe that greater regulation and education are necessary to protect investors and ensure the stability of the industry. In the meantime, investors must carefully weigh the risks and benefits of self-custody and hard wallets when deciding how to secure their digital assets.