Heard the saying “not your keys, not your crypto”? Essentially, this means that when you store your crypto with a custodian, you’re giving them control of your crypto assets. While most custodians are well trusted and have extensive security procedures, fraudsters in the industry like Do Kwon with Terra and the infamous Sam Bankman-Fried at FTX can cause havoc, abusing their access to your assets.
Theft and hacks in the first quarter of 2023 continue to grow pointing toward a need for crypto security. Managing your own private key puts you in complete control of your assets and how they are stored. If you decide to go down the route of self-custody, you may be given a seed phrase, otherwise known as a recovery phrase. This helps you gain access to the wallet where your crypto is stored if ever you lose access or damage your cold storage device such as a hardware wallet.
However, it’s no mean feat remembering a 12–24-word long seed phrase and forgetting even one letter of your seed phrase could result in you being locked out of your cryptocurrency wallet and losing access to your funds forever. An estimated 20% of Bitcoin in circulation has been lost forever. That’s why safely storing your seed phrase is so important, although some methods are more secure than others.
If anything happens to your computer, you will lose your seed phrase. Your computer could be stolen, you could accidentally delete the document, or it could crash and wipe your files. It’s not a good idea, and if you do, you should consider password-protecting your document.
A photo or a screenshot is not a great idea. If someone hacks your phone or computer, they could easily access these photos. Using photos and digital copies of your seed phrase creates more copies that have the potential to be hacked or passed around. Not only this, having only digital copies of your seed phrase runs the risk of loss if a computer or phone is stolen.
A paper wallet is when your seed phrase is on a single piece of paper. This can be a physical printout that has your keys on. While this method is secure from being hacked and less likely to be stolen, it could be easily lost or destroyed, and you’d lose access to your funds.
The famous case of Lichtenstein and Morgan who stored their private keys online where the government were able to easily gain access to their wallets on suspicion the couple were laundering stolen Bitcoin. Whilst you shouldn’t be hiding your seed phrase for the wrong reasons, this case shows how easily accessible storing your seed phrase in a cloud service is, increasing the risk of being hacked.
If you forget your seed phrase, you lose access to your crypto forever! Even if you remember the individual words, if you can’t remember the correct order, you will not be able to access you crypto. Software developer, Stefan Thomas holds over $232 million worth of Bitcoin but he only has two more chances to guess his seed phrase until he is locked out forever.
It’s important that when choosing where to store your seed phrase, you can access it with ease whenever you need it, but equally it has to be secure enough that no one else can access it. The more secure, the better.
If you choose to make a physical copy of your seed phrase, you could consider using a safety deposit box that is locked and fireproof. You should never share where your seed phrase is stored or the code to unlock it.
Despite the risks, if you do decide to store your seed phrase online, you should make sure it is secured with a password.
Keeping a seed phrase safe shouldn’t put you off joining the world of crypto. Alternatively, you could consider backing up your private key in the event of disaster. Contact us today and one of the team will be happy to talk through your options with you.