On November 2, it was revealed that Alameda Research, the quantitative trading firm also run by Bankman-Fried, held a position valued at $5 billion in FTT, the native token of FTX. Binance sold all its FTT tokens, and FTX announced a liquidity crisis. On November 11, the crypto exchange declared bankruptcy. And the volatile cryptocurrency market, which lost billions at the time. Following that, FTX experienced a possible hack in which hundreds of millions of tokens were stolen.
The entire incident drove many users away from exchanges and towards holding their own cryptocurrency. “Not your keys, not your money” has become a crypto community catchphrase. Many experts argue that if your money is held by a centralised entity, it is not truly yours. To make it yours, you must self-custody it, which means putting it in a cold wallet. Following the FTX collapse, many users have turned to self-custody, 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.”
Hard wallets store cryptocurrencies in “cold” storage, which means they are not linked to the internet. They are physical devices, similar to a USB stick, that serve as stripped-down, single-purpose computers. Crypto transactions are signed digitally within the device using your private key and then securely published to the blockchain through a crypto bridge with a hard wallet.
These wallets aren’t usually appealing to first-time investors, who commonly buy cryptocurrencies on big exchanges. Such buyers prefer to keep their holdings on such platforms, where they can quickly log in with a username and password. These hot wallets are handy and allow for swift trade which is more suited for seasoned traders.
Companies that supply devices for self-custody are profiting from the mayhem in the industry, including Ledger, one of the largest makers of hard wallets. According to its CEO and Chairman, Pascal Gauthier, Ledger had its most successful month in history in November. Ledger sold 1 million devices between June 2022 and February 2023. These sales are despite the bad market and regulatory headwinds. It sold around 5 million units in the previous eight years on the market.
However, Brooks argued that self-custody poses a far greater risk to the average user. The difficulty with holding cryptocurrency in a personal wallet is that there is no room for error. If one loses the private key and 12-word recovery phrase, the cryptocurrency inside is gone forever. According to estimates, about 20% of all Bitcoin, worth tens of billions of dollars, has been lost in this manner.
