Cryptocurrency owners must keep their “seed phrase” — a series of words that grants access to wallets — in a safe place. Keeping it on the same piece of paper as your password or sending it to a friend leaves your assets vulnerable to hackers.
Aidan Larkin of Crypto Asset Recovery explains how digital forensics can help recover lost assets. He also discusses his conference presentation, Demystifying crypto asset recovery.
How It Works
The digital world is increasingly a target for fraud and theft. In 2021 alone, malicious actors bilked investors and others out of $14 billion in crypto and other digital assets, according to blockchain analysis firm Chainalysis. Often, scammers claim to be “crypto recovery specialists” or similar experts. They may also offer fake social media accounts, including verified Twitter and Reddit profiles, populated with glowing testimonials from made-up recovery customers and high ratings from fake review services.
Any service that claims to be able to recover lost cryptocurrency should raise serious alarms. Reversing a transaction or hacking back into an account is impossible once it has been recorded on the blockchain. Also, if a service requires an upfront fee for recovery services, this is likely a scam.
In many cases, scammers will contact their targets to phish for their personal information. If they succeed, they’ll claim to have found the lost crypto and offer to return it in exchange for a tax or other payment. The crooks will pocket the payment, gain control of the victim’s account or sell their stolen data to other criminals.
Law enforcement agencies, insolvency practitioners and court-appointed receivers are encountering cryptocurrencies more frequently and need an end-to-end solution for managing, storing and realising these assets when they’re seized. To address these challenges, a network of asset recovery experts has been formed to provide expert insights and training in crypto recovery.
Seed Phrases
While a recovery seed phrase is far better than a password in protecting users’ wallets, it can also be a source of frustration. If you’re not careful, a seed phrase can end up in the wrong hands and render your crypto assets inaccessible.
The simplest way to store your recovery phrase is to write it down on paper and keep it in a safe, fireproof, waterproof location. Ideally, it will be somewhere only you can access. Avoid digital storage methods, like saving the phrase on a hard drive or in a cloud, as these can be susceptible to malware and hacking.
Seed phrases are a mnemonic, human-manageable version of a 256-bit private key, which is generated when users create a wallet. They are needed to regain access to a lost or broken wallet.
It’s important to keep in mind that if someone gains access to your seed phrase, they will be able to move funds between any devices that are connected to the same crypto wallet. That is why it’s so important to keep your recovery phrase safe from hackers, phishing attacks and other malicious activity.
Hardware Wallets
A hardware wallet is one of the best ways to store your cryptocurrency and provides you with peace of mind, as your assets are not exposed to online threats. These devices have secure elements, user-friendly interfaces, and wide compatibility. They also offer backup and recovery options, which can be extremely useful in the event that you lose your wallet or it is hacked. When choosing a wallet, be sure to read independent reviews and consider its features and capabilities before making a purchase. It is also advisable to avoid second-hand wallets, as they may have been tampered with and could result in the loss of your funds.
Crypto hardware wallets store your private keys offline, keeping them safe from hackers and malware. This is why they are often referred to as cold storage, as they isolate your private keys from the internet. However, your cryptocurrencies do not live on the hardware wallet itself; they reside on the blockchain where they can be accessed and transferred to. The hardware wallet merely stores your private key, which opens the lock to your address on the blockchain and allows you to interact with your tokens. In addition, hardware wallets come with a backup seed or recovery phrase, which is a list of 12 to 24 words that you can use to recover your funds should you ever lose the device.
Self-Custody Wallets
A self-custody wallet is a crypto wallet that allows you to have full control over your private keys and your assets. This gives you the flexibility to buy, trade and manage your digital money 24x7x365 without relying on a third party custodian.
While a self-custody wallet will give you the freedom to buy, trade and manage your crypto assets without having to rely on a third party custodian, it comes with some drawbacks. One key issue is that the security of your wallet becomes entirely your responsibility. If you forget your password or otherwise lose access to your wallet, it can be impossible to recover your digital assets. Another potential issue is that self-custody wallets typically require a degree of technical know-how in order to set up and use.
If you decide to choose a self-custody wallet, you’ll need to have access to a device that can store your private keys (such as a hardware wallet). Some self-custody wallets also allow you to back up your seed phrase or private key on multiple devices so that you can recover your assets even if you lose or damage one of them.
Other popular options for self-custody wallets include mobile or web wallets that can run on any device, and paper or offline wallets that are printed on a piece of paper (or encoded in a QR code) and stored somewhere safe. While these wallets are less convenient to use than a software or hardware wallet, they offer more privacy in the case that your computer is compromised.
