A lost crypto wallet does not necessarily mean lost cryptocurrency. But lose the recovery phrase as well, and getting those assets back could become impossible. This is one of the key risks investors need to understand when using cold wallets, which keep private keys offline to reduce exposure to internet-based threats.
Vikaas M Sachdeva, CEO of BitDelta India, said the recovery phrase is critical because anyone who obtains it could gain access to the associated crypto holdings.
He advised investors to store it securely offline, never share it or save it as a screenshot, and buy hardware wallets directly from manufacturers or authorised sellers.
What happens if a cold wallet is lost or damaged?
Cryptocurrency is not stored physically inside a cold wallet. The assets remain on the blockchain, while the wallet holds the keys required to access them.
If a device is lost or damaged, access can generally be restored using the recovery phrase on a compatible wallet. However, losing both the device and the recovery phrase could result in permanent loss of access to the holdings.
If the original device is still accessible but the recovery phrase is lost, investors may be able to create a new wallet and generate a fresh recovery phrase. This should be done carefully, with the new backup verified before resetting the existing wallet, Sachdeva said.
Why does crypto custody involve more than offline storage?
For institutional investors, custody also involves controlling who can initiate and approve transactions and ensuring access can be maintained if employees leave, credentials are compromised or systems are disrupted.
Manhar Garegrat, India Head at Liminal Custody, said institutional custody requires secure key management, multiple levels of approval, separation of responsibilities and recovery processes.
Technologies such as multi-party computation (MPC) and hardware security modules (HSMs) can strengthen key management, but need to be supported by internal policies and accountability, he said.
While cold storage reduces exposure to online threats, safeguarding crypto assets also depends on protecting recovery credentials, managing transaction approvals and maintaining reliable access arrangements.
Crypto investor safety checklist: What to keep in mind
- Secure the recovery phrase: Write it down and store it in a secure offline location.
- Never share credentials: Do not disclose the recovery phrase or save it as a screenshot or on a computer.
- Buy from authorised sources: Purchase hardware wallets directly from manufacturers or authorised sellers.
- Verify transactions: Check the recipient’s wallet address on the device screen before confirming a transfer.
- Maintain a backup: Ensure the recovery phrase is accessible if the original device is lost or damaged.
- Exercise caution while resetting: If generating a new recovery phrase, verify the backup before resetting the existing wallet.
- For institutions: Establish clear transaction approval processes, separation of responsibilities and recovery procedures.
NOTE TO READERS
Disclaimer: This article is for informational purposes only and should not be construed as investment advice. Readers should consult certified experts before making any investment decisions.