The massive security failure affecting Coldcard hardware wallets, which reportedly caused users to lose around $89 million, could not help but trigger a debate about the reliability of self-custody in crypto.
According to Bloomberg senior ETF analyst Eric Balchunas, the incident provides a clear argument in favor of regulated spot Bitcoin ETFs and could significantly undermine the concept of holding assets on personal devices.
The technical cause of the incident was a firmware flaw in Coldcard wallets produced by Canadian company Coinkite Inc. that had existed since 2021. Instead of generating private keys inside an isolated hardware chip, the devices used a predictable software algorithm, allowing hackers to calculate the keys offline and launch an automated withdrawal of funds.
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While discussing the situation on social media platform X, Balchunas drew attention to the modest size of the manufacturer. According to PitchBook and LinkedIn data, Coinkite has a staff of only around five people, which appears strikingly disproportionate to the amount of capital its products are expected to protect.
“TIL Coldcard’s co has like 5 employees. That seems crazy low for such an important job. Would you use a bank to store your life’s savings that had 5 people working there and was based in Canada? Maybe that’s a feature in the crypto world, but to me that would be a red flag,” Balchunas said.
From the analyst’s perspective, the infrastructure provided by giants such as Coinbase or Ledger appears far more logical for protecting large amounts of capital, while their high fees can be justified by the scale of their security controls.
ETF safety vs. private keys
As an alternative, Balchunas points to spot ETFs, where custody protection is provided by regulated institutional entities. In theory, this removes the risk of software-related technical failures for investors.
At the same time, the obvious limitations of exchange-traded funds — including the inability to withdraw coins 24/7 or use Bitcoin directly as a payment method — still make this instrument unsuitable for everyday transactions.
Nevertheless, Balchunas emphasizes that for long-term investors seeking only price exposure to Bitcoin, exchange-traded ETFs could become the preferred option following the Coldcard collapse, as investors may be unwilling to take risks in what he views as a largely makeshift market for BTC self-custody solutions.