What Coldcard Hack Means to Industry of Cold Wallets

When one hears the term cold wallet, one associates it with safety. The phrase itself sounds nice, secure, impenetrable, and tucked away. Hot wallets are for the browsing and the exchanges; cold are for the keeping and the sleeping.

That narrative took a hit with the recent Coldcard entropy issue.

The irony of the situation is that the compromised aspect of this security incident was not some hot wallet phishing scam or a rogue MetaMask extension or even an insecure exchange deposit address. It was the wallet component that crypto natives gravitate toward when they want to talk about the responsible management of funds: a Bitcoin-only hardware wallet. This was a device trusted by users who took extra steps to minimize exposure to the online world. And yet, some of the seeds generated by this supposedly cautious cold wallet had an insufficient amount of entropy for true security.

That is a problem. A hot wallet heist is disappointing, but the theft of a cold wallet’s entropy is a depressing realization that the object you bought to reduce your level of trust in the world still required a certain amount of trust in its firmware, build flags, random-number generators, auditing process, release discipline, and the tiny, nearly invisible space between its internal randomness and your own.

Most users of Coldcard and other similar cold storage solutions do not have an intimate knowledge of the mechanics of random number generation. To them, the twelve-word (or twenty-four-word, or whatever it happens to be) phrase on the screen is a sacred mystery. They write the words down, hide the words, and never type the words anywhere near a website without double-checking its address. They do all the right things. However, the Coldcard issue serves as a sobering reminder that the entire point of a cold wallet is compromised if the wallet’s random seed is not actually random. This is why the phrase that the user sees as an inaccessible, unassailable source of randomness can fail them at any point.

How a Safe Phrase Becomes a Guessable Phrase

The safe phrase is supposed to be random. For a standard 12-word BIP-39 seed, that means having 128 bits of entropy in it. That number may seem impossibly large, but it is standard for the field of cryptography, and for good reason: a number that big cannot be guessed, even if an attacker uses all the resources at their disposal. One would not try to brute-force a 128-bit key with an ordinary PC, a botnet, a quantum computer, or even a combination of all three. Even though a cold wallet is supposed to be more secure than a hot wallet, the same principles apply to its random number generator.

Coldcard’s issue was not that BIP-39, Bitcoin, or cold wallets in general were insecure. It was the implementation, specifically a build-time issue that caused some of the affected devices to use a deterministic software-based random number generator instead of the cryptographically secure hardware random number generator for the seed. That may sound very technical, but it really means that the device used less entropy than it was supposed to when generating the random seed.

On the affected Mk2 and Mk3 devices running the 4.0.1 to 4.1.9 firmwares, the number of bits of entropy in a seed created without sufficient dice rolls was estimated to be around 40. To put that in perspective, 40 bits of entropy is enough for a theoretically secure random number generator to produce a 1 in a trillion possible outcomes. It is not impossible to guess such a number, especially if the attacker has some information about it or can use some resources to narrow down the possibilities. On the newer, but still affected, Mk4, Mk5, and Q devices, the amount of entropy was somewhere between 40 and 72 bits with some estimates of the guaranteed secret entropy being as low as 56 bits.

This is an important distinction, as it shows why the issue affected some of the Coldcard users and not all of them. The Mk2 and Mk3 devices with insufficient entropy were the emergency category, while the Mk4, Mk5, and Q devices were only weak. Still, for the users who owned the affected devices, there was not much they could do about it besides update the firmware to the fixed version, create a new seed with it, verify the receiving address, send a small amount of funds to it, and move the rest. It is a tedious process, but at least it ensures that the old, weak seed is not used to store any value.

But here is the part that many users will not like to hear: updating firmware does not fix an old weak seed. Randomness is fixed at the moment of generation. If the phrase was created poorly, then subsequent updates will not pump the old entropy. The only practical solution is to update, create a new seed on the fixed firmware, check the backup and receiving address, make a small transaction, and move the funds.

The exception also confirms the rule. The one who created the seed with at least 50 throws of private dice is generally considered to have placed the key outside the cold wallet’s randomness path. A sufficiently strong BIP-39 passphrase serves as an additional protection layer but does not solve the weak seed problem. It is like a safe inside a safe, but one that only opens with a skeleton key. Of course, it is better than nothing, but it is still a safe inside a safe.

Why Hackers Want Cold Wallets To Have Bugs

At first glance, cold wallets are not interesting as attack vectors. They are designed to be offline, isolated from the browser, and not expose private keys in the network stack.

This is why they are so attractive. Cold wallets contain large sums of money. A user does not move small amounts from a hardware wallet; they move the remainder, the prize fund, the inheritance – coins that will sleep for decades. The cold wallet owner may not watch the market closely; they may not know about the race condition or the mempool congestion. They may not have checked the Twitter account of the wallet manufacturer for the latest security advisory. In other words, the longer the coins are in the cold wallet, the more potential attack surface there is.

The criminal has an incentive to develop such an attack. One class of vulnerabilities can affect hundreds or thousands of users at once. A phishing campaign must be carefully crafted; malware must be distributed; fake support must convince the victim to provide access. But weak randomness, when guessed, allows an attacker to generate candidate seeds, derive addresses from them, check the blockchain for matches, and transfer funds. There is no need to hack the user’s PC; there is no need to lure the victim into a trap. The attacker simply needs to write a program that tries to find weak wallets on the blockchain.

This is why weak entropy is so dangerous. The private key is secure because no one knows about it; it is not hidden, but it is unattainable because the search space is too large. But if the space is reduced, the attacker will be patient enough to find the right key.

How could the attacker have found it? There are several attack vectors, but the most interesting is that no special skills or equipment are required. Coldcard firmware is publicly available; hardware wallet users and security researchers discuss their details openly. An attacker can study the code, look at the build scripts, and try to find out what went wrong. Another vector is the analysis of publicly available data: if the attacker finds out about the drained wallet, they can look for other vulnerable wallets. In the end, the blockchain is a database of addresses and transactions, so guessing the address will allow the attacker to check if the wallet has any coins.

There is a third reason for the interest in cold wallets: the users of these services are often enthusiasts. Coldcard users are people who know the Bitcoin protocol inside out, who are likely to have more significant deposits than the average crypto enthusiast. They are the opposite of reckless speculators; they have a solid understanding of the risks and are taking them deliberately. To put it another way, cold wallet users are serious about self-custody, and a potential vulnerability in one of these services is a serious threat to their funds.

The economics of the attack also differ. A conventional thief cannot rob 500 houses at once; they have to go from door to door. A phishing group has to find 500 victims who will give their private keys to a fraudulent website. But an attacker who finds a vulnerability in the cold wallet only has to write one program that will go through all the weak wallets on the blockchain and drain them. The victim does not have to do anything; they do not have to click on the link or type the key. They only have to leave their coins in the vulnerable wallet, which, unfortunately, is quite common.

This creates an additional challenge for the cold wallet user: determining the time when the weak seed stops being a threat. One month has passed since the last transaction, and nothing has happened. One year has passed, and nothing has happened. If the user had known that the seed had low entropy, they would have moved the coins long ago. But until the first withdrawal attempt, the cold wallet owner has a false sense of security.

This is where the public blockchain becomes the attacker’s greatest aid. In most crimes, the criminal has to find the victim first. The attacker has to somehow find out where the money is: in the bank vault, in the cryptocurrency wallet, in cash. But with Bitcoin, the process is reversed: the attacker only has to guess the private key, after which they can check the blockchain for addresses and transactions. In other words, the transparency of the blockchain is a tremendous advantage to the criminal if they can narrow down the search space.

Another factor influencing the potential attacker is the cold wallet user themselves. Hardware wallet users are generally more knowledgeable about the intricacies of the security of their instruments. They are also more likely to participate in public debates on the security of cryptocurrency, conduct their research, and publish articles. This is not surprising: these users devote a lot of time and effort to ensuring that their assets are as safe as possible. But this also means that they are disappointed and frustrated when a vulnerability is found in one of the tools they admire.

What Broke Was Trust, Not Just Randomness

The industry reaction shouldn’t be limited to firmware version tables – tables are essential, but the bigger wound to heal is trust.

Hardware wallet companies sell the reduction of dependence, but not the elimination – the user still depends on myriad factors: manufacturing, chips, firmware, bootloaders, build systems, open source reviews, closed source components, documentation, packaging, distribution, and even the honesty of all the participants. Their marketing proclaims “don’t trust, verify,” but the typical user cannot retrace the steps from the physical noise inside the chip to the seed phrase on the screen.

It is not hypocrisy – it is the recognition that security is a chain of trust. The industry has the unfortunate tendency to conflate slogans with security.

The Coldcard revelation touches on a subtler level on the contract between the user and the cold wallet: ‘I will be responsible for the custody of my coins – I will write down the seed, I will not store it in iCloud, I will not give it to a phishing Telegram, I will not spend it on an exchange. In exchange for my responsibility, the hardware wallet must not contain a vulnerability that would allow my secrets to be removed from my control.’ The responsibility of the hardware wallet company is to facilitate this trust: to create a secret that remains secret even if the company is compromised. If the company fails at its fundamental duty, the user’s discipline becomes irrelevant.

Perhaps this is why the industry feels such a visceral disgust at the idea of “entropy failure” – in a way, it is an indictment of the entire ethos of crypto. In the case of a successful phishing attack, the industry could point at the user error – and it is indeed cruel, but it is coherent. The user who fell for a phishing scam did not protect their assets despite their ability to do so – their power was in their hands. However, in a case of entropy failure, the user may have done all the ‘right’ things and still started with a compromised foundation. He was as disciplined in his preparations as he could be, but the weakness was in the preparation itself – it failed him at the very moment when he relied on it the most.

This places a fundamental new burden on cold wallet manufacturers: in addition to hardware and UI, ‘protection auditability’ now becomes one of the key pillars of trust. Users want the ability to verify the screens, QR codes, air-gapped communications, secure elements, open source code, metal backups, mobile apps, and the packaging – and now they want the ability to verify the seed ceremony. Everything else is mere decoration if the source of randomness was compromised.

The industry now needs to see a lot more of entropy-related guardrails: reproducible builds, auditing of firmware, public test vectors and run-time checking, stricter build-time checks, and separation of build-time and run-time randomness, and a better separation between hardware and software entropy sources. There is also going to be a shift towards multisig, both as a technical and user experience layer – not just as an option for the paranoid. A two-signature setup using two different devices and/or vendors could allow the user to withstand one vendor’s mistake, assuming he used the ‘wrong’ one only in one of his devices. This is obviously not a universal solution, but it is significantly better than nothing when it comes to critical mistakes like entropy failure.

Cold wallet vendors now have to adjust their communication strategy – ‘please update the firmware’ is not just a generic ‘something went wrong’ message anymore. The typical user has learned to associate ‘firmware update’ with ‘things will get better’ – but in reality, an update typically only fixes the future use of the device, i.e., future seed generations. The user has to perform an action that is substantially more involved: create a new identity for his money and migrate it. This exposes the user to transaction fees, address verification risks, backup and recovery risks, inheritance risks, and the risk of him doing something wrong in his haste to ‘fix things’. Vendors that experience a critical internal error like entropy failure now have to communicate to their users like crisis managers and not as generic software companies.

There is also an existential risk for businesses that sell cold storage devices: the value proposition is inherently tied to the users’ trust in the company’s paranoia on their behalf. One entropy failure can turn cold wallet buyers from customers into skeptics – after all, it is not a stretch to assume that other, deeper issues could also be present. The industry will not really change its ways just because of one scandal: every major product in modern crypto is fraught with compromises, and the general attitude towards all of them is that no one can be completely confident in anything, period. However, the expectation in terms of cold storage is substantially higher – the emotional burden placed on cold wallets is substantially deeper, and the users are not just skeptical about the companies’ security – they are vulnerable. One entropy failure will make everyone in the business realize why cold wallets are not like other crypto products – their users undergo a substantially deeper psychological journey, and a lot of them are fragile in their own unique way.

A similar psychological burden is placed on multisig users – the technology is unquestionably secure, but it is substantially more involved and risky at the personal level: more to type, more to backup, more to lose, and more to inherit. We cannot just tell everyone that they can use multisig and rely on it to be more secure – at some point, that approach can start alienating users instead of helping them. At some point, the users will feel like the whole system wants them to be security experts and nothing else.

And thus we come to the real problem with the whole situation – the cold wallet industry is now being asked to make the default safer, for the regular users, not just the ones who roll dice, read whitepapers, and verify build logs. The appeal of dice is the purity of the process, but it is also a confession of faith – the average user is being asked to make up for the shortcomings of the manufacturing process by rolling dice. This is not sustainable long-term, and Coldcard failure shows why the industry should move away from such approaches.

Cold Wallet Myth Gets Smaller

Cold wallets are not going away any time soon – the Coldcard revelation does not make hot wallets secure, exchanges trustworthy, or third-party custodians immune to failure. Good hardware wallets remain one of the best available options in the fight against malware, clipboard theft, browser-based attacks, and other forms of digital intrusion. Offline storage of keys remains one of the pillars of retail-level crypto security. However, the industry must recognize that the cold wallet is not an impenetrable fortress – every step of the way, the user must be prepared to perform active security checks.

The Coldcard episode touches on some of the most foundational security assumptions that the crypto industry holds – and the industry will have to reevaluate said assumptions in light of this. Hardware wallets and their associated keys are not immune to compromise, but the burden of proof must be carried by the companies – not the users. In the future, hardware wallet companies will see increased scrutiny around randomness and secrecy: the industry will demand stronger proofs of randomness, stronger auditing, greater transparency, stronger default settings, and more separation between hardware and software layers. Everyone will want to see a detailed explanation of what happens when a wallet’s firmware is updated – the update itself may not affect existing keys, but it will almost surely affect the future keys, and the transition must be carefully evaluated.

It will be increasingly important to distinguish between “firmware update” and “seed migration.” The former is a routine procedure performed by the user – the latter, however, involves substantially more responsibility. The user must understand that his ability to update the firmware does not mean that his ability to update the secrets is automatic – in practice, migration usually involves creating a new set of keys entirely, i.e., transferring funds from one set of keys to another. This could involve transaction fees, address verification problems, and other inconveniences. This is why, when faced with the threat of a potential compromise in one of their wallets, many users prefer to move their assets to another wallet in the same blockchain. This way, they avoid all the migration costs and risks – but, of course, they also do not benefit from the advantages that the ‘faulty’ wallet may offer.

The industry must be especially careful when communicating with its users – the revelations around Coldcard are a sobering reminder that users must always think critically before doing anything with their assets. The companies should be especially careful to avoid using vague technical jargon – the typical cold wallet user does not really understand the nuances of the hardware’s interaction with the software. He trusts the vendor to keep his assets safe, and the vendor must live up to this level of trust. The vendor, in turn, must recognize that its actions directly affect the emotions and decision-making of its users – and it must act accordingly. If the wrong choice is made, the consequences for everyone can be severe.

A hardware wallet is not just a piece of technology – it is a promise that people place in their safety. After Coldcard, that promise is due for a major reassessment.

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