The cryptocurrency world was jolted at the end of July when reports surfaced that a number of Coldcard hardware wallets—long‑held up as the benchmark for self‑custody—were being emptied of their Bitcoin holdings. The breach, first reported on July 29‑30, has sent shockwaves through the community that has built its identity around the credo “if you don’t hold the keys, you don’t own the coins,” raising doubts about the reliability of even the most trusted cold‑storage solutions.
The Coldcard Breach and Its Immediate Fallout
According to a post originally published in The Sovereign Capitalist Letter #65, the author Mark Jeftovic (via BombThrower.com) was traveling when the Coinkite vulnerability was disclosed, a situation that underscored the perennial challenge of balancing secure, offline storage with the need for emergency access on the move. The July 29‑30 disclosures confirmed that certain Coldcards—devices manufactured by the Canadian firm Coinkite and widely regarded as the industry’s gold standard for self‑custody—had been compromised and their funds siphoned away.
The reality of the breach has far‑reaching consequences, not only for Coinkite but also for the broader philosophy of self‑custody that underpins much of the Bitcoin narrative. Since Bitcoin’s inception, the mantra “Not your keys, not your coins” has been the rallying cry of purists, who dismissed any alternative as the domain of “shitcoiners,” “suitcoiners,” or worse. Within that community, the use of a Coldcard was practically a badge of authenticity; those who opted for other solutions were often labeled as merely role‑playing the part of a true Bitcoiner.
Jeftovic admits that his own Bitcoin was not stored on a Coldcard at the time, though he had recently purchased a new unit with plans to migrate his holdings after the upcoming BIP‑110 and eCash forks.
A Cultural Reckoning
The author paints a stark picture of a future “Utopia” that would admit only the most ardent self‑custody advocates, relegating everyone else to a status akin to serfs under various forms of “slavecoins,” central bank digital currencies, or the dreaded “paper Bitcoin.” Earlier in his journey, Jeftovic confessed that he had once described Bitcoin as his religion, a statement half‑joking yet deeply sincere.
While the current bear market has been relatively mild—prices hovering roughly 50 % below the all‑time high—it has proved to be one of the most self‑destructive cycles for Bitcoin culture, eroding the communal ethos that once bound its adherents. The confirmation that the Coldcard flaw was genuine only intensified this malaise.
From Theory to Loss: What Happened to Users
Individuals who had meticulously transferred their Bitcoin from exchanges into air‑gapped Coldcards—powered solely by a 9 V battery and believed to be impervious—found their life savings vanished in an instant. The incident first emerged on the r/bitcoin subreddit, prompting Jeftovic, a longtime advocate of the device, to issue an emergency alert to his mailing list once he verified the vulnerability.
Initial analysis suggested that the defect was confined to older Mk2 and Mk3 models. However, within days, newer Mk4 and Q1 series cards also fell victim to the attack, albeit requiring greater computational effort and longer timeframes to breach the entropy protections of the later hardware.
Inside the Cryptographic Mechanics
A Bitcoin address is secured by a private key, which can be represented in a human‑readable format as a 12‑ or 24‑word seed phrase drawn from the BIP‑39 word list. The specific words themselves are merely mnemonic aids; the crucial element is the underlying numerical value they encode, and the order of the words must remain exact.
The size of the possible keyspace is astronomically large:
- A 12‑word phrase yields 2¹²⁸ (≈ 3.4 × 10³⁸) distinct combinations.
- A 24‑word phrase expands that to 2²⁵⁶ (≈ 1.1 × 10⁷⁷) possibilities.
Even the 12‑word space dwarfs the total number of grains of sand on Earth or the observable stars in the universe, while the 24‑word space exceeds the estimated atoms in the Milky Way and approaches the count of atoms across the observable cosmos. These figures, however, assume that the seed is generated from a truly random entropy source.
If the seed is not random—for example, by simply selecting the first 12 or 24 entries from the BIP‑39 list—the resulting wallet becomes vulnerable to rapid brute‑force attacks, as the effective keyspace collapses dramatically.
Coldcard’s Entropy Shortfall
Coldcard devices include an integrated random‑number generator that is intended to produce the 12‑ or 24‑word seed phrases users rely on. In the official documentation, the manufacturer recommends supplementing this on‑board RNG with “external entropy,” such as rolling a physical die 50 or 100 times, to maximize randomness. Many users skipped the dice rolls, trusting the hardware RNG alone to deliver a secure seed.
The issue, however, lay in the firmware itself. Since November 2021, a flaw had allowed the RNG to be bypassed, yielding seed phrases with dramatically reduced entropy. The bug is visible in the open‑source code, and a subsequent tweet from the Coldcard team clarified the problem:
“Mk4, Q, and Mk5 attempt to compensate at boot with secure‑element input, but the reseed truncates it to 32 bits, sharply limiting the secret entropy it contributes – far below what wallets should have.”
A deeper technical review by Core‑Lightning developer ddustin traced the vulnerability to a workaround that disabled the hardware RNG. While integrating Python, MicroPython C code, and the STM32 hardware RNG, a compiler error arose. To resolve it, the developer turned off the RNG by setting MICROPY_HW_ENABLE_RNG to 0, allowing the firmware to build. As a consequence, new wallets no longer used the hardware generator but instead fell back on MicroPython’s weaker Yasmarang software RNG.
Some commentators have suggested that the loss of funds on Coldcard devices is solely due to users neglecting to add external entropy—rolling dice or otherwise. This claim is misleading. No other Bitcoin hardware wallet mandates user‑supplied entropy for operation. These devices are marketed as highly secure, self‑contained “Swiss‑bank‑in‑a‑pocket” solutions that protect against state‑level theft. The Coldcard’s requirement for additional entropy is a unique and unnecessary stipulation that has caused confusion.
The recommended mitigation is straightforward: if you own a Coldcard, move any stored funds to a different wallet regardless of how you initially configured the device. The vulnerability was not a matter of cryptographic weakness in SHA‑256 or a theoretical quantum attack; it was a direct result of insufficient entropy generation due to programming decisions and bugs. This shortfall made the device’s seeds vulnerable to brute‑force attacks using tools such as Fable or Opus 5.6‑sol, which can recover weakly generated keys in a matter of minutes.
By contrast, most other hardware wallets rely on well‑established CSPRNG sources within the device and combine them with additional entropy sources such as clock jitter or dedicated chips. This layered approach mitigates the risk of a single weak entropy source compromising the entire wallet. The Coldcard incident underscores the importance of rigorous entropy management in secure hardware design.
The Role of AI in the Entropy Exploit
A recent X post from a different wallet provider explains why Coinkite altered its open‑source licensing strategy and modified the Coldcard firmware code years earlier. According to the post, those changes set the stage for the current crisis. The author also notes that Coinkite CEO @nvk deleted the tweets in question and has been cleaning his timeline ever since the incident broke out, a move described as poor leadership.
In short, the problem is not that artificial intelligence could break the entropy that creates seed phrases—a scenario that would spell disaster for Bitcoin. What actually occurred was the use of AI, after the existence of a vulnerability became apparent, to discover a flaw in entropy generation. This is a distinct issue from a direct entropy breach.
Consequently, mainstream wallets such as Trezor, Bitkey, Sparrow, and Electrum remain secure, and the author maintains confidence in them, especially after exploring the matter over the past two days.
Implications for Multi‑Signature Wallets
Wallets that mandate multisignature spending allow a fully self‑managed approach, such as a solo multisig setup that requires two of three signatures to authorize an outgoing transaction. The author intends to produce documentation or tutorials on configuring such a system.
However, this approach has drawbacks; notably, establishing a multi‑generational custodial entity in a developing field is challenging, as it typically demands integration of established traditional financial institutions with cypherpunk principles. In reality, the institutions that are best positioned for this role are not exclusively Bitcoin‑focused, a factor that concerns some maximalists. Moreover, this introduces an additional issue: if not during this bear market, then during the next. The reason is that, in the larger context, insufficient individuals prioritize Bitcoin to sustain a purely Bitcoin‑focused business model over time. Roughly 90 % of those assigned to Bitcoin, according to estimates, fall into this category.
Most of these participants show little interest in self‑custody, preserving lineage, adhering to the 21‑million cap, or evading state control, as well as the array of maximalist purity criteria. Their primary goal is a double‑digit compound annual growth rate and to capture the next bull run, which represents the majority of Bitcoin investors—a stark reality.
Long‑Term Viability of Bitcoin‑Only Businesses
This point warrants emphasis. The trade‑offs include forfeiting fork rewards—typically captured by ETF sponsors—and operating within the traditional financial system. Nonetheless, these vehicles enable investors to tap into Bitcoin’s upside, maintain long‑term holdings, and preserve full liquidity.
Investor Preferences and Market Dynamics
Another controversial claim, yet factual, is that most people avoid the burdens of self‑custody. The barrier is high, and what most individuals desire is a “PayPal for crypto.” Note that the author referenced “crypto” rather than “Bitcoin,” a term avoided by purists, because widespread adoption is occurring within the broader cryptocurrency space. Bitcoin remains a subset of that larger ecosystem.
One could imagine a portfolio where most Bitcoin exposure is obtained through ETFs, while a smaller portion is held in self‑custody for emergency purposes, complemented by a Lightning wallet stocked with spendable funds.
A Personal Reassessment of Bitcoin‑Only Thinking
The author admits that his earlier stance on Bitcoin‑only investment has shifted. While Bitcoin still qualifies as a digital asset and a store of value, he now views it as one among many options rather than the sole solution for savings or wealth building. He critiques the notion that devoting every dollar to Bitcoin is the only rational path, citing a heartbreaking tweet that illustrated the absurdity of substituting real‑world gifts for crypto exposure.
He also reflects on a previous boast that easyDNS keeps all of its retained earnings in Bitcoin, and that others have similarly placed their entire life savings into the cryptocurrency. He recognizes that such an approach is flawed, especially after witnessing a rapid loss of life savings in a recent incident.
Adjusting the Allocation
Looking ahead, the author plans to shift his portfolio gradually, believing that the market is currently at a low point in the cycle. As the bear market recedes, he intends to increase exposure to income‑generating businesses. This strategy will involve both leveraging collateral in a potentially upward‑trending market and selling assets when conditions are favorable.
He is also exploring special opportunities that could benefit from forming an investment partnership, which would require liquidating some Bitcoin holdings to provide seed capital. In addition, he maintains a diversified position with gold and other non‑crypto investments, and is eyeing real‑estate purchases amid a depressed market.
Releasing the Maximalist Dogma
The author argues that the long‑standing maxim—“buy Bitcoin whenever it’s cheap, never sell, and ignore all other assets”—must be abandoned by anyone serious about building wealth. He does not seek to uphold a “pure” Bitcoin ideology and acknowledges past mistakes in this regard. He points to Luke Gromen’s decision to sell Bitcoin near a cycle peak, which had earned ridicule from the community, as evidence that professional investors employ different frameworks and are not bound by the “never sell” mantra.
In his view, the era of Bitcoin maximalism, its associated culture, and its influencers has ended. Bitcoin will persist, but without the cult‑like fervor that once surrounded it.
Closing Thoughts
The author’s shift reflects a broader trend toward more balanced portfolios that include cash, real‑estate, and other tangible assets alongside Bitcoin. As the market evolves, the lesson remains clear: a single‑asset focus—especially one as volatile as Bitcoin—can be a significant risk. Diversification and a willingness to adapt appear to be the prudent path forward.
