General

The end of a terrible November in 2022 has resulted in substantial losses for crypto's greatest assets, with both Bitcoin (BTC) and Ethereum (ETH) finishing down ~16%. Other players (alt-coins and companies) have been hurt by the broader macroeconomic slump and the reputational damage caused by the demise of mega-entities such as FTX and Terra. This includes crypto stalwarts such as BlockFi, Genesis Global, and Ikigai Asset Management.

However, as the chart below illustrates, this drawdown in the BTC price over the course of 2022 is not unlike previous drawdowns. In fact, it mirrors the prior two bear market drawdowns in both magnitude and timing thus far. Such is the life of a crypto HODLer…

Image: BTC Drawdowns Source: Arcane Research\Tradingview (Bitstamp)

Bitcoin has remained relatively steady over the last month, mostly trading in a tight range of around $17,000. Meanwhile, the GBTC discount has grown to -48%. ETH and BTC mostly trade in tandem, while altcoins like GMX (up) and BNB (down) trade on separate, individual news cycles.

Image: A chart comparing Bitcoin to large-, mid- and small-cap stocks. Source: Arcane Research\Tradingview (Coinbase)

Despite the fact that Bitcoin's price has been stable around $17,000 for the past few weeks, this week could be tumultuous owing to numerous significant economic developments. Today's CPI announcement revealed a lower-than-anticipated MoM rise of 0.1%, pushing BTC toward $18,000. The market is currently pricing in an 80% chance of a 50 bps rise as opposed to a 20% chance of a 75 bps hike for the FOMC meeting tomorrow. In addition to the nearest hike, Jerome Powell's hints about the anticipated hiking schedule for 2023 are likely to contribute to an unstable climate. In addition, the BoE and ECB will raise interest rates this week, which may have repercussions for bitcoin as it may directly affect the dollar's strength.

Headlines

Sam Bankman-Fried, the former CEO of FTX, has been arrested in the Bahamas. Bankman-Fried was arrested by Bahamian officials at the request of the U.S. government.
U.S. Justice Department considering charging Binance for possible money laundering and criminal sanctions violations
The Block CEO resigned after failing to disclose loans from Alameda Research
Circle, the issuer of the USDC stablecoin, claims companies may accept USDC with Apple Pay
Ethereum censorship trends down after reaching ~75% of blocks
Curve published a whitepaper regarding their overcollateralized Stablecoin, crvUSD.
J.P. Morgan made its first live trade on Polygon using a customized version of Aave.
Telegram plans to launch a non-custodial wallet and decentralized exchange.
Chainlink staking is now operational
FTX.com, FTX US and Alameda BlockFi Suspends Withdrawals and Files for Chapter 11
Genesis Halts Withdrawals After Declaring They Were Fine Publicly, Said to be on the Brink of Insolvency
Gemini Earn Halts Withdrawals Due to Genesis Exposure, Possible Bankruptcy Filing
Kraken Fires 30% of Staff
Fidelity to Offer Retail Customers Commission-Free BTC and ETH Trading
Instagram Integrating Polygon and Solana NFTs and utilizing Arweave for Store NFTs.
Google Cloud Commences Solana Validator Operations and Will Accept Crypto Payments
Phantom wallet moving to support Ethereum and Polygon ecosystems.
Casa, a multisig custodial wallet, will now support Ethereum in addition to Bitcoin.
Trader Joe, Avalanche's premier DEX, will deploy on Arbitrum One.

Bonus Headlines/Narratives Heading into 2023

Image: Upcoming Events and Narratives in December.

Wallets, Self-Custody, and Best Practices

In part, the market crypto experienced over the past ~2 YEARS has been artificial. To some inarguable extent, the frauds perpetuated by FTX and 3 Arrows Capital buoyed the bull run of 2021.

Risks (and returns generated in 2021) have been so warped by leverage and fraud that true value is difficult to discern. Many of the most esteemed investors have seen their returns plummet by 75% or more YTD, even before the FTX collapse. So, with the current landscape so muddy, let's drive home something we can control: wallets and self-custody.

Interacting with digital assets within the crypto economy (and the broader blockchain industry) has grown in scope considerably over the past several years. For users to buy, hold, and sell digital assets, digital wallets and custody solutions were required as a form of evolving technology. Today, there are countless options on the market to fill the need of digital wallets on behalf of blockchain users that fill in different categories and types depending on their design.

Image: Wallets By Feature Types. Source: Medium\amanda0x

There are two key classifications that fill this technology need: non-custodial and custodial. Non-custodial or self-custodial wallets mean that digital assets (e.g., cryptocurrencies) are held directly by the user. This represents the majority of popular on-chain wallet solutions like MetaMask, Trust Wallet, and more. On the other hand, custodial solutions mean that a third party, typically an exchange, takes custody of the assets on behalf of the user. This is similar to a traditional bank where the user has access to the funds when they are needed, but the funds are ultimately held and utilized by the bank itself.

Self-custody represents one of the core philosophies behind the creation and utilization of cryptocurrencies, starting with Bitcoin. When users control their own funds outright, they cannot be easily confiscated, misused, or frozen by any external parties like governments or institutions. This is the primary directive of decentralized, stateless currencies.

When cryptocurrencies are handed over to an entity like a centralized exchange (CEX) such as FTX, control over those funds is forgone, and the user no longer has possession of the crypto. This is where substantial risk has been introduced into the crypto economy over the past year with the collapse of CEXs and loss of customer funds.

With SELF-CUSTODY: the practice of holding our own crypto in our own possession.

In fact, the ability to self-custody is one of the key features of cryptocurrency in the first place. No government or institution can freeze our funds or take away our right to transact, this is what “censorship-resistance” means. But again, this requires us to have our own crypto in our own possession. If we hand it over to a centralized exchange (CEX; FTX being the most notable example), we no longer have possession over our crypto. It’s like giving your dollars to a bank, it’s possible that you walk in one day and it's not there anymore.

The only solution is self-custody, and there are plenty of ways to do that. Today, we’ll take you through the spectrum of self-custody, and you can make your own decision on what might work best for you. But first, some vocabulary that’s vital to understanding what all of this means:

Wallet

A digital “wallet” represents a blanket term that refers to anything in which crypto can be stored. Wallets, specifically, hold a user’s private keys that enable the user to access the funds on the blockchain. This grants the ability to buy crypto, use crypto (i.e., yield farming, staking, etc.), and any other functionalities available via on-chain applications. This can come in the form of a hot wallet (internet-connected) or a cold wallet (offline and secured).

Crypto wallets don’t actually store funds. Instead, they store two keys:

A public key links to an address that lets you send and receive transactions. Think of it as your email address.
A private key proves that you own the tokens associated with your public address. Think of it as your email password. Since a private key is hard to remember (it’s a very long string of random numbers), wallets also give you a 12-24 word seed phrase. Private keys signify complete ownership of all digital assets. Therefore, protecting them is imperative.

Image: An infographic operating a wallet.

Downloading a cryptocurrency wallet from a wallet provider to a computer or phone does not automatically mean that the owner is the only one who has a copy of the private keys. For example, with Coinbase, it is possible to install a wallet on a phone and to also have access to the same wallet through their website.

For crypto wallets, conventional wallets utilize a seed phrase and hierarchical structure to create and denote private keys, public keys, and the front-facing on-chain addresses to identify the wallet. Private keys are used to sign and execute transactions, while the public key is what external users are given to send crypto to the wallet.

Image: An infographic operating a hierarchical deterministic (HD) wallet.

Seed Phrase

A seed phrase is a phrase of 12 to 24 words that corresponds directly to a private key. Seed phrases are employed since private keys are typically large strings of letters that appear unreadable to humans. Words are much easier to remember and transcribe than a string of random letters and numbers.

As shown below, each word in a seed phrase corresponds to a specific string of characters. Because there are 2048 potential words and 12 or 24 randomly generated words in a private key, it is nearly impossible to crack your wallet.

IMPORTANT! Record your seed phrase in the correct sequence and protect it at all costs! You must keep your seed phrase/private key protected. They are nearly impossible to hack or penetrate, unless you get it stolen or give it to someone.

Image: Explaining the difficulty of guessing a specific 256-bit private key.

Do NOT share with anyone! If someone sees these words, they CAN steal all your crypto.

Do not try and save these words on anything digital. Do not screenshot these words. Do not store these words on your computer or mobile device. Your security is only as strong as your 12-word seed and passphrase. Check your work twice, and then confirm that you have acquired your 12 words.

All wallets have different characteristics depending on their underlying designs. Typically, there is some form of give and take with a number of identifiers, including the following:

Security
Privacy
Cost
User Experience
Recoverability
Extensibility

Security is generally considered to be one of, if not the most important attributes of any crypto wallet. Secure wallets have a higher degree of protection from external, sophisticated attacks and are harder to break. This means that user funds are less susceptible to hacks and attack vectors, keeping funds safe. In a similar manner, privacy helps to protect the identity of the user behind the wallet. This can be utilized for many different reasons, such as an organization wanting to remain anonymous or an individual wanting to keep their identity confidential when making sensitive transactions.

Cost is a big factor when considering adoption and ease of use (user experience). Some wallets may be expensive to obtain (typically hard wallets like Ledger) or transact with. This goes along with user experience, which refers to the permissions, controls, and accessibility of the wallet. As crypto wallets become more in demand from mainstream adoption of blockchain technology, recoverability has grown into a far more significant quality. Recoverability refers to the ability to recover assets in the event of a compromise, loss of life, or some other factor.

Lastly, extensibility refers to the level of access and compatibility that the wallet allows. Different blockchains and ecosystems have compatibility for different wallets. Some chains, like Fantom, even have their own native DeFi wallets that users can open to interact with that specific ecosystem. Many universal wallets like MetaMask are accepted nearly everywhere and even support many different networks.

1. Paper Wallet

Paper wallets are basic wallet options that generate a key and security phrase, which can then be written down and hidden for later access or recovery. Using a metal plate or temperature resistant item is advisable, as it's fireproof/waterproof, etc. This is the best option for investors or users looking to keep crypto in “cold storage” (offline and not traded) for extended periods of time. Those wishing to trade crypto, engage in DeFi activities, or utilize applications would be unsuitable to utilize a paper wallet.

2. Hot Wallet

Hot wallets are the most popular and widely utilized wallet form in the crypto economy. Hot wallets allow users and investors to actively use their crypto assets in trading, swapping, staking, and any other DeFi-related mechanics. Hot wallets include popular options like MetaMask. These wallets have the capability to stretch across ecosystems (Ethereum, Avalanche, Polygon, etc.) and access numerous decentralized applications.

The vibrant access that hot wallets enjoy also comes with extensive attack vectors. While cold wallets store keys completely offline, hot wallets can be stored directly on a PC or a cellphone. This means any security breaches to the device can result in the loss of keys (potentially funds).

Popular hot wallets in specific sectors include:

Ecosystem-specific wallets - Phantom and Glow on Solana, Braavos and Argent X on StarkNet, Electrum for Bitcoin, etc.
Mobile - Rainbow wallet
DeFi - Zerion, DeBank, and Zapper
NFT - Castle and Genesis
Teams or institutions - Squads, Gnosis, and Fireblocks

Software or “Hot wallets” are wallets connected to the internet and kept in a downloaded software/app on your computer, phone, or tablet. This method of storing your crypto adds a bit of convenience but at the risk of potential hacking and malware. It is usually recommended you only store a small amount of the BTC you intend on using in a “hot wallet” and the rest in a “cold wallet.” This is similar to how one does not walk around with their entire life savings but rather lets a bank hold onto the majority.

Hot wallet attack vectors

Computer hacks
- Copy + paste bug
- Screen tracking
- Keyboard tracking
Malware from plug-ins
- Phishing (email and Twitter)
- Give-away scams (typically Twitter)
Fake URL/website
Social engineering
- Exploiting customer help to obtain personal information or bypass security
- SIM swapping
Fake re-sellers or tampered devices
- ONLY buy DIRECT from the retailer. No Amazon, eBay, Facebook, etc.

3. Cold Wallets

Hardware wallets are a type of “cold storage” that keeps your BTC secure, offline, and away from potential hackers. This is the most recommended option for storing cryptocurrencies. Fortunately, there are several great options for BTC. The Ledger (Ledger Live tutorial), TREZOR, ColdCard, and KeepKey are currently the four most popular, while BillFodl and CryptoSteel add another dimension of security for storing your seed phrase/private key.

Image: A chart comparing wallet features.

Hardware Wallet Best Practices

The below suggestions are a bit advanced. A huge percentage of “lost crypto” is due to the owner simply being phished or key mismanagement (losing your seed phrase). In both scenarios, THE OWNER is the issue. Not some thief with a wrench. Be honest with yourself about your own operational security, how reliable you are as a steward of the keys, and the lengths you’re willing to go to protect YOUR money.

Many will be too lazy or say, “Well, it’s just X amount of dollars. It’s not that much and worth all this hassle.” However, you should protect your crypto now like it’s worth 20x its current value because that has happened time and time again. That $10,000 turns into $200,000+ and is secured by a binder in a closet next to old receipts.

Once your crypto stack becomes large enough that you would be upset if it all disappeared, you’ve waited too long! It’s now time to take measures to protect your stack.

Keep duplicates- there’s a saying in some industries, “One is none. Two is too few. Three is key.” For incredibly important things, like a seed phrase/private key, always have duplicates to remove any single points of failure.
Diversify
- Now that you have multiple copies of a seed phrase, you need different locations to store them. Storing them all under your bed accomplishes nothing. Try to have two very different and distinct locations. A safety deposit box at a bank is a decent 2nd location.
- Buy hardware wallets from different companies in case one goes bankrupt, gets exploited, or acts maliciously
- Seed phrase storage - Do not label your seed phrase “Joe’s Crypto Password.” Be discreet. Do not make it obvious to anyone should they get access to it.
Durable - Your storage locations need to be resistant to fires, floods, kids, pets, natural disasters, etc. Don’t just write it on a piece of paper and keep it in a drawer. People have lost tens of millions of dollars due to simple floods and pets.
Secret - This is a matter of personal preference (and well, really, all of this is) but keeping a low profile is better than not. Social media, your friends, people on Tinder, etc. do not need to know “when you got into Bitcoin” or “how much crypto you have.” It puts a target on your back, and you will be surprised how many people come reaching out after the next BTC all-time high.
Back-up plan - If you die, fall down a well, get divorced, etc. Private key custody is hard. Succession/inheritance plans are another wrinkle. Look into plans that fit your needs. Some services specialize in exactly this.

Image: Wallets By Feature Types. Source: nichanank — Image: Wallets By Category. Source: Medium\1k(x) Network

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