How self-backup failures happen in crypto
An estimated 3–4 million Bitcoin is permanently inaccessible, largely because of forgotten private keys, lost seed phrases, or failed self-backup strategies. This equates to as much as 20% of Bitcoin’s total supply, making self-inflicted loss one of the most significant and enduring risks in the crypto ecosystem.
As crypto infrastructure has matured, protections against technical and adversarial threats have improved markedly. Custodial platforms, wallets, and protocols now deploy advanced security frameworks. Yet one risk remains largely unresolved, and that is the reliance on individuals to perform perfect key backup and storage themselves, often underestimating how fragile that responsibility becomes over time.
Why self-backup introduces a new category of risk
Self-backup means taking full responsibility for your crypto assets on a non-custodial wallet, rather than relying on a third party to manage and secure your private keys in case of lost access. While this approach offers a degree of control, it also places the full burden of security and recovery on the individual, making self-backup risky for many wallet users.
Most self-backup processes are designed around a single moment: wallet creation. Users are shown a recovery phrase, told to store it safely, and then left to manage it indefinitely. But crypto ownership isn’t short-term. It can span years or decades. Over time, the assumptions that made a backup feel “safe” at the start begin to break down.
People move house, change devices, travel, lose documents, experience illness, or pass away. Backup methods that seem robust at creation—paper seed phrases, metal plates, offline storage—can quietly degrade. In many cases, failure is only discovered when recovery is needed, and by then, it's too late.
Common ways user's backup their crypto wallets
Most self-custody crypto wallets secure funds with a private key or seed phrase (12-24 words long) using the BIP-39 standard. Individual users’ backup practices usually including one or more of the following:
Writing down a seed phrase on paper
This is the most used method. The wallet software displays a series of words (the “mnemonic phrase”) at setup, and the user is told to copy them down accurately. That written phrase is the master backup – anyone who has it can re-create the wallet and spend the funds.
Storing digital copies
Some users make digital backups – e.g. saving the phrase in a text file, emailing it to themselves, or storing an encrypted wallet file. This is convenient but introduces risk (devices or cloud accounts can be compromised).
Hardware wallets
Hardware wallet devices like Ledger Recover keep private keys offline. However, even these require the user to record the recovery seed during setup. If the device is lost or breaks, the seed phrase is needed on a new device to recover funds. Without that backup, the funds secured by the hardware wallet are inaccessible - permanently.
When can these backup processes fail?
Unfortunately, there are irreversible pitfalls with each method of self-backing up a crypto wallet.
Losing the only backup copy
A very common disaster is when a user did write down their recovery phrase or key, but that single copy gets lost, stolen, or destroyed. Paper is fragile – it can be misplaced, thrown out, or ruined by fire or water. One famous case is that of James Howells, a Welsh IT engineer who, in 2013, mistakenly discarded a hard drive containing his Bitcoin wallet backup; it ended up in a landfill, along with access to what became crypto worth tens of millions of dollars. Relying on just one backup is akin to having no backup at all if anything happens to it.
Storing backups in insecure ways
Some “convenient” backup methods turn out to be disastrously insecure. For instance, saving the seed phrase as a screenshot or in cloud storage makes it easier to retrieve – for you and for hackers. Malware commonly scans devices for files or images containing a seed phrase. There are many cases of people who kept their seed phrase on Google Drive/Dropbox or in an email, only to have their account hacked and crypto wallet emptied. Similarly, writing the seed phrase in a notes app on your phone means if the phone is compromised, so is your wallet.
Forgetting passwords/PINs to wallets
Many software wallets or encrypted backup files have an additional password or PIN. If the user forgets that and doesn’t have the seed phrase, they’re stuck. A high-profile example is Stefan Thomas, a programmer who misplaced the password to his encrypted USB wallet containing 7,002 BTC. The device only allowed 10 guesses before permanently locking – Thomas had tried 8 wrong passwords, and had just 2 chances left, with $7,002 at stake and no way to recover the password he lost. It is estimated that his digital wallet is now worth $777 million. This illustrates the risk of depending on memory for critical credentials.
User misunderstanding
Many users simply fail to treat a crypto seed or key with the same care as, say, a bank PIN – sometimes because they don’t grasp that there is no safety net and “no reset password” button. Many users do not realise that a seed phrase is the wallet. For device PINs and wallet passwords, understand that your true backup is your seed phrase. If you have your seed phrase stored securely, you can always restore your wallet on a new device and set up a new password.
Social engineering and fraud exploits
No matter how strong your cryptography is, if someone tricks you into handing over your keys, it’s game over. Phishing emails, fake wallet apps, and social media scammers have stolen untold millions by exploiting human trust or panic. For example, a scam might claim “Your wallet is corrupted, enter your seed on this official recovery site to fix it.” Panicked or unaware users might comply, essentially self-compromising their backup. These scams succeed because they target human behaviour rather than technical weaknesses. Technology can reduce exposure at the edges, but it can’t eliminate the core risk when users are manipulated into bypassing safeguards. That’s why education and clear user design matter so much.
Lack of ongoing maintenance
A lack of ongoing maintenance often leads to users forgetting to regularly check and update their backups. Because seed phrases are created at wallet setup and permanently tied to the wallet, missed backup checks can go unnoticed until recovery is needed. At that point, keys cannot be rotated, leaving users with no option but to create a new wallet and transfer assets.
If years pass, do you remember where your backup is, and is it still legible? People often fail to periodically check their backups. Over time, paper can fade or get sealed away then forgotten. Crypto might be a long-term investment, but humans have short-term memories, so without a habit of regularly reviewing recovery materials, a backup can become useless (for example, if you no longer recall the meaning of a clue you wrote, or the location of a hidden key).
The individual person is often the weakest link in crypto security. A wallet can be cryptographically unbreakable and yet fail because a person mismanaged the backup or fell for a scam. Recognising this, both users and service providers need to invest in better awareness, simpler backup tools, and processes that account for human error (e.g., having guardians or fallback mechanisms).
What this means for the future of crypto adoption
In conclusion, the importance of backup in crypto cannot be overstated. Cryptocurrencies empower individuals to “be their own bank,” but with that comes the sober reality that there is no recourse if a user mismanages their keys. There is no Forgotten Password button that we’re used to in the web2 world. As crypto moves toward mainstream adoption, it’s increasingly clear that expecting every user to manage perfect self-backups for decades is unrealistic. For many people, the safer path is to consider third-party recovery support—solutions that preserve access through well-designed safeguards and recovery processes, reducing the risk that an everyday human failure turns into irreversible loss.
How CoinCover can help
Coincover Recover is designed for the real-world ways in which backups fail, by giving wallet providers and their customers a more resilient path to recovery when the worst happens. Instead of forcing users to choose between sovereignty and security, CoinCover helps close the self-custody trust gap with safeguards that are credible, protect a user’s sovereignty, and are built for long-term ownership.
If you’re a wallet, financial institutions or crypto platform looking to reduce loss, build customer confidence and improve retention, get in touch with us to explore how CoinCover Recover can be integrated into your customer experience.
