People are calling on Coinbase users to transfer their crypto into hardware wallets after the exchange warned a bankruptcy could mean losing their investment

• Many are calling for Coinbase users to move crypto to hardware wallets, or physical storage devices.
• Coinbase disclosed Tuesday that it could absorb users' crypto in the unlikely event of bankruptcy.

Coinbase on Tuesday warned it could absorb its users' crypto as property in the unlikely event of bankruptcy.

The acknowledgment put some crypto-watchers in a tizzy as it appeared to go against a core tenet of the decentralized finance movement: giving people complete control and ownership of their money.

And now, many users on Twitter and other social media sites are calling for Coinbase users to transfer their crypto to so-called hardware wallets as a solution.

Experts have long said hardware storage is the most secure way to store keys, and Douglas Borthwick — chief business officer at crypto firm INX — told Insider that doing so is something that many long-time crypto users, or HODLers, have already mastered.

These maximalists want to hold onto their balance, not trade it. For that reason, it might be new crypto disciples that get burned if Coinbase ever did go bankrupt.

"The hardware wallet is essentially like putting something in Fort Knox," Borthwick said.

—Duo Nine (@DU09BTC) May 11, 2022

There are exchanges and then there are 'hot' and 'cold' wallets

There are a few ways to store digital coins. One is to simply keep them on an exchange like Coinbase. That avenue might now seem a bit sketchy to some given the company's disclosure this week.

Coins left on Coinbase would become collateral for the company in bankruptcy proceedings, it said. That's different than in a bank or licensed brokerage account, for instance. He said the company included the disclosure because of rules recently set by the Securities and Exchange Commission.

A second way is to store crypto on a software, or digital, self-custody wallet. This puts more power over your coins into your own hands — so the phrase goes, "not your keys, not your coins." You access your holdings that are stored in these wallets with private keys, which are passwords otherwise known as seed phrases. It's a unique 12 or 24-word phrase of random words.

—The DeFi Edge ️ (@thedefiedge) May 11, 2022

Coinbase has one of these "hot" wallets, called Coinbase Wallet, and others include Rainbow and MetaMask.

Another is Exodus, which told investors Wednesday: "You'll always have that 12-word phrase if you want it. It's at your disposal. You can take it to any other platform and access your wealth. That's one of the key powerful features of self-custody."

Then there's a hardware, or "cold," wallet that looks like a USB drive. It's a physical device that stores your private keys in a secure, offline way, giving you another line of defense against malware and cyberattacks. You can keep keys to different cryptocurrencies on it too, like bitcoin and ether. Ledger and Trezor are two of the most popular companies offering these gadgets.

—EthereumJesus.eth ⟠ (@EthereumJesus) May 11, 2022

"It's out of control of exchange platforms," Nicole DeCicco, the founder of a crypto consulting firm that specializes in cold storage, told Insider. "Essentially when you hold your crypto in cold storage, you own the private key, and the private key is really the essence of custody."

The downside to them is that if you misplace it and don't remember your private key, you lose access to your crypto forever. Still, they provide eons more security in a space fraught with bad actors.

"If I have a bag of gold, I can either keep it on the counter for people when they want it, or I can keep it stored in my vault and I can go and get it and retrieve it when someone wants it," Borthwick said.

Are you a Coinbase user considering transferring your holdings? Get in touch with this reporter at kcanales@insider.com