CZ urges wallet splitting after Coldcard Bitcoin theft

Binance founder Changpeng Zhao has urged cryptocurrency holders to divide their assets among several wallets after attackers stole more than $70 million in bitcoin by exploiting weak recovery phrases generated by Coldcard hardware devices.

Zhao, widely known as CZ, said even hardware wallets with long operating histories could contain software flaws. His warning marked a shift from the traditional advice to diversify cryptocurrency holdings, extending the principle to the infrastructure used to store them.

The theft unfolded on July 30, when more than 1,000 bitcoin was drained from 1,196 wallets within about 41 minutes. Early estimates had placed the loss at roughly 594 bitcoin, worth about $38 million, before investigators identified additional compromised addresses.

The attack did not require hackers to gain physical possession of the hardware wallets or intercept transactions while they were being signed. Instead, the vulnerability weakened the randomness used when affected devices created secret recovery phrases, allowing attackers to reconstruct possible wallet keys and search for funds linked to them.

Coldcard manufacturer Coinkite acknowledged that a combination of firmware errors had prevented the intended hardware random-number generator from contributing sufficient randomness during seed creation. A software-based generator was used as a fallback without providing the expected level of cryptographic security.

The most serious exposure involved Coldcard Mk3 devices running firmware versions 4.0.1 to 4.1.9, released from March 2021 onwards. Coinkite estimated that seeds generated by those versions could have provided an effective search space of about 40 bits, far below the 128-bit security level expected for standard wallet seeds.

Later devices, including the Mk4, Mk5 and Q models, gained additional randomness from secure elements. However, seeds generated before the latest fixes may still have contained about 72 bits of entropy, leaving them weaker than intended and potentially vulnerable to well-resourced attackers.

Coinkite has released emergency firmware across its affected product lines. The safe versions include 4.2.0 or later for Mk3, 5.6.0 or later for standard Mk4 and Mk5 devices, and 1.5.0Q or later for the Q model. Separate Edge firmware users have been directed to install versions 6.6.0X or 6.6.0QX, depending on the device.

Installing the update prevents newly created seeds from inheriting the flaw but does not strengthen existing recovery phrases. Owners who generated wallets using affected firmware must create an entirely new seed and transfer their bitcoin to addresses controlled by it.

The company advised users to update their firmware before producing a replacement phrase, verify the new wallet fingerprint and receiving address, and send a small test transaction before moving the remaining balance. Users have also been warned not to destroy their old backups until all transfers are confirmed.

Wallets created with at least 50 fair, private and independently generated dice rolls may have sufficient additional entropy to avoid the weakness. Those unable to confirm the number or secrecy of their dice rolls have been advised to migrate their funds.

A strong BIP-39 passphrase may also provide an independent layer of protection, although short, predictable or reused passphrases remain vulnerable to guessing attacks. The device PIN does not provide the same protection because it controls access to the hardware rather than changing the cryptographic wallet itself.

Zhao’s call for wallet diversification reflects growing concern that concentrating assets in one storage system can create a single point of failure. Splitting holdings among devices from different manufacturers, software implementations or multisignature arrangements can limit losses if one component is compromised.

The episode has also challenged the assumption that offline storage automatically removes technology risk. Hardware wallets reduce exposure to internet-connected malware and exchange failures, but their security still depends on firmware quality, seed generation, supply-chain controls, backup practices and user verification.

Security specialists have long argued that high-value holders should use layered arrangements rather than relying on one device. Multisignature wallets, which require approval from several independent keys, can prevent a weakness in one seed or device from granting an attacker immediate control over all funds.

The Coldcard failure originated during a 2021 software migration involving a widely used Bitcoin cryptography library. The cryptographic library itself was not at fault. The problem arose because the wallet’s seed-generation process resolved to an unintended software random-number function while the correct hardware implementation remained present elsewhere in the firmware.