Can you recover lost crypto assets?

The self-sovereign nature of cryptocurrencies means that anyone can become their own bank and custody their digital assets without the need for a trusted third party.

However, this financial empowerment also comes with its own unique risks. Without any intermediary to fall back on, it can be easy for people to lose access to their crypto assets through personal error or fraud.

This can be incredibly distressing, especially if large sums are involved. Thankfully, modern techniques and services have emerged that may help to recover lost crypto assets in specific situations.

The self-sovereign nature of cryptocurrencies means that anyone can become their own bank and custody their digital assets without the need for a trusted third party.

However, this financial empowerment also comes with its own unique risks. Without any intermediary to fall back on, it can be easy for people to lose access to their crypto assets through personal error or fraud.

This can be incredibly distressing, especially if large sums are involved. Thankfully, modern techniques and services have emerged that may help to recover lost crypto assets in specific situations.

Broadly speaking, there are five main ways a person can lose access to their crypto funds:

• Personal error
• Fraud
• Theft
• Software/ hardware malfunctions
• Platform shutdowns/ bankruptcy

Personal error

Forgetting passwords, losing recovery phrases, misplacing hardware wallets or sending crypto funds to the wrong address are all very common ways people lose access to their digital assets.

One research firm estimates that at least 4% of Bitcoin in circulation is permanently lost from these examples of human error.

The case of Stefan Thomas is a famous example of how simply forgetting a password can cost someone millions in unrealized profits. Thomas, a computer programmer and former Ripple CTO from Germany, was paid 7,002 BTC in 2011 to produce an educational crypto video. At the time, bitcoin prices were around $5 per coin. 

He stored access to the digital assets inside a password-protected hardware wallet, and wrote the phrase down on a single piece of paper. Some time later, he lost that piece of paper, and, with it, access to his sizable BTC fortune.

Fraud

While cryptocurrency itself is not a scam or fraud, it is unfortunately used by criminals to carry out several types of fraudulent activities.

Cryptocurrencies represent a highly lucrative target for scammers, rug pullers and other types of malicious actors. From phishing scams and ponzi schemes to targeted social engineering attacks and SIM swaps, the cryptocurrency industry continues to be a hotbed for fraudulent activities.

In a report, the United States Federal Bureau of Investigation (FBI) attributed crypto losses totaling $2.59 billion due to fraud over 2022.

Theft

Exchange hacks, smart contract exploits and loopholes are another highly common way that many crypto users lose their funds. Oftentimes, it's not the individual that's targeted, but the platforms where their funds are held.

The advent of decentralized finance (DeFi) protocols introduced new autonomous platforms that run almost exclusively using self-executing smart contracts and liquidity provided by crypto holders. These platforms create a concentration of user funds, inviting hackers to look for ways to exploit bugs or vulnerabilities in their underlying code and access those funds.

More than $680 million has been stolen from crypto platforms in Q3, 2023 alone, leading some experts to call it the worst quarter for security-related crime in the crypto industry's history.

Software/hardware malfunctions

While considered a lesser threat to crypto holders, there have been instances where users have been unable to access their funds because of online glitches or malfunctions with hardware wallets or online crypto services.

Platform shutdowns, collapses and bankruptcy

Leaving crypto funds parked on any platform is considered risky, especially when basic security and business principles are not followed. The infamous demise of the FTX crypto exchange in 2022 is a notable example of how devastating platform collapses can be for individuals and the broader industry.

It's believed over $8 billion worth of customer funds went missing following the cryptocurrency exchange's sharp decline.

Other examples of platform shutdowns and bankruptcies following FTX’s collapse include Celsius Network, Voyager Digital and BlockFi.

In some of the above examples, modern tools and services have become available that seek to help individuals in recovering their lost or stolen cryptocurrency.

Recovering cryptocurrency from password-protected wallets

Forgetting passwords to digital wallets is one of the easiest ways to be locked out of your funds.

Virtually all hardware devices and software wallets will require users to set passwords or PINs when setting up their accounts. This feature acts as a first line of security against online hackers or in-person theft. A crypto owner must input their password or PIN each time they wish to access their funds, making it a vitally important piece of information to remember.

Up until relatively recently, if a person forgot their password, there was little to no help available to restore access to the funds associated with their crypto wallet. But now, a handful of crypto recovery services have emerged that seek to combat this prevalent problem.

These services work by brute-forcing a person's crypto wallet password using specialized computer tools. These tools can generate many thousands of passwords per second with a view that eventually they'll find the right one. To streamline the process, crypto wallet owners are usually asked to provide a list of their known passwords and potential variants to help narrow the search.

Remember Stefan Thomas' story? It's been reported that he enlisted the help of two password-cracking teams to resolve his issue, with a third offer from another company on the table.

While this method is not guaranteed to unlock every crypto wallet, it can offer some people a second chance at recovering access to their funds.

Recovering cryptocurrency from hardware or software wallet malfunctions

If a person's hardware wallet or device with their software wallet installed is stolen, damaged or lost, it can be restored using the wallet's recovery seed phrases.

When creating a crypto wallet, a person will be prompted to copy down a list of words in a particular order. This is known as the recovery seed, or recovery seed phrases. Oftentimes, recovery seeds will consist of at least 12 random words. Correctly copying down the order of these words is crucially important.

Security experts generally recommend people write down these phrases on pieces of paper and make several copies as redundancies. If a person can find their wallet's recovery seed, they can simply download the same software wallet on another computer, or purchase a new hardware wallet device, input their recovery seed and port their associated funds across.

If a person cannot find their recovery phrase, access to their funds will likely be lost forever.

Recovering cryptocurrency held by bankrupt companies

For crypto traders that have lost funds due to custodial bankrupt platforms freezing withdrawals and going offline, they may receive some form of compensation once the company's assets are liquidated.

This depends entirely on the individual circumstances of the platform and whether there are any remaining assets to distribute to affected victims after creditors and other costs have been paid. Overall, this process can take many years. For verified users that have submitted their personal information, the bankrupt company will likely make efforts to contact them regarding making a claim.

Beware of crypto scams during these times. It's common for large-scale phishing email campaigns to emerge once a platform goes bankrupt. These emails pretend to be from legitimate sources, and may invite users to click a malicious link that downloads malware, or provide sensitive information.

The question of whether a person can recover lost cryptocurrency is complex and multifaceted. While the decentralized and pseudonymous nature of cryptocurrencies provides a level of security and privacy, it also presents challenges when it comes to retrieving lost funds.

Factors such as private key mismanagement, forgotten passwords and fraudulent activities contribute to the difficulty in recovering lost crypto.

Various methods and tools exist to potentially aid in the recovery process, including professional services, forensic analysis and technological advancements. However, success in recovering lost cryptocurrency greatly depends on individual circumstances, the nature of the loss and the chosen approach.

The key takeaway is to prioritize security measures from the outset to minimize the risk of losing access to crypto assets. This includes safeguarding private keys, using secure wallets, implementing multi-factor authentication and staying informed about best practices in the ever-evolving crypto landscape.

Kraken Wallet is a new non-custodial wallet where users retain complete and exclusive control over their private keys.

The service supports multiple blockchains and hundreds of cryptocurrency assets, including NFTs.

It's built from the ground up with privacy in mind. No KYC, email addresses or sign-up details are held by the company when you use the Kraken Wallet.

All code is fully open source too, so anyone can review the underlying software for themselves.