An outflow of about $89 million from the Coldcard hardware wallet platform is fuelling renewed debate over the stability of bitcoin’s self-custody model.

On Aug. 2, blockchain media outlet U.Today reported that Bloomberg senior ETF analyst Eric Balchunas said the incident could highlight the advantages of regulated spot bitcoin exchange-traded funds (ETFs).

At the centre of the incident is a firmware flaw in the Coldcard wallet made by Canadian firm Coinkite Inc. The flaw was reported to have existed since 2021. The device did not generate private keys inside a separate hardware chip and instead used a predictable software algorithm. That allowed attackers to calculate keys offline and automate withdrawals.

As the scale of the incident grew, market attention shifted to self-custody infrastructure itself. Balchunas pointed to Coinkite’s organisational scale on X, formerly Twitter. Citing PitchBook and LinkedIn data, he said Coinkite has only about 5 employees. "That is too small for a company entrusted with something this important," he said. "If the Canadian bank holding your life savings had only 5 employees, would you use it?" he said, adding, "It may be common in the crypto industry, but to me it just looks like a warning sign."

Balchunas said that for protecting large sums, the security infrastructure of bigger operators such as Coinbase or Ledger is more reasonable. Even if fees are higher, he said, they can be justified given the scale of security controls.

He also presented spot bitcoin ETFs as an alternative. Because ETFs are based on an institutional custody system under regulation, investors have less need to directly shoulder risks of technical failure such as software defects, he said. In particular, he said long-term investors who want only bitcoin price exposure may prefer ETFs after the Coldcard incident.

Still, he drew a clear line on the limits of ETFs. "If you want to actually use bitcoin as a means of payment, an ETF is actually a bad option," Balchunas said. That is because ETFs do not allow direct, 24-hour withdrawals of coins and bitcoin cannot be used immediately as a payment instrument. "But for people investing, I think it is by far the best choice," he added.

The incident again highlighted the difference between directly holding bitcoin and indirectly investing through institutional products. Self-custody returns control of assets to investors, but also requires them to bear technical flaws and operational risks. By contrast, ETFs are less useful but place more weight on lowering custody risk through a regulated custody structure.

As a result, the fallout from the Coldcard incident may not be limited to a single wallet accident. If long-term holders reassess security risks, the next point to watch is whether preference for spot ETFs rises as a way to gain bitcoin exposure.

True if you want to use btc to transact then ETF is bad option but for all the investor ppl i think it's by far the best choice