Bitcoin investors have seen their wealth increase by orders of magnitude over the past decade, but price appreciation alone is not enough. Security plays a major role in preserving the wealth of crypto assets and best practices in this space have evolved significantly over the years.
As a security expert, I have helped many wealthy people protect their Bitcoin and store their wealth for generations to come. It’s pretty common for me to advise someone who has owned Bitcoin for years and still uses a setup that I consider appropriate only for securing hundreds or thousands of dollars rather than securing millions of dollars. If a significant portion of your net worth is held in Bitcoin, you should be much more thoughtful about how you store it, as a single mistake could be catastrophic.
Don’t leave Bitcoin on the exchanges
Bitcoin is a bearer asset, just like precious metals or collectibles. Anyone who holds the private keys of a Bitcoin address can spend from that address at any time.
Because most people acquire their Bitcoin on an exchange, it’s quite convenient to just leave them there. But if you leave your Bitcoin on an exchange, the exchange holds the keys, exposing your assets to counterparty risk and various external threats. The exchange could be hacked, seized, or for a number of reasons the exchange may not even have Bitcoin.
These threats may sound theoretical, but they have been a recurring theme throughout Bitcoin’s history. In 2014, the MTGOX Bitcoin exchange revealed that 850,000 Bitcoin had gone missing and possibly stolen. The exchange filed for bankruptcy, resulting in a legal mess that persists to this day. MTGOX handled most Bitcoin transactions at the time, and early Bitcoin investors remember the loss of funds all too well. Since 2014, we’ve seen dozens of other exchanges suffer catastrophic losses from internal and external attacks.
Single points of failure like exchanges are why it’s important to keep your own keys.
Don’t take unnecessary risks
There is a saying in financial circles: You only need to get rich once. When investors accumulate significant life-changing wealth, their tolerance for risk changes and they tend to change their mindset from accumulating wealth to preserving wealth.
This is especially true for investors with large holdings of Bitcoin, except that they perceive risk differently from their contemporaries. Trading and lending exposes your Bitcoin to counterparty risk, and the rewards aren’t always worth the danger. For example, if you’ve been holding Bitcoin for more than a few years, the prospect of earning single-digit annual interest on an asset that can appreciate that much in a single day might not be worth the risk of a 100% loss.
With today’s price appreciation, it has become increasingly difficult to replace Bitcoin that is lost. If you are bullish on Bitcoin as a store of value or even see it as just a hedge against inflation, you can only expect to reap these rewards if you keep your coins. Everything else carries an additional risk. If you’re not happy with a compound annual growth rate of around 200%, will you feel significantly better with around 205%?
Consider all threats
Humans have cognitive biases and these biases sometimes cause us to over-prepare for certain threats while neglecting more likely threats. Because Bitcoin is digital, investors are hyper aware of the risk of personal hacking. This risk may cause them to leave their coins on an exchange as it is protected by security professionals, but these exchange wallets are more at risk of being targeted by attackers as they are known to hold money. for many people.
In reality, Bitcoin investors are much more likely to lose their funds due to user error. Hacking a hardware wallet is difficult. Misplacing a hardware wallet is easy, but this threat can be mitigated with redundancy, backups, and legacy planning.
Some wealthy cardholders are so afraid of making mistakes that they move their funds to storage services that literally store the keys inside underground bunkers. But in doing so, they’re not actually protecting themselves from all threats – they’re just handing the risks over to someone else for them to manage.
If a considerable amount of your net worth is in Bitcoin, you want to be protected against any threats you can conceive of. Review your safety and emergency plans from all possible angles, including your own mismanagement.
Keep it simple
Once someone understands all the potential threats to their Bitcoin, they are often tempted to adopt an elaborate security plan, but that line of thinking is another trap. Complexity is the enemy of security – it can give a false sense of security (while offering only obscurity) while increasing the fragility of the procedures required to regain access or transfer ownership.
For example, a particularly paranoid investor might choose to divide their Bitcoin into 10 unique keys with different models of hardware wallets hosted in many jurisdictions. This type of diversification lowers the risk of a catastrophic event wiping out all of your holdings, but it dramatically increases the risk of losing some of your holdings at some point.
Healthy money deserves good custody
Self-sovereignty is about keeping control of your property. It’s not about making your assets impossible to reach – a perfectly secure asset is an unusable asset. Secure auto-custody is how you take ownership of your crypto assets. Implement a plan if you don’t have one and revise it from time to time. That way, if your investment goes to the moon, you can be sure to hold on to the moon landing.