Bitcoin investors’ wealth has grown by orders of magnitude over the last decade, but price appreciation alone does not tell the whole story. Security is critical to the long-term preservation of crypto assets’ wealth, and best practices in this area have evolved significantly over time.
As a security expert, I’ve assisted numerous high-net-worth individuals in safeguarding their Bitcoin and preserving their wealth for future generations. It’s quite common for me to advise someone who has held Bitcoin for years and is still using a setup that I’d consider suitable for securing hundreds or thousands of dollars rather than millions. If Bitcoin represents a significant portion of your net worth, you should be much more cautious about how you store it, as a single mistake could be disastrous.
Avoid Leaving Bitcoin on Exchanges
Bitcoin, like precious metals or collectibles, is a bearer asset. Whoever controls the private keys to a Bitcoin address has the ability to spend from that address at any time.
Because most people get their Bitcoin from an exchange, it’s simple to leave them there. However, if you leave your Bitcoin on an exchange, the exchange will keep the keys, exposing your assets to counterparty risk and a variety of external threats. The exchange could be hacked, seized, or the exchange may not even have Bitcoin for any number of reasons.
These threats may appear hypothetical, but they have been a recurring theme in Bitcoin’s history. In 2014, the Bitcoin exchange MTGOX revealed that 850,000 Bitcoin had vanished and were most likely stolen. The exchange declared bankruptcy, resulting in a legal shambles that has lasted to this day. At the time, MTGOX handled the majority of Bitcoin transactions, and early Bitcoin investors recall the agony of lost funds all too well. Since 2014, dozens of other exchanges have suffered catastrophic losses as a result of both insider and external attacks.
Single points of failure, such as exchanges, are why it’s critical to keep control of your own keys.
Don’t take unneeded risks.
In the financial world, there’s a saying that you only need to get rich once. When investors amass substantial, life-changing wealth, their risk tolerance shifts and their mindset shifts from wealth accumulation to wealth preservation.
This is especially true for investors who have significant Bitcoin holdings, but they perceive risk differently than their peers. Trading and lending expose your Bitcoin to counterparty risk, and the benefits do not always outweigh the risks. For example, if you’ve been holding Bitcoin for a few years, the prospect of earning single-digit annual interest on an asset that can appreciate by that much in a single day may not be worth the risk of a total loss.
With today’s price increase, it is becoming increasingly difficult to replace lost Bitcoin. If you believe in Bitcoin as a store of value, or even as a simple inflation hedge, you can only expect to reap the benefits if you keep your coins. Anything else is fraught with danger. Is a 205 percent compound annual growth rate going to make you feel any better if you’re not happy with a 200 percent compound annual growth rate?
Consider All Potential Threats
Humans have cognitive biases, which cause us to over-prepare for some threats while overlooking more likely threats. Because Bitcoin is digital, investors are acutely aware of the risk of personal hacking. That risk may lead them to leave their coins on an exchange because it is protected by security professionals; however, exchange wallets are more likely to be targeted by attackers because they are known to hold money for a large number of people.
In reality, Bitcoin investors are much more likely to lose money due to user error. It is difficult to hack a hardware wallet. It is simple to misplace a hardware wallet, but this risk can be mitigated through redundancy, backups, and inheritance planning.
Some high-net-worth individuals are so concerned about making mistakes that they transfer their funds to vaulting services, which literally store the keys inside subterranean bunkers. However, by doing so, they do not actually protect themselves from all threats; instead, they simply transfer the risks to someone else to manage.
If you have a significant portion of your net worth in Bitcoin, you want to be protected from any threat you can think of. Examine your security and contingency plans from every angle possible, including your own poor management.
When someone understands all of the potential threats to their Bitcoin, they may be tempted to implement an elaborate security plan, but this is yet another trap. Complexity is the enemy of security; it can provide a false sense of security (while only providing obscurity) while increasing the fragility of procedures required to regain access or transfer ownership.
For example, a particularly paranoid investor may choose to split their Bitcoin across 10 unique keys held by various models of hardware wallets located in multiple jurisdictions. This type of diversification reduces the likelihood of a catastrophic event wiping out all of your holdings, but it significantly increases the likelihood of losing some of your holdings at some point.
Sound money warrants sound custody.
Self-sufficiency entails maintaining control over one’s property. It’s not about making your assets unreachable – a perfectly secure asset is one that can’t be used. Secure self-custody is the method by which you acquire ownership of your crypto assets. If you don’t already have one, make one and review it on a regular basis. That way, even if your investment goes to the moon, you can be certain that it will land safely.