Being your own bank isn’t all roses. You have to do the boring stuff too, such as security procedures. Keeping your bitcoin safe requires a significant shift in mindset and a willingness to take responsibility for your own security.
Educating oneself on security is a continual process, but it must begin somewhere. I recently took a poll of around 1,600 Bitcoiners to get a sense of how they think about security. I asked respondents to name what they perceive to be the biggest threat to their bitcoin.
This is not intended to be the last word on continually evolving security threats, but rather the first step in what I hope will be an ongoing conversation. I don’t always agree with my audience, but that’s another beautiful thing about Bitcoin: we can differ and, through discussion, advance our revolution through the ever-increasing knowledge of our community.
Poll rank: 1st (39.8%)
Bitcoin has more in common with older forms of money than we sometimes care to admit. Like gold, silver and seashells before it, once you’ve lost your bitcoin, they are practically irrecoverable. That’s why respondents identified the biggest threat as accidental loss.
I agree… and so do the statistics. Earlier this year, it was widely reported that a fifth of all the bitcoin that has been mined so far — around 3.7 million — have been lost and probably won’t ever be recovered. There are many reasons for accidental loss, but it invariably comes down to forgetfulness. For example, the coins lie in dormant exchange accounts or, worse, owners have forgotten their ‘secure’ passwords to their physical or digital wallets.
We’ve all mislaid money in the past, but these aren’t back-of-the-sofa figures: it’s equivalent to $250 billion at current prices.
There are preventative steps you can take to protect your bitcoin. Investing in a cold (offline) wallet may give excellent protection against theft; to guard against accidental loss, however, you must back up your seed phrase offline or use a distributed multisig arrangement if you have a significant amount of bitcoin.
Once you’ve created and tested your backups, check them at least annually and whenever you move to a new computer, mobile device or operating system.
Poll rank: 2nd (27.1%)
It’s fair to say that most governments aren’t the biggest champions of Bitcoin, but is state confiscation as big a threat as our respondents believe it to be? Sure, governments have banned certain activities like mining – most recently in China – and law enforcement has confiscated the profits of criminal activity held in Bitcoin. But as of right now, criminals pose a bigger risk than governments.
Why did this rank so highly? It’s happened before to other assets, most famously, in 1933 when US President Franklin Roosevelt signed Executive Order 6102 forbidding gold possession above a certain threshold.
Government prohibition of any commodity is rarely effective, but that doesn’t preclude a desperate nation-state from trying. While it’s most likely to happen in authoritarian regimes – especially given Bitcoin’s utility as a tool for freedom fighters – we shouldn’t discount the possibility of government seizure in mature democracies. Even so, while we should be on our guard against this risk, I believe criminals represent a far bigger risk at present.
Poll rank: 3rd (19.6%)
I believe digital theft should actually be weighted higher than the poll results suggest. In a self-selecting poll, those with a keen interest in security are more likely to respond, and they are the ones who are more likely to self-custody their Bitcoin rather than keeping them on-exchange.
But this in itself provides useful insight, because it reinforces the point that the only way to be sure of your security is to keep the keys yourself, rather than entrust them to third parties. The first layer of security should always be privacy. Don’t share sensitive financial details with others, never boast about your bitcoin, and always make sure you hold your own keys. Last but not least, don’t have all your private keys in one place or in a setup that could be physically compromised.
Poll rank: 4th (13.4%)
People’s perceptions of violent crime often differ from the reality, and physical attacks on Bitcoiners are thankfully rare. But they do happen, especially against high-value targets.
In fact, only a few weeks ago one Bitcoiner suffered a break-in where thieves ran off with his hardware wallet and recovery words. Fortunately, he didn’t lose any bitcoin: as a Casa customer, his keys were protected by his multisig setup. I agree with respondents that this is the least likely threat vector, although if losing all your coins would ruin your year rather than just your day, I’d never discount it.
One threat was notable by its absence from my poll, and it’s a certainty unlike all the other
examples. We’re all going to die, but many Bitcoiners give no thought to inheritance planning.
The results of poor inheritance planning can be disastrous. When Bitcoiners fail to communicate effectively with their friends and relatives about holdings, they jeopardise the access to their bitcoin, which defeats the point of investing it in the first place. Devote some time to teaching your heirs about Bitcoin, so they can reap the rewards after you’re gone.
The threats you’ll face depend on a number of factors, including the size of your holdings and your lifestyle. But it’s not difficult to load the dice in your favour by following best practices such as self-custody via multisig security.
Get the basics right, and you’ll find that security need not be a headache and being your own bank can make your bitcoin safer than your fiat will ever be.