Here is the opinion of James Altucher, an American hedge fund manager, entrepreneur, best-selling author and venture capitalist.
As much of our lives moves online, passwords have taken an outsized presence in our digital world. Nowhere is this more true than in digital currency. Cryptocurrency represents the first form of money that can be stored in your brain. In order to access digital currency, all you need to know is the password, called the private key.
However, digital currency has a special wrinkle: anyone with the correct private key can withdraw funds from a wallet. For this reason, passwords must be complicated in order to prevent hackers from trying to guess the right code and withdraw funds.
Being Proactive Is Key
Now, estate planning might not be the first thing you think about when it comes to cryptocurrencies. But it’s becoming more and more relevant. You see, when people with crypto holdings die – and their relatives or heirs do not know their digital currency private keys – their digital currency will be lost forever.
The story of Matthew Moody recently went viral in cryptocurrency circles as a cautionary tale for cryptocurrency investors.
Moody was an early adopter and cryptocurrency enthusiast. He began mining bitcoin in 2013. After Moody tragically passed in a recreational airplane accident, his parents were unable to recover his substantial cryptocurrency savings.
But this isn’t an isolated incident.
It’s estimated that 20% of all bitcoins in existence are in accounts with lost keys. What this means is that while only 21 million bitcoins will ever be in existence, the number of usable bitcoins is actually far less. Over time, as keys are lost and forgotten, the number of usable bitcoins could become fewer still.
What can we do to protect our cryptocurrency?
Two options for storing your cryptocurrency that can make it easier for your loved ones to access your funds are outlined below. Unfortunately, neither of them is foolproof. Each has its share of pros and cons. Only you can decide which of them works best for you.
Option 1: Store Currency with a Hosted Wallet
If you own cryptocurrency, you probably bought your currency from an exchange. But it’s important to know that when you use one of exchanges, they actually hold your private key for you. This presents a unique risk. If the exchange doesn’t protect your private key well enough, your money could be stolen by hackers. On the other hand, this also means these exchanges can transfer currency out of an account in the event of a person’s death.
If you have an account with an exchange, be sure to let someone you trust know about the account so that funds can be retrieved. With that said, if you have a substantial amount of money invested in cryptocurrency that you do not intend to withdraw for a long time, you better remove funds from the exchange and store them on a hardware wallet.
Option 2: Store Your Currency on a Hardware Wallet
Storing cryptocurrency on a hardware wallet can be a tricky but worthwhile security measure. If you already have your cryptocurrency stored on a wallet, it means you’ve clearly taken steps to protect your assets from theft and loss. In the event of death or incapacitation, accessing wallets can be challenging for heirs or loved ones. For this reason, it’s important to have a plan in place. One option is to write down instructions for where your wallet backups can be found. Then either give the instructions to someone you trust or tell them where they can find the instructions.
Just be careful with this option. If someone you don’t trust, get the instructions, it will give them access to your cryptocurrency. There is a way to avoid that, however. You can split the instructions into multiple pieces and place them in different locations.
For example, many wallets have a 12- or 24-word passphrase that can be used to recover funds if they are lost. You can consider splitting these passphrases up into three-, four- or six-word phrases, and placing them in different locations. You can also take your codes and encrypt them using PGP or some other encryption methodology. Then you could give the private key to someone you trust, along with instructions for where to find the encrypted message.
Whatever you decide to do, don’t procrastinate. Planning for the unexpected can often become a low priority for some people. But there may be nothing more important than planning for your family’s financial future.