February 22, 2021
By Ross Macdonald
These lyrics come to mind…
“Watcha gonna do with all that junk inside yo trunk?”
Yes the Black Eyed Peas were talking about something else, but we need to consider how you and I store our increasingly valuable digital asset portfolios.
It is essential that we do not lose what we have created in value for ourselves. The stories are starting to fly about noobs investing in bitcoin and alt-coins while losing access to their crypto. Private keys being lost. Passwords forgotten. Cold wallets overwritten.
It’s the next level of examples layering on top of old stories about hard drives full of Bitcoin being lost in landfills. The wave of mistakes are rising to the surface, so let’s learn a little and profit with some smart decisions here together.
If you are a multi-national corporation, a small business or the average person who has invested in cryptocurrencies, you should consider a few questions about your crypto:
1. What investment value amount would represent a lot of money to me to protect?
2. How can I reduce my risk with safe storage and management of my investments?
3. What decisions do I need to make to capitalize on the opportunities present in 2021?
In the past few months we have seen the corporate world make huge moves with Bitcoin investments.
When Microstrategy buys over $1 billion in Bitcoin and Tesla buys $1.5 Billion in Bitcoin, do you think they store all of that on one cold wallet?
The answer is no. And if I am wrong in that assumption, the group of people managing those funds should be exiled to Mars without an oxygen supply.
Storing over a billion dollars of Bitcoin in one wallet means that all of your eggs are in one basket. We have seen digital exchanges who have done this in the past get burnt them to a crisp when they lose access or get hacked. Mt.Gox, Quadriga CX, Bithunb, Coinrail, BitGrail, Coincheck, OkEx and other exchanges have been taken down by hot wallets being accessed or CEO’s having sole control of the private keys or passwords.
Look at this list of the largest bitcoin wallets.
The largest Bitcoin holdings in one wallet is owned by Huobi.com with an impressive 141,452 BTC valued at over $6.6 Billion USD. This is a potential weak point to storage. Prove me wrong.
Storing over 100,000 BTC in one wallet is risky. It doesn’t matter if you keep access to this in a safe, a security deposit box, or in the XAPO private, guarded underground bunker in Switzerland.
One point of failure equals high risk of loss
Even storing large amounts of crypto in one single cold wallet leaves the path to loss at one fracture point. Reducing risk storing crypto, means that this needs to be reviewed at regular intervals from hardware to software, on-ramps and off-ramps. It is a complex system that should be made simple by our decisions.
If crypto exchanges set no standards in terms of how crypto holdings are stored to impress and attract users, and governments along with the public require no standards, then what exactly are we doing as an industry?
Here is an example of standards that SHOULD be set for businesses and have not. A specific dollar amount, let’s say $100,000 or $1,000,000 USD capped out for cold storage devices, stored in a locked fireproof and waterproof safe. Multi-sig wallets used with specific team members to allow access even if one signee is not available.
Once a business’s facilities caps out at a % of their holdings in crypto 5-10%, cold wallet devices and passwords should be kept on multiple separate sites. The goal should be the decentralization of storage so that the risk of failure to access is also decentralized.
For you and I, holding small portfolios in comparison to corporations still brings the question — how should we manage our crypto storage? The same principles apply, but on a smaller scale. If $500 or $100,000 of investments is a lot of money to us, then it should be on a cold wallet. If this is traded or appreciated over time to 5x or 10x, then we may want to hold the funds in separate cold wallets and continue splitting portfolios to decentralize our own holdings.
A pile of cold wallets in a desk drawer with seed words on paper beside them is unacceptable for secure storage of crypto. If this is where you are at, welcome to becoming a statistic. We will expect to hear your sob story on reddit about the sweat and tears you have put into your portfolio, just to have lost it all into the digital wasteland of missing crypto.
In summary, remember these points.
- Multiple cold digital wallets reduces your risk to loss.
- Cold wallets are not accessible while disconnected.
- Private key and seed word management of digital wallets is the biggest threat to your security if not done well.
Watch for new standards to be set this year around the world in terms of crypto storage and promoted as a reason to invest in companies with rock solid bitcoin holdings!