UPDATE: The day after I posted this, the news broke that the well known bitcoin site coindesk was hacked and hackers stole over $1m of bitcoin. Chief executive Kris Henriksen wrote on the Bitcoin Forum: ‘Please be advised that attacks are not isolated to us and if you are storing larger amounts of coins with any third party you may want to find alternative storage solutions as soon as possible.”
A few months ago, I wrote a bit about the difficulties I had
Well, eventually, as a
result of establishing a bunch of wallets and setting up accounts (some
verified, some unverified) in a dozen different bitcoin exchanges and sites, I
was finally able to start buying bitcoin, although in small quantities.
As a result, I ended up with small amounts of bitcoin in
different wallets spread between my hard drive(s), and various online places or
The next question I faced was: once you’ve got some bitcoin,
where should you store it?
With the expanded coverage of bitcoin due to its dramatic
rise recently, this is becoming an even more important question.
There was a well publicized account recently of an IT professional
in the UK who got quite a few bitcoins from mining a few years ago (until his
girlfriend told him to shut down the computer at night because it was making
too much noise).
Earlier this year, he
inadvertently threw away the hard-drive that had the bitcoin on it.
Today the bitcoin are worth $7.5 million!
So, having all your bitcoin in one wallet on one hard drive
may not be the best place to keep them.
Of course, you should backup your hard-drive, that should help, but it’s
What if your house burns
down? What if you lose the backup?
are some bitcoin clients let you print out your private key (or a way to
re-generate your private key) – but what if you lose that piece of paper?
And both of those don’t protect you from someone stealing
your hard drive (or making a copy of the piece of paper with the private key on
there) and then spending those bitcoin for you.
So what’s a bitcoin owner to do?
In the real world of what’s called fiat currency – i.e. USD
and the like -- we don’t store cash (or even gold or securities) at home for
these very reasons – they could get stolen, burned down or otherwise
Rather we use the banking
system to keep track of our money.
we learn anything from the traditional banking system?
Well that would be funny, because the whole point of bitcoin
is to get around
Well, the equivalent of banks would be online wallets or
exchanges where you buy and sell bitcoin, like coinbase and bitstamp and localbitcoins
or mt gox.
This seems like a good idea
as well since they have servers (multiple servers, I’m sure) and back up their
But there are non-trivial drawbacks to storing your bitcoin
on these sites as well:
There have been a number of well publicized break-ins and thefts of
bitcoin from servers. There was one in
Australia where a well known site literally lost millions of dollars in bitcoin
through a breakin – and the best they could offer their clients as an
apology. Also, all someone needs is your
password and they could break into your account, perhaps this is even easier
than breaking into your house.
- Web accounts vs web wallets. Most of these sites don’t actually store your
bitcoin separately from others. Instead,
they keep track of the bitcoin you have in your account, and store them in
central pools. Try it – go to one of
these sites and look for the single bitcoin address that holds all of the
bitcoin you have in that address. If
they are holding your currency in a pool, again the possibility exists of
something going wrong.
These sites are run by companies which may or may not be well funded,
and it’s possible they could go out of business. What happens to your bitcoin
then? They’re locked in some address that’s owned by the business. Are you technically a creditor of a company
that holds your bitcoin and goes bankrupt? I don’t think this is really clear.
At one point, the US government made it difficult for people to get
their money out of exchanges like Mt. Gox, so it could be a tricky situation
when you use these sites to store your bitcoin, then you sell some of it.
- Scams. In another well known example, there was
a website in China where people deposited bitcoin in web wallets, and the
people who setup the site decided to just take the bitcoin and run with
Unfortunately, there is no FDIC (Federal Deposit Insurance
Corporation) for bitcoin. At least not yet. After all we didn’t have FDIC until so many banks went belly up in the
So, having bitcoin on your hard-drive is kind of like having
cash under your mattress.
bitcoin in online accounts is kind of like putting your money in banks before
the Great Depression.
So, again I ask, where should you store your bitcoin?
The right answer, for now anyways, is nowhere.
Or rather, everywhere.
To be more specific, don’t store it in just one place or one
type of wallet/account.
In a fault tolerant system, one part of the system can go
down, but the others can keep going. An old trick used by those with lots of
money when FDIC only insured up to $100K per account was to have different
accounts in different banks, each with $100k in them.
I came upon this solution of spreading out my bitcoin by
chance, since I ended up buying bitcoin on different sites.
My plan was to transfer all the bitcoin to my
hard-drive, but then as I thought about it I realized having a significant
amount of bitcoin on one hard-drive, even with a backup, is probably not the
best idea, so I left small amounts on various sites and even transferred from
my hard drive to some web wallets.
As more and more people see bitcoin as an asset class
to store your savings, just
like stocks and bonds, it’s bound to be regulated in some ways (maybe even with something along the lines of an FDIC).
But today, it’s still the wild wild west, and
my advice is, don’t put all your bitcoin eggs in one basket!
Labels: asset class, bitcoin, bitcoin exchange, btc, coinbase, cryptocurrency, FDIC, hacking, local bit coins, mt. gox, savings, scam, Venture Capital