Accidental loss: How to save your bitcoin from yourself
Tens of billions of dollars worth of bitcoin are lost forever. Unlike hard cash that gets locked away in a physical vault with a physical key to open the door, bitcoin is locked away in a digital storehouse that can only be accessed with a digital key. If the digital key is lost, the door to that "bitcoin vault" can never be opened again.
How bitcoin private keys work
All bitcoin is stored on the bitcoin blockchain. In metaphorical terms, this could be considered a gigantic collection of vaults containing bitcoin. Specific digital keys called private keys are used to open these vaults — one key per vault.
Software programs called wallets help you manage the private keys necessary to open these vaults. These keys can also be stored on physical devices, such as USB drives and, sometimes, even on paper! So long as you have this digital key, you can access the bitcoin that key unlocks.
In essence, these private keys are really just a long piece of unique text. Think of it like a gigantic password.
An important concept to understand is the bitcoin itself is stored on the blockchain. The key is only the means to access that bitcoin.
Hot wallets are wallets that are always online. These are sometimes provided by cryptocurrency exchanges such as Coinbase, Binance, or Crypto.com. The problem with these hot wallets is that they are easier for criminals to access. In some cases, they might also be easier to hack depending on how you have configured it.
This prompted the development of cold wallets which are simply a method of storing the bitcoin keys offline. Special hardware manufacturers started creating hardware devices that are themselves locked by a password so hackers can't simply steal the device and gain access to your private keys.
The problem with private keys in cold wallets
One of the biggest problems with a cold wallet is that you can lose it or lose access to the data inside it.
The stories of individuals who have lost access to their hardware wallets are legendary. One of the most well-known tales is that of San Francisco software developer Stefan Thomas who forgot the password to his hardware wallet and thereby lost access to over $200 million in bitcoin.
Thomas stored his private keys in an IronKey USB device that encrypts its contents. The device lets you type in a password 10 times before it wipes itself out. In January 2021, Thomas had two more attempts left before he would lose access to those keys permanently, and therefore lose access to his hundreds of millions of dollars. He said at the time that he had "made peace" with the loss.
James Howells of the U.K. threw away an old laptop that contained the keys to £200 million ($227.5 million) worth of bitcoin. Local regulations forbade him from hunting through a landfill for the laptop, despite his magnanimous offer of millions to be allowed to do so. The lesson from the above examples is clear: Private keys on a hardware wallet can be lost for good, and the chances of those keys being recovered are usually zero to none without a backup. Goodbye, millions in bitcoin.
Hacking risks with hot wallets
The bitcoin blockchain itself has never been hacked. Many extremely intelligent mathematicians and programmers have tried and failed. But cyber criminals don't need to hack the bitcoin blockchain to get at the funds. They only need to get people's private keys — and they try to do that by accessing people's online wallets.
Social engineering is the use of manipulative techniques to get people to willingly hand over sensitive information. If your wallet is online (hot wallet), all a hacker needs to do is cleverly convince you to hand over the password to it.
This is not as preposterous as it might sound. The recent hacks against Uber, Dropbox, and other tech companies reveal that even experienced programmers can be subject to the most common form of hacking used today — social engineering.
The exact same tactics would be used to steal hot wallet passwords which would then give hackers access to the keys inside them.
So, how do you secure your bitcoin keys?
Revolutionary new technology has emerged that solves the problem of lost keys. That solution is to use multiple keys to access your bitcoin.
Think of it like a bank vault that requires several simultaneous keys to open it. Casa has introduced technology that combines three or more keys to protect your bitcoin.
This way, a bitcoin investor can have one key in a hardware wallet (or even on a piece of paper in a safe!), another one on a mobile device, and a third one held by Casa to assist with recovery. This distributes the risk associated with holding your bitcoin and provides you with redundancy in case of an accident.
With the above setup, at least two keys are necessary to access the bitcoin. For very large sums of bitcoin, Casa also offers a solution of five separate keys, where a minimum of three keys is required to access the bitcoin. This technology is known as a multisig wallet.
This approach thwarts crooks because they would need to have access to multiple keys to gain access to the bitcoin.
Final thoughts
Regardless of the price of bitcoin, the technology of digital currencies has revolutionized the way money works. Cryptocurrency and blockchain technology are here to stay. And the permanence of the technology means that cybercriminals will become more sophisticated at trying to gain access to the growing pool of funds available for the taking.
A multiple-key solution is the only way to truly secure bitcoin in this rapidly evolving ecosystem. And you can try it out here. It's free for 30 days.
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