In our Friday series, we take a deep dive into different asset investments. The first asset we’re covering - which we will stick with over the next several weeks - is Bitcoin (BTC). Our goal with this weekly series is to familiarize readers with BTC and to address common anti-BTC arguments. For full disclosure, Brandon and Daniel are strong believers in Bitcoin and both have allocated portions of their portfolios to BTC (HODL baby).
Before we address losing your Bitcoin, let’s take a look at the State of the Coin
A look off chain:
Strike lets users buy BTC on Lightning: Jack Maller’s Strike is now letting users buy Bitcoin directly from its Lightning smart phone application with near zero fees, making Bitcoin even more accessible to the masses.
The following large corporations are now accepting Bitcoin: Whole Foods, PayPal, Starbucks, Twitch, Etsy, Home Depot, BMW, Coca-Cola, Rakuten, and Microsoft.
Soros Fund Management begins trading Bitcoin: The private investment firm of billionaire George Soros has reportedly begun trading Bitcoin as part of a broader exploration of digital assets.
Government officials continue to push for regulation: In a move that surprises absolutely nobody, a U.S. member of Congress called for a need to reverse Bitcoin transactions. As BTC grows, expect a bigger push for regulation. To learn more about regulation and BTC, check out our newsletter from last week!
A look on chain:
We’re continuing to get our feet wet with Glassnode on chain data!
Price remains stable from last week and low relative to all time high (~48% draw down):
In a recent podcast featuring Willy Woo, we learned that hash rate may have limitations related to self-reported values. A better metric may be block interval, which measures that amount of time passed between blocks being mined. Both metrics show a spike in mining difficulty following the Chinese ban.
Hash rate versus hash interval:
On the same podcast, Willy Woo discussed the relationship between hash rate and price, so we ran a simple correlation between the two to explore how these two metrics interact. We found a surprisingly strong correlation, at least for data from January 2020 to today (r = 0.72)!
Now, on to this week’s argument….
How do you even store Bitcoin?
There are multiple ways to store Bitcoin, each with varying degrees of safety, user difficulty, and trust. Every Bitcoin wallet contains one or more “private keys” that you will need to know in order to unlock and complete transactions. All BTC private keys are 256-bit numbers, making them incredibly difficult - nearly impossible - to guess (this is the “crypto” aspect of BTC). Unfortunately for non-technical users, this also makes private keys incredibly easy to forget/lose. While this may sound daunting for new users, many common custodial wallets (e.g., Coinbase, BlockFi, Gemini) generate and store private keys for you. Both writers (Brandon and Dan) use custodial wallets to hold some of their Bitcoin - we both use CoinBase and BlockFi. Although this eases the process for end users, it requires trust - the user must trust the wallet to keep private keys secure (particularly against hackers). The opposite is true for HODLers who hold their own BTC - while they don’t rely on trust in random employees at companies like Coinbase, they must be technically competent. Thus, there is a delicate balance between user experience, trust, and security. Users will vary in their want/need for each of these aspects and will opt for different solutions to meet those needs.
If you’re interested in opening an account with CoinBase check out this referral, if you’re interested in opening an account with BlockFi check out this referral. Other ways to store your Bitcoin include hardware wallets, multi-signature wallets, and cold storage, each of which will be explained below.
Hardware wallets - what are those?
A hardware wallet is a security-hardened device specifically made for storing bitcoins. A common hardware wallet is Ledger, which looks similar to a USB drive or external computer hard drive. A hardware wallet holds the seed in its internal storage and is resistant to both physical and digital attacks. The device signs the transactions internally and only transmits the signed transactions to the computer, never streaming data to the devices it connects to, therefore separating the private keys from a potentially vulnerable environment. Your Bitcoin lives on this hardware wallet and all you need is an internet connection to access your coins.
Now, onto Multi-Signature Wallets
A multi-signature wallet is one where multiple private keys are required to move your BTC instead of a single private key. There are companies that store a single key for you, such as Casa, and require a second key - which you can store however you see fit - to access your wallet. This is similar to a dual-verification login system.
Is cold storage really cold?
A cold storage wallet generates and stores private wallet keys offline on a clean, newly installed air-gapped computer. Payments received online with a watch-only wallet and these unsigned transactions are generated online and then transferred offline for signature. The signed transaction is then transferred online onto the Bitcoin network. Cold storage protects users from online threats, but the major downside is that transferring your Bitcoin for transactions is difficult and less practical than many of the alternative methods mentioned above. However, if our long term hypothesis on BTC is correct, difficulty transferring coins could be viewed as a positive in that it allows you to HODL with no problem!
Sounds like I can lose my Bitcoin?
The short answer is yes, you can lose your Bitcoin if you keep a hardware wallet and lose it or place your Bitcoin into cold storage and lose the private keys, but in a sense that is the beauty of Bitcoin. You are in full control of your money, not a bank, not a government, but each individual has the ability to control their own wealth. As the saying goes: “with great power comes great responsibility.” Well, if you want power of control over your wealth, you will need to take responsibility for it as well. The key to protecting yourself from losing your BTC is to keep redundant backups (in safe, unhackable locations) so that if one is lost or destroyed, you have a backup (or multiple) in place.
As we said in our introduction, we plan to address several arguments against BTC, one at a time, over the next several weeks. We hope that our weekly posts will encourage readers to learn more about this emerging technology.
Common arguments against BTC:
Be sure to check out our previous articles explaining Bitcoin and subscribe to get the new topics straight to your inbox!
It’s easy to lose access to BTC wallet
Happy Friday everyone - get after it this weekend!
Brandon and Dan
Disclosure: The authors of this writing hold positions in cryptocurrency mentioned in this article. That cryptocurrency is Bitcoin. The article was written by Daniel Kuhman and Brandon Keys, and it expresses the author's own opinions. They are not receiving compensation for it. The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock or cryptocurrency. Brandon and Daniel are not financial advisors. We encourage all readers to do further research and do your own due diligence before making any investments.