Cryptocurrencies

Following on from the last post about testing Exodus wallet, yesterday (1st September 2017) I went onto their Slack channel (exodusmovement.slack.com) to find out more about their product.

There was a guy on there called @rhyso who claimed to have lost 2 BTC and some other coin totalling USD 12,000.

Ouch.

He seemed genuine and he was blaming Exodus for creating an alleged security flaw. In a nutshell, by Exodus sending a link for restoring your wallet to your email, this could have given hackers a way into your Exodus wallet.

As at today, I don’t think this has been resolved and I don’t know whether @rhyso’s claim re the security flaw was correct. Let’s wait and see before passing judgement on Exodus’s wallet.

However, whilst almost everyone was sympathetic to @rhyso’s situation, one Slack user pointed out that @rhyso shouldn’t have had USD 12,000 sitting in one wallet anyway and certainly not in a hot wallet.

The bigger issue however is this:

As cryptocurrencies grow in value (price), and people’s holdings grow and grow, how do you securely store that amount of coins?

Think about this:

If you had 10 Bitcoins (BTC), bought at USD 100 (total cost = USD 1,000), and now BTC’s price is close to USD 5,000, so your BTC total holding is worth USD 50,000.

Say that the price moves to USD 10,000 in 2018, which is totally possible.

Your total holding is worth USD 100,000.

Now if you had USD 100,000 in actual US dollars, you would be comfortable having that in the bank.

(You would even be comfortable having USD 10 million in the bank, although I would split that across 5 different banks to reduce the risk of a bank failure destroying my capital)

However, how would you store USD 100,000 worth of Bitcoins?

You certainly wouldn’t put it all into a hot wallet (web wallet, local computer wallet). You’d be worried all the time about being hacked or losing access to your coins.

So you might then only store them in cold storage like a hardware wallet like Trezor or a Ledger Nano S.

But even then, would you be comfortable having that size of holding in one Trezor wallet? Or split across two Trezor wallets?

Thinking back to @rhyso’s predicament, it would really hurt to lose USD 12,000 in one go.

It would REALLY hurt.

So applying this to our conundrum of how to store USD 100,000 of Bitcoins, what amount would you be okay losing in one go?

For me USD 12,000 would really hurt.

Would USD 5,000 hurt? Hell yeah.

Would USD 2,000 hurt? Yes but a lot less.

Would USD 1,000 hurt? Yes but not as much. It would be bad but not too painful. I would chalk it up to experience and look at improving my security.

So if I would only store USD 1,000 worth of Bitcoins onto one hardware device, if I had USD 100,000 worth of Bitcoin in total, that’s 100 hardware devices!! How would you physically manage this many devices? You couldn’t. That would be 100 devices and 100 pin codes and 100 24xword recovery seeds.

It would be impossible. And in the meantime, Bitcoin’s price could double again, and your total holding would now be worth USD 200,000. So you’d now have USD 2,000 on each hardware device.

That’s getting to the uncomfortable stage.

The only answer would be to raise your risk tolerance levels and get comfortable with bigger amounts on your hardware wallets, say USD 10,000 of Bitcoins on each.

The next question then is where do you physically keep your hardware wallets?

You might be okay putting your 10 hardware wallets in a safe in your house, whilst keeping your recovery seeds and pin codes physically separate. But that’s still all in one basket.

Or you could split them and put some into a safety deposit box at a bank but there is still an element of physical risk there too. See this article on UK safety deposit boxes. It’s not as straightforward as proponents in the cryptocurrency space make out.

This must be a real problem to anyone who bought Bitcoins at USD 30/BTC who’ve now seen their investments rise into the millions (in USD). How would you safeguard this? How would you sleep?

To be frank, I would be shitting my pants.

Millions in fiat currency in the bank is not the same as having millions in coins in wallets that you control and are ultimately responsible for.

This, then, is why I think that until this is solved, mass adoption of cryptocurrencies might not happen.

At least not to the stage where it replaces fiat currency.

A lot of people have in excess of USD 100,000 in surplus cash. And a lot of people have a lot more than that.

For these people, the peace of mind of having this in a bank, where the bank or government will guarantee this to a point, must be very reassuring.

At this point in time, without the same sense of security and peace of mind for cryptocurrency assets of the same size of holding (USD 100,000 and beyond), then I just can’t see how we get to that level of adoption. Where normal people hold large amounts of cryptocurrency.

And if as everyone who is in this space currently is right, that cryptos are going to the moon :), then in a few years’ time, a lot of people will have very large holdings indeed.

Mass adoption is the next level up even from that though. That level is where my family and friends hold Bitcoins and other coins. It’s where they have serious amounts of money in cryptocurrency. And where most importantly, they feel as comfortable holding this amount as they do holding fiat currency in a bank. We’re a long way from that though, but I hope we get there.

Let me know your thoughts in the comments below!