Noah Brier | January 13, 2021

Why is this interesting? - The Bitcoin Bloopers Edition

On currency, security, and redundancies

Colin here. In his piece on the spear-phishing phenomenon, Noah outlined how even with sophisticated systems and processes to prevent fraud, humans are often the weak link. In fact, the act of social engineering, or getting someone to divulge information or click on an innocuous link, is often where hackers and other nefarious actors start, rather than trying to breach fortified defenses. 

Security is not the only place this happens. I was recently listening to Kara Swisher on one of her many pods, where she talked about how she lost a drive that held some now precious bitcoin:

During Bitcoin’s early days, Kara was working on a story about the cryptocurrency. “Someone I covered … said, ‘You should buy some, Kara.’ I go, ‘I’m not really going to buy this stuff, but I think I’ll write about it or talk about it.’” Ultimately, as part of her research, she did end up buying 10 bitcoins, but at some point she lost track of where they were stored. “I might’ve thrown it [out]. I’m sure I threw it out. I don’t keep those stupid things because I think they’re dangerous. I don’t know.” The current price for 10 bitcoins? $52,151.

Turns out it happens to both super tech-savvy people like Swisher, but also to others. Matt Levine (who writes the essential read Money Stuff) unpacks a Times story about a forgotten password for a drive with hundreds of millions of dollars of Bitcoin on it:

Of the existing 18.5 million Bitcoin, around 20 percent — currently worth around $140 billion — appear to be in lost or otherwise stranded wallets, according to the cryptocurrency data firm Chainalysis. Wallet Recovery Services, a business that helps find lost digital keys, said it has gotten 70 requests a day from people who want help recovering their riches, three times the number of a month ago.

Bitcoin owners who are locked out of their wallets speak of endless days and nights of frustration as they have tried to access their fortunes. Many have owned the coins since Bitcoin’s early days a decade ago, when no one had confidence that the tokens would be worth anything.

This is a truly astounding number. Imagine if 20 percent of people who opened a checking account were suddenly locked out because they forgot their password. Human fallibility is a real phenomenon, and in this particular instance, an incredibly costly one. The piece features people lamenting the loss of their now-valuable cryptocurrency, often because of silly reasons. 

Why is this interesting? 

As the space has matured, buying and storing Bitcoin has been made significantly easier with digital wallets in many of your favorite apps. If you use the Cash App, you can even activate a Bitcoin boost to get 5% off your next purchase back in Bitcoin. But things weren’t so simple in the frontier days when you needed to know what you were doing, or at least have a secure place to house the keys that unlock your loot. It’s easy to see how so many lost their access. As Levine points out, the problem compounded when it was a professional investment firm buying Bitcoin on another’s behalf:

But if you are a professional investing firm who bought some Bitcoins with your investors’ money and held them as a fiduciary for those investors, and then lost the password, then you probably can’t be a professional investing firm anymore. That’s not good.

And yet it is in a way understandable. If you are a hedge fund and you buy some stock, you will not spend even a moment worrying about losing the stock. That is an entirely solved problem in 21st-century finance. You will have a custodian who holds the stock for you, but it’s not like the custodian is keeping stock certificates in a vault that might burn down.

Turns out there is a rather funny, analog solution when it comes to hyper-futuristic methods of payment. Cryptocurrency exchange Coinbase stores its customers' bitcoin offline, “using an elaborate process that breaks apart encryption codes and stores them on,” wait for it, “paper.” Revolutionary? Hardly. But it turns out simple things like knowing where the money is and having it be safe, secure, and accounted for is perhaps something we’ve taken for granted with our old school ways of paying. (CJN)


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Thanks for reading,

Noah (NRB) & Colin (CJN)

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