This update is an adaptation of my recent answer to a Quora reader who was in a panic. She asked:
“What can I do after a hard drive crash?
How can I recover my cryptocurrency?”
In the past, I would address the immediate problem of course. (My answer is below). But to prepare for the next unfortunate event, I recommended a wallet type based on a user’s unique experience, expertise and comfort zone. I guided the reader to weigh trade-offs of important criteria: Security, portability, convenience, and quick access to assets).
I had believed that some types of wallets were better for some individuals, but that they required a background in cryptography—or at least a discipline for meticulous practices. As CEO of the Cryptocurrency Standards Association, I had also believed that simple, unified, and popular standards would emerge very soon. I figured that this would enable users to practice safe-wallet maintenance in their own homes.
I was wrong. Most crypto wallets have not sufficiently evolved to counter the risks and complexities of everyday scenarios —not even for expert users. The problem isn’t the fault of any one vendor or hosted online service. It is that all of these gadgets, apps and services have not gotten together behind a single set of risk standards to a point where they become simple, standardized and compliant-friendly in the real world.
The lack of comprehensive standards and best practices dealing with total loss of access can bite anyone in the tush. Expertise and experience be d*mned. Today, I recommend only two types of wallets. All others are simply too risky to play a role in any financial portfolio. They set the stage for losing your wealth and health in so many plausible scenarios:
- If your electronic device is lost, hacked, stolen or run over by a truck
- If you become incapacitated or die
- If you forget a secret, or where you stored it
- If you have no idea what is “multisig” and don’t care to learn strange new practices
- If an online cloud service or exchange goes dark or mysteriously disappears
Here is my answer to the reader who urgently needs to recover from a disk drive crash. After dealing with that crisis (it’s not at all pretty), I explain what do do in the future…
Question: “How can I recover my cryptocurrency after a hard drive crash?”
Bear in mind that your digital wallet doesn’t really hold wealth or coins. It holds a private key that lets you access your wealth on the blockchain. The key is like a password, but you cannot choose your own and it is too complex to remember. And so, you need a place to store it. That’s all a wallet really is.
If you stored this key on an electronic device (or in a software app or even on paper), but with no way to recover it—in case the device is lost, broken, hacked or stolen—then you are screwed! Your bitcoin still exists, but access to it has been lost forever.
Let’s be extra clear: If the device cannot be repaired or recovered, there is absolutely nothing you can do except lick your wounds and learn from your experience.
Now, let’s talk about next time…
A beautiful trait of crypto is that you can back up your wallet easily. The elegant and secure way to do this is by creating a list of 11 or more common dictionary words and placing this list where you and 2 or 3 trusted friends can always find it. The ability to generate this list of words is a Bitcoin standard. It greatly reduces the risk of loss—but only if you are aware of the feature, make use of it, and periodically practice asset recovery.*
But, we’re getting ahead of ourselves. Let’s back up, and describe the way to store your keys…
There are only two ways that you should stash cryptocurrency until we reach a day when standards, best practice and multisig escrow are second nature, trivial and understood by everyone.
You can either (1) trust a custodial exchange, or (2) use a hardware wallet. In a nod to smart phones and software apps, I will describe something that they are good for in these safety tips. But your go-to wallet should never be an app.
1. Trust a custodial exchange like Coinbase or Bitstamp
Despite what your Libertarian friends have told you (“It misses the whole point of owning crypto!”, don’t dismiss this option so quickly. A traditional bank/brokerage model offers several benefits which are important to some individuals. We’ll get to those in the bulleted list below.
Choose an exchange that is compliant (fully licensed and follows regulations for all activities). They must be well capitalized by reputable investors and subject to random, outside audit. The two mentioned above belong to this very small class of exchange-wallet services.
The exchange holds your crypto in their own offline vault and gives you access on demand through an account user interface using two-factor authentication. The process can be frustrating, if you lose your smart phone and haven’t prepared or practiced for such an inevitability. That’s because they must be absolutely certain that access is being made by you or someone that you have authorized
Why would anyone want a service to control their assets? There are good reasons:
- Since their main business is acting as an exchange, broker or market maker, you can quickly shift assets into Fiat or other cryptocurrencies
- Their meticulous record-keeping aids your own end-of-year tax reporting
- A real person can help with confusing or unexpected circumstances
- Just as with a bank or stockbroker, you can designate heirs, a spouse or co-owner, and your anticipated executor or a relative with power of attorney
- A reputable custodian makes it difficult to accidentally lose access to wealth
But what about security standards? With all of the exchange failures, the lack of an insurance framework, and many that have simply lost or fled with customer assets, can you trust an exchange to implement security in the very best way?
Ultimately, a reputable exchange that practices security drills, subjects itself to outside audits and has investors with lots to loose is more likely than you to implement, update and rigorously practice safe methodology. This may change in the future, as standards and practices become more clear, unified and easier to follow. But for now, the traditional bank model makes sense for a great many users. I have owned Bitcoin for ten years, and I have only switched from Coinbase to method #2, below, in the last month.
