Diversify Your Keys, Not Your Coins
Ask an investment advisor about risk, and they’ll talk about diversification. Holding different assets protects you from the risk that an unexpected catastrophe wipes out everything, and ensures that you have money to spend long into the future.
But what happens when the risk is to the money itself?
Bitcoin’s primary use is as a hedge against the fiat monetary system. For now, most Bitcoin-focused companies still operate in the fiat system. This makes them susceptible to failure at the exact moment they’ll be needed most. Bitcoin held by an institution that is struggling to stay afloat is at risk of being sold to recapitalize the business, or even being stolen by disgruntled employees. A hedge that stops working when you actually need isn’t much of a hedge. This is why self-custody matters - it’s the only way bitcoin can act as a lifeboat in the event of systemic and institutional failures.
Buying Bitcoin means trading the unknown risks of politicized fiat for the known risks of peer-to-peer electronic cash.
Self-custody is hard
Securing the private keys that control your bitcoin can be a lot of work. These tiny 32-byte strings of characters are capable of storing your entire net worth. Keys can be lost, preventing anyone from ever moving those bitcoin again. They can also be stolen. On a long enough timeline, both of these risks will present themselves in one way or another. Our CTO Jameson Lopp recently compiled an exhaustive list of the threats Bitcoiners face today.
Any financial advisor will tell you to expect some losses over the life of your portfolio. Apply the same logic to your bitcoin, and you'll quickly realize that key loss and key theft will happen to you.
This means taking responsibility for your decisions when it comes to custody. If you are storing your entire wealth in a single key, the day may come when you lose everything. It won’t matter that you were hedged with the world’s first cryptographically scarce asset if you can’t hold onto it.
By contrast, if instead you keep a diversified portfolio of keys, you’re sure to never go broke when the unexpected occurs on a macro or micro scale. The question is how to best do this. One approach is to think like a pirate burying treasure (or a gold bug stashing bullion), and spread single-signature hardware wallets and steel backups around multiple secure locations.
But Bitcoin is technology, and we can do better.
Multisig made easy
Multi-signature (multisig) wallets are a clever idea that allows you to protect your coins with multiple keys. If one key is stolen, the funds don’t go anywhere. If one key is destroyed, it’s not the end of the world. This subtle shift opens up an ocean of possibilities - because keys can finally come out of their bunkers.
I work with clients every day on securing their private keys from digital threats and physical attacks, while also improving the user experience of key management. When it comes to software or "hot" keys, digital theft is more common than digital loss. The opposite is true for hardware keys, where physical loss happens more than physical theft. A properly managed hardware wallet solves the remote theft problem, while storing keys in multiple locations reduces the risk of physical loss.
With this simple framework, it's possible to protect bitcoin from a wide variety of threats. Using hardware wallets from multiple manufacturers mean a critical vulnerability or clever phishing attack doesn't result in lost bitcoin. Murphy’s Law says we can’t entirely rule a simultaneous earthquake and hurricane taking out two keys, so resilient backups are worth considering as well. A key held with a friend, a key recovery service, or an encrypted key stored in the cloud makes it easier to recover from loss, without introducing a single point of failure.
Multisig buys you time and space to recover from the unexpected. The future is unpredictable and full of potential disasters, but in the real world these are rarely correlated. Managing bitcoin well requires a steady, long-term approach. The benefit is money you can rely on, no matter what the world throws your way.
Hedging for an unknown future
For now, Bitcoin is a hedge, a put option on the value of fiat currency. Bitcoin’s value is that, like gold, it exists in the real world. ASICs running on vented gas, nodes tucked away in closets, and microscopic bits encoding private keys on hardware devices - these are what tether Bitcoin to reality and separate it from fiat.
The real world entails real risks, like losing your savings in a natural disaster. But real risks are predictable, unlike the whims of an increasingly politicized monetary system. Bitcoin means we can prepare, hedge, diversify, and insure to protect our future wealth, rather than remain locked in a system where the risk is the machine itself. With multisig, we have the tools to help manage risk right out of the box.
Need peace of mind about your Bitcoin security?
If you're looking for a consultation on your Bitcoin security setup, Casa is ready to help. Our Platinum and Diamond memberships include dedicated Client Advisors from my team, who will work with you to design a custom setup to your specific needs.