Keeping your Bitcoin safe, the Art of Hodling

To hodl; a verb coined by the online Bitcoin community, standing for “hold on for dear life.”

Those who have managed to hang onto their Bitcoin during the rollercoaster ride of its price oscillations are known as hodlers. As Bitcoin has skyrocketed in price again this week, nudging gently up against an all-time high, the question of the security of your funds can suddenly feel rather pressing. So how to hodl safely?

While anyone who bought Bitcoin during the dips of the last few months will be celebrating their precipitous rise in net worth, Bitcoiners recognise that holding the reins of your own finances brings responsibilities of its own.

So you’ve bought some Bitcoin and it’s sitting on an exchange or in a wallet on your phone. You’re watching the value of your investment accumulate nicely. What next?

The key threat to the security of your funds is hacking. There have been, alas, a number of attacks on Bitcoin exchanges. The most infamous story in Bitcoin history is probably that of Mt Gox, back in the early days of Bitcoin innovation. In 2011, Mt Gox announced that it had been hacked and around 850,000 Bitcoins stolen. More disappeared as a result of fraudulent trades. As years have gone by some of that money has been recovered but early Bitcoiners were badly burned in this episode and the lesson it taught seared into the collective Bitcoin memory: funds kept on exchanges and on “hot wallets”- that is, connected to the internet, are, by definition, potentially vulnerable to attack.

The second that your Bitcoin holdings start to gather real value, you will need to take steps to increase your security, essentially creating your own bitcoin “keys” and practicing with them, again and again until you are comfortable with key management.

This comes in two steps. First, it’s good to be aware of your general online security. If, for example, your account on Bitstamp, say, is linked to a gmail email address and your password is your dog’s name combined with your Mum’s birthday, you are an easy target for attackers. Using an encrypted email address, for example those provided free by the Swiss company Protonmail (www.protonmail.com) already increases your security. Paying some mind to your password security is also crucial. Password managers like NordPass (http://nordpass.com) or Dashlane (www.dashlane.com) provide an excellent service, often free or for a very low price. Not only do they keep your passwords and are encrypted, they can also generate passwords for you, a scrambled series of letters, numbers and symbols, impossible to guess and very difficult to remember, even if the wrong eyes did see it.

Second, it’s worth taking your Bitcoin offline. To do this, you need to buy a hardware wallet. Coldcard and Trezor are perhaps the best known brands. Admittedly, we are straying here a little into geek territory, but I promise that these items are user friendly!

If you invest in a hardware wallet, and I strongly recommend that you do as soon as your investment starts looking like what you think of as a decent amount of money (for example the amount you could use to buy a car), you will need to walk through the process of setting up your device, pressing receive and transferring your funds to the Bitcoin address which your device displays. Setting up your device requires you to take note of a list of words generated by it. These words are random but the combination of them, in the correct order, will give you access to the funds on this device. These words are known as your private keys and give rise to the Bitcoin saying: “not your keys, not your Bitcoin.” That is – if you don’t have your Bitcoin on a hardware wallet and you’re not in possession of those words you can’t really consider yourself to be in full ownership of it. Keeping your money on a hardware wallet ensures its safety and above all ensures that you are proprietor – as surely as if Bitcoin were gold and you were storing it under your mattress. Always do a test run of your keys, deleting and restoring your wallet before transferring any substantial amount to it.

So… all of this may sound complicated and more than a little intimidating. But when you consider the upside which Bitcoin brings there can be no doubt that shouldering financial responsibility for your own funds, taking it out of the traditionally greedy (and none too clean) hands of the banks, is well worth while and very liberating. For the first time in history since banks came into being we can transact internationally, peer to peer, without relying on financial third parties and without anyone being able to censor us or seize our assets. If you so wished, you could sell you house for Bitcoin without the hassle, hindrance and delay of bank approvals, fluctuating exchange and inflation rates on mortgages and so forth. A company exporting Portuguese goods could receive payment in a matter of minutes from anywhere in the world without a money transfer service skimming off a fat fee. Combining these lightning fast, global, cheap and unhindered financial services with a degree of financial sovereignty unprecedented in the history of money since banks were introduced, it’s no wonder that more and more of us are choosing to hodl, and no wonder that we have seen this soaring price. At the average value appreciation of Bitcoin, 10% of disposable income invested will yield a full 100% equivalent of disposable income in just 3 years, again and again. The trick is to hodl and basically never sell.

At the time of writing, one Bitcoin is worth around 53,000 euros, up 440% in the last year. This price increase gives the absence of capital gains tax on Bitcoin in Portugal an additional significance for Bitcoiner expats there – as the capital gains and/or wealth tax on Bitcoin for this calendar year look set to be substantial elsewhere.