Why Storing Bitcoin in a Single Wallet is a Bad Idea

In September 2018, a long-dormant bitcoin wallet suddenly showed signs of activity. While there are millions of BTC wallet addresses out there, this one was special; the wallet in question contained over 111,000 BTC and an equivalent amount of bitcoin cash. The bitcoin in this wallet is worth close to $850 million, making it one of the very largest stakes of the world's most popular digital currency. Although the wallet's owner remains elusive, thanks to blockchain ledgers individuals everywhere have been able to watch as the wallet has lurched to life, with funds flowing out periodically in the past weeks. Regardless of who owns this particular stash of bitcoins, the discovery of this mega-wallet has served as a reminder to many investors in the cryptocurrency community as to why it is risky to hold a large quantity of tokens in a single place.

The Blockchain Shows All

One of the primary benefits of blockchain technology can also be a downside for whale investors. Blockchain ledgers reveal all transactions to those who take the time to explore them. While the identity of participants in bitcoin transactions remains cryptographically encoded and unavailable to these watchful onlookers, the activity in particular wallets is easily available. This means that an investor wishing to move any quantity of bitcoin, large or small, cannot do so in private. When the wallet holds close to $1 billion in the digital currency of choice, it's even more difficult for the wallet's owner to conduct transactions without drawing scrutiny.

Scrutiny in and of itself is not necessarily a bad thing, but in the digital currency world, where privacy and anonymity reign supreme, it is seldom something that investors are looking for. Besides that, drawing attention to a wallet of this size means that innocent bystanders, as well as potential criminals, will become aware of its existence. With crypto hacks still a major problem for digital currency exchanges and individual investors alike, all it would take would be a single successful hack of the wallet for the owner to lose a massive fortune instantly.

Private Key Risks

Even if hacking is not a concern, there are other ways that the owner of a bitcoin wallet can lose access to their funds. As Bitcoin investors know, "lose the private key and you've lost your fortune." Wallets are accessed via private key code. This is unrecoverable and impossible to track down if you've lost it. Having the code means unlimited access to the contents of the wallet, so investors tend to guard their codes carefully. However, if they are too cautious--to the point of losing or forgetting the code themselves--they have little or no recourse for retrieving their tokens.

For all of these reasons, it makes sense for an investor to split up a sizable quantity of crypto tokens into multiple wallets. This can aid in risk management (if you lose one private key, you still have access to all of your other wallets, say), and it can also enhance privacy. Smaller transactions are less likely to draw attention than their larger counterparts.

There is one final issue with storing a massive quantity of coins in a single wallet. Because of the transparency of blockchain, investors can see when a large quantity of coins is sent to an exchange wallet. An action of this kind can be enough to spark panic among investors who suddenly fear a major dumping of coins. In this sense, the actions of a single investor can have a dramatic impact on the entire cryptocurrency market.

Investing in cryptocurrencies and Initial Coin Offerings ("ICOs") is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns bitcoin and ripple.

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