While Bitcoin works differently from fiat currency in many aspects, one statement is true for both: Never keep all your eggs Bitcoin in one basket wallet.
Depending on the country you are in, the banks will be regulated by a central body. Part of this regulation is that banks have to protect people’s money in their account, up to a certain amount.
For example, in Europe, a person’s money is protected up to €100,000, in the UK, it’s £85,000, and in the U.S, it’s $250,000.
If you have more money than the amount your bank is regulated to protect, then you need to have a second account at a different bank. By sticking to these protection limits, you can always ensure you won’t lose any money if your bank goes insolvent.
If the bank does go insolvent, your country’s government will reimburse your money up to the protection amount, anything above this amount, you’ll never see again.
Therefore, financially, it’s always a risk to keep too much money in one account.
Additionally, there is another great reason why you should never keep all your money in one account: availability.
For example, let’s say your bank has temporarily frozen your account due to a computer error, this is the kind of issue that could take days to solve.
In the meantime, you have no access to your money to pay for food or bills. However, if you have another account, you can dip into those funds while the problem with your other account is being resolved.
Given the fact that it’s not uncommon for people’s accounts to get frozen for a few days or weeks through no fault of their own, it’s always safer to have a “backup” account.
Where Bitcoin Is Affected
However, since Bitcoin is not regulated or insured and freezing of wallets is so incredibly rare, these points aren’t going to affect your crypto.
So, if Bitcoin isn’t affected in the same ways, why does the same expression apply?
The Mystery of the Stuffed Wallet
Back in September 2018, there was a Bitcoin wallet that suddenly started showing signs of activity after years of dormancy. The wallet was estimated to contain around 111,000 Bitcoin, worth more than $700 million at the time.
This was the largest known wallet at the time, and the community was instantly intrigued as to who had managed to nearly become a Bitcoin billionaire.
However, having thousands and thousands of people able to publicly follow the Bitcoin being transferred out bit by bit, really highlighted a couple of good reasons why it’s never a good idea to hold a huge stash of coins in one place.
Why It’s a Bad Idea
1. The Blockchain Is Public
Blockchain ledgers are public to anyone who wants to spend time watching wallet activity and exploring what’s happening can do so whenever they want. This feature is one of the main benefits of this technology.
However, this benefit can also have a negative effect. While the actual identity of the person behind the wallet is anonymous and remains cryptographically encoded and hidden from anyone watching, all the activity can be seen by anyone.
This means that the transactions and amounts are not private. And therefore, certain transactions can cause a bit of a stir, especially if there are large quantities being moved out and sold. Like they did with the wallet containing 111,000 BTC.
Having thousands of people watch as a dormant wallet suddenly becomes active and starts moving all their BTC out can cause a panic.
As unfounded as it may be, this panic can lead to Bitcoin’s value dramatically dropping as others start to sell their Bitcoin also. After all, if the dormant wallet owner has suddenly started getting rid of their BTC, something bad must be coming, right?
Not necessarily. There are so many reasons why someone might suddenly decide to start selling off their BTC and none of which include something bad coming.
2. Hot Wallet Hacks
Hot wallets are connected to the internet. And anything connected to the internet is at risk of being hacked. If your hot wallet is hacked, you’ll lose any Bitcoin that’s in there. If all the Bitcoin you own is in one wallet, then you’ll end up with nothing.
3. Lost Cold and Paper Wallets
Imagine you emptied your bank account and managed to stuff all your cash into your wallet. Then one day while out walking, you lose your wallet which is never to be seen again. In just a few moments, you’ve managed to lose everything you owned because instead of keeping $50 in your wallet, you put everything in there.
The same can happen with those who prefer cold wallets or paper wallets. And it has already happened to plenty of people.
Cold and paper wallets can be easily lost, misplaced, or thrown out by mistake. Once it’s gone, all your Bitcoin goes with it.
However, if you spread your Bitcoin over multiple wallets, even if the worst does happen, at least you haven’t lost everything you own.
Wallet freezes are rare but they are worth a quick mention because having your wallet frozen when you have done nothing wrong is highly improbable rather than impossible.
For example, on the question of freezing wallets, Coinbase says the following,
“In extremely rare circumstances, and only where required by law, Coinbase may block or "freeze" customer funds on our platform. We will take this action only when: We are required to comply with an order from a court or other authority that has jurisdiction over Coinbase which compels us to restrict access to funds.”
So, as an ordinary investor, you’ll most likely never experience a wallet freeze. But still, like with your bank account, it’s good to have backup wallets where you still have access to other coins while you get the issue resolved.
Better to Be Safe Than Sorry
One reason alone may not be enough to make you want to spread out your Bitcoin, but when there are several reasons and potentially a lot of money at stake, it more than makes sense to set up multiple wallets of different kinds. This type of risk management is essential if you’re going to be dealing with assets and investments.
When it’s so easy to have as many wallets as you need, there’s no reason to put yourself at greater risk than necessary when it comes to the security of your Bitcoin.
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