Farukh Kitchlew | Nov 29, 2023 | 0
A German programmer might lose $200 million if he can’t locate his Bitcoin keys
German programmer Stefan Thomas is in a critical situation; he has only two attempts to remember his password. He will lose access to his 7,002 Bitcoins earned in 2021 if he fails to recall the password. He stores the crypto on an encrypted hard drive. If he forgets the password, he could lose $220 million based on current Bitcoin prices.
Stories of Lost Keys Might Worry Beginners
Thomas is not alone in losing crypto access this way. Chain analysis revealed that approximately 20% of 18 million circulating Bitcoin are trapped in lost wallets. Although the name indicates its link with the physical coins, a single Bitcoin doesn’t exist in a tangible form. It is a digital chain of signatures approving various transactions cumulatively representing one Bitcoin.
Bitcoin transactions require individuals to sign each payment using a private key, typically a combination of numbers and letters. These private keys ensure the authenticity of a transaction. Others use public keys to confirm that the owner of the matching private key genuinely signed a transaction.
There have been notable incidents involving misplaced Bitcoins:
- Mt. Gox Exchange Incident: One of the most significant Bitcoin mishaps. In 2011, around 2,609 BTC, valued at approximately $76 million today, was mistakenly sent to incorrect addresses in 20 separate transactions.
- Poloniex Incident in 2022: Due to outdated software that concealed the error on the user interface, Poloniex engineers unintentionally received 300 BTC in their Tether wallets.
Challenges Faced by Top Investors in Safeguarding Bitcoin Keys
Private keys are crucial for your access to your cryptocurrency. If you lose the key, you will lose your crypto access. Diogo Monica, the founder of a startup helping people recover their crypto, said;
“Even sophisticated investors have been completely incapable of doing any kind of management of private keys.”
Many major exchanges also prioritize the secure storage of keys in well-protected facilities. Gemini and Coinbase also use this approach. Some cryptocurrency enthusiasts suggest keeping paper backups in places safe from theft. Another approach involves enclosing a user’s crypto address within a smart contract to simplify key management complexities. This smart contract can handle private key storage and blockchain credentials sharing with trustworthy parties. Moreover, if the original key is lost, users can also generate backup keys for creating new ones.