My Bitcoin Loss: A Costly Lesson Learned

Investing in Bitcoin can be a rollercoaster. I know this because I've lost money on it. A lot of money. I'm not alone in this, and there are many reasons why people lose their Bitcoin investments. From the volatile market to flash crashes, and even just forgetting your seed phrase, there are many ways to lose your Bitcoin. Here's my story.

Bragging about your Bitcoin

You might be tempted to tell everyone about your Bitcoin, but it's best to keep a low profile. Bragging about your Bitcoin can attract negative attention and make you a target for bad actors. It's also important to remember that Bitcoin is irreversible—there are no do-overs if something goes wrong. Here are some tips to keep your Bitcoin safe:

• Keep your Bitcoin secure: Don't leave your Bitcoin on an exchange. Take self-custody of your Bitcoin and use multiple keys on different devices stored in different locations to protect against hacks, accidents, and other single points of failure.
• Be careful when spending Bitcoin: Always validate the address before sending a transaction. Even Bitcoin OGs double-check addresses before spending.
• Keep track of your taxes: Buying and selling Bitcoin can result in capital gains taxes, so make sure you maintain proper documentation of your transactions.
• Don't spend Bitcoin unless you really mean it: On-chain Bitcoin transactions are permanent and irreversible. There are no customer support lines to call if you make a mistake.
• Understand the risks: Bitcoin is a volatile asset class and is not protected by the Securities Investor Protection Corporation (SIPC). There have also been several high-profile hacks of cryptocurrency exchanges, so be aware of the security risks.

In conclusion, while it's exciting to own Bitcoin, it's important to keep a low profile and not brag about your holdings. By keeping your wealth private, you can reduce security threats and protect your Bitcoin from potential threats.

Not understanding how custody works

When it comes to Bitcoin and finance, custody refers to a service provided by a custodian who controls and safeguards assets that legally belong to another party. Custodians are typically institutions with experience and expertise in custody, making them more secure and reliable than individuals. They lend out assets under their management and earn interest for their clients.

However, not understanding how custody works can lead to losing your Bitcoin investments. Here's why:

Risks of Custodial Wallets

With custodial wallets, users put their assets under the complete control of a middleman or service provider who has total control over the private keys. This poses several security risks and increases the likelihood of losing funds. It can also result in access limitations, as exchanges may freeze access to funds due to legal issues, policy violations, or technical problems.

Even high-profile cryptocurrency exchanges have been targeted and successfully hacked in the past. Recent collapses, such as that of FTX, have highlighted the reckless management of customer funds or susceptibility to full-blown bankruptcies. Users who custodied their assets on FTX lost tens to hundreds of millions of dollars.

Risks of Not Understanding Custody

When investors choose to use non-custodial wallets, or self-custody, they have total control over their private keys and, by extension, their assets. This means there is no counterparty risk, and investors have the flexibility to exchange their assets wherever and however they choose.

By self-custodying, there is no risk of a third-party provider getting hacked, going bankrupt, or disappearing. Additionally, since there is no third-party involvement, transactions can be more private, depending on the blockchain used.

However, the drawback is that with self-custody, individuals are solely responsible for maintaining their private keys. There is no password reset option, and misplaced private keys may result in the total irrecoverable loss of funds.

Recommendations

It is recommended that individuals new to cryptocurrency opt for a custodial wallet, as they are typically easier to use and often come with a user-friendly interface. Additionally, certain custodial providers offer insurance solutions to mitigate counterparty risk.

However, it is crucial to scrutinize custodial strategies constantly and ensure that funds are properly managed. It is also important to select exchanges that are regulatory-compliant, employ high-security standards, and are transparent regarding their funds and ability to collateralize assets.

Losing your seed phrase

If you do still have access to your wallet and keys, you can create a new wallet and generate a new seed to send your coins to. However, it is recommended to first send your coins to an exchange of your choice and ensure that the transfer is complete before resetting your wallet device. This process will give you peace of mind, knowing that your new seed is secure and that your crypto assets are protected.

On the other hand, if you have lost your seed phrase and no longer have access to your wallet, you may be in a challenging situation. Your crypto assets are likely lost until you can find your seed phrase again. This scenario underscores the importance of self-custody and the responsibility it entails. While it is a tedious task, taking the time to consider the logistics and develop a well-thought-out plan for securing your seed phrase is crucial.

To prevent future losses, it is essential to write down your seed phrase and store it in a safe place. Engraving the seed phrase on steel or keeping it in a safe deposit box can provide added security. Additionally, be cautious of phishing scams designed to trick you into revealing your seed phrase. Remember, no legitimate website or organisation will ask for your seed phrase, and it should never be shared with anyone.

Not storing your cryptos on a hardware wallet

Security Risks

The primary reason for using a hardware wallet is to safeguard your private keys, which are essential for accessing your cryptocurrency. If you store your cryptos on a software or hot wallet, your private keys are more vulnerable to hacking and cyber-attacks as they are connected to the internet. While software wallets offer convenience and ease of access, they lack the robust security features of hardware wallets, such as PIN codes, encryption, and protection against hacking and malware.

Loss of Control

When you store your cryptos on an exchange wallet, you entrust a third party with your private keys. This means you lose control over your assets, and your funds are at the mercy of the exchange's security measures. If a hack occurs, your funds are at risk. Additionally, you are trusting the exchange not to misuse or negligently handle your assets.

Inconvenience and High Costs

Hardware wallets require a physical connection to your computer or smartphone for transactions, which can be inconvenient for frequent traders. They are also typically more expensive than software wallets, with some models costing over $100. However, the added security and peace of mind may be worth the investment, especially for long-term investors with significant crypto holdings.

Seed Phrase Risks

If you opt for self-custody of your Bitcoin, be cautious with your seed phrase. The seed phrase is crucial for generating your private key and accessing your wallet. Memorizing it and then deleting or destroying any record may seem secure, but it is risky. Most people will not be able to recall the words in the correct order after a few months. Writing it down or storing it in the cloud introduces additional risks, especially if you've boasted about your Bitcoin holdings to others.

In summary, not storing your cryptos on a hardware wallet can lead to security breaches, loss of control, inconvenience, and seed phrase risks. To protect your investments, consider using a hardware wallet in combination with other security measures, such as regular backups and a strong password.

Panic selling

During a panic sell-off, investors tend to act on emotion rather than rational analysis, hoping to limit their losses by exiting the market quickly. This can lead to a self-reinforcing cycle where the very act of panic selling drives prices even lower, creating more fear and uncertainty.

In November 2018, for instance, Bitcoin experienced a significant panic sell-off, with the price falling by more than 15% in a single day and continuing to drop over the following weeks. This particular episode was likely influenced by a combination of factors, including the breaking of a consolidation zone, a controversial hard fork of Bitcoin Cash, and the overall bearish sentiment in the market at the time.

The dynamics of the crypto market make it particularly susceptible to panic selling. Since the market is largely driven by future expectations and belief rather than fundamental values, extreme price movements in either direction can occur. The highly volatile nature of cryptocurrencies means that even small triggers can lead to panic selling, as investors rush to exit their positions to avoid further losses.

It's important to note that panic selling is not always driven solely by negative events. In some cases, positive news or a rapid price increase can also trigger panic selling as investors try to realise profits or avoid what they perceive to be an overvalued market.

Identifying when panic selling will occur is challenging due to the unpredictable nature of the crypto market. However, some indicators, such as volume climaxes and rapid price declines, can suggest that a market bottom is approaching.

Ultimately, panic selling is a natural consequence of the high volatility and emotional nature of the crypto market. While it can lead to significant losses for individual investors, it also presents opportunities for those looking to enter the market or increase their holdings at more favourable prices.

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