While scrolling through social media the other night, I came upon this doozy of a headline from the New York Times:
Lost Passwords Lock Millionaires Out of Their Bitcoin Fortunes
Of course I click to read the article, and it’s even more horrifying that I imagined. Stefan Thomas, a programmer in San Francisco, owns 7,002 Bitcoin, worth $250 million dollars as I write this post. He stored the digital wallet key needed to access his Bitcoin on a hard drive that will self destruct if he enters the wrong password ten times. The problem; he lost the password to that hard drive. To date, has has tried eight different passwords to unlock it. He is now two tries from losing his Bitcoin fortune forever.
For those who are not familiar with digital wallets, think of them as a secure lockbox for cryptocurrency. Since Bitcoin does not exist in physical form, it must always be stored digitally. The wallet is protected by an insanely long, supposedly uncrackable, private key. Bitcoin owners store cryptocurrency in the digital wallet until they need to use it for a transaction; such as converting Bitcoin to US dollars. Without the wallet key, the owner cannot access the Bitcoin. In this case, Mr. Thomas stored his private key on a small hard drive secured with its own password. He forgot that password, and threw away the piece of paper on which is was written.
I have heard stories of lost Bitcoins through the years. A hard drive reformatted. Coffee spilled on a laptop. A fried portable hard drive. But none of these compare to losing access to a QUARTER OF A BILLION DOLLARS. Here’s another quote from the NYT article:
Of the existing 18.5 million Bitcoin, around 20 percent — currently worth around $140 billion — appear to be in lost or otherwise stranded wallets, according to the cryptocurrency data firm Chainalysis.
As I am reading this article out loud in our kitchen, my husband is quick to respond, “That would be us if I had bought that Bitcoin miner back in 2011.” And then I realize the secret to making millions on Bitcoin. Lose your password.
Let’s assume that you did begin mining Bitcoin in the early days, seemingly creating money out of thin air. Perhaps you even bought some at low prices, accumulating a total of 1,000 Bitcoin. Do you think you would have sold some in January 2015, when it was worth $300,000? How about two years later, when it was worth $1.1 million? One million dollars out of thin air, and you don’t think you would have taken some chips off the table. Ok. How about a year later when it was worth $20 million? I am pretty sure that unless you had lost your mind, you would have cashed in at some point along this journey.
And most likely, that moment would have come at $10,000, $50,000, or $100,000. Sure, you believed in the blockchain revolution, but not enough to turn down real money that fell from the money tree.
I argue that the only way to make $200 million dollars in Bitcoin is to lose your password.
The human brain was not designed to take a pot of money and invest it in risky assets to be spent decades in the future. We react to fear and greed in the moment. When our ancestors saw something that looked like a lion, they ran. It didn’t matter if they were wrong, they lived to see another day. This instinct to act works against us when we invest. We have the urge to react immediately when our fear sensors are triggered, such as when stocks drop 30%, 40%, even 50% in a bear market, as they do quite regularly.
There’s another trick we play on our minds. We regret what could have been. We sell a stock at a huge gain, then feel immense regret when is goes higher. I bet many early Bitcoin investors feel this way about cashing in.
Regret works on the way down, too. After Bitcoin spiked to $20,000 in late 2017, it crashed below $3,000. I imagine there was a lot of regret among those who saw their fortunes rise above $1 million, only to crash a few months later. It’s not easy, but the only way to overcome this mind trick is to ignore and move on. There’s no use agonizing over a decision already made.
Lost Bitcoin passwords remind me of a quote from Jack Bogle, founder of Vanguard:
Time is your friend, impulse is your enemy.
Perhaps the secret to long-term investing success is not to lose your password, but to entrust it to a neutral third-party who doesn’t allow you to pay attention to the short-term fluctuations in value.
I sincerely hope that Mr. Thomas is able to recover his password and Bitcoin fortune.