You may not think your small cryptocurrency investments are worth bother planning for, but if they continue to grow they could make up a large part of your estate. Make sure you have a plan in case something happens to you — after all, “you only live once!”
Crypto accounts differ from regular investment accounts in that they’re more prone to security risks and you usually can’t name a benefactor. If, for example, you keep your crypto on a physical device at home with only a few people knowing your key -– which functions as password of sorts allowing access to a Crypto wallet – one of those acquaintances could easily come into your house and burglarize your crypto just as if they walked off with great-grandmother’s diamond earrings. Alternately, if you share the keys with no one and something happens to them, then your crypto is lost forever.
Just like you would with any other valuable asset, it’s important to understand how to safely store your crypto and communicate your wishes with your loved ones.
Know how your crypto is stored
Leather wallets store and trade cryptocurrencies, but they’re not the kind you’ll find at Walmart or Etsy. Digital cryptocurrency wallets are software programs or websites that allow you to keep track of your crypto assets. Physical hardware wallets, on the other hand, provide a more secure way to store your digital currencies. The type you pick is determined by what you want to do with your bitcoin.
Hot wallets: Bitcoin ATMs are machines that allow users to trade and buy cryptocurrencies. They’re typically free and easy to use, but they’re not as secure because they’re always connected to the internet.
Cold wallets: The most secure method of storing crypto is to use a hardware wallet. These are used to keep cryptocurrency for longer periods of time. Consider it like putting your assets into a freezer.
The hot wallet is intended for more immediate use, like a checking account, while the cold wallet is better for long-term storage, similarly to a savings account. You’re able to have both at the same time.
The person who has control over the randomly generated numbers and letters that make up a password – known as a key – also has access to your crypto. This could be you, a third-party exchange, or some combination of both.
Alex Mejias, founder and managing attorney at James River Law in Richmond, Virginia recommends not keeping more than you’re willing to lose on a third-party exchange as a long-term solution. “You don’t control the keys,” he says. “They could freeze your funds or get attacked.” Instead, he suggests looking into a self-custody or hybrid option as the value of your crypto grows.
Keep your crypto secure, yet accessible
A cold wallet is a physical storage device that’s easy to lose because it’s small. To access your cold wallet, you need a PIN code, and you must also set up a recovery phrase as a backup in case you lose your key. Mejias says it’s crucial to have a fireproof safe at home or a safety deposit box at the bank; however, don’t store your coldwallet in the same place as the note containing all of items–your key, PIN, and recovery phrase. If somebody finds those together, then whoever has them can say goodbye to any Bitcoin stored there.
More than anything, devise a storage system that is logical. “Don’t make it overly complicated to the point where you can’t even remember it,” Mejias says. He knows of people who write down their keys and then tear the paper into three pieces before hiding each section in different places. “It sounds like a good idea at first, but it’s actually terrible. If you lose just one of those three pieces, your key is gone forever–and now you’ve tripled your risk.”
Make a detailed plan for your loved ones
You can name a beneficiary in your will for your crypto assets, as well as add a document to your estate plan with passwords, PINs, keys and instructions on how to find your cold wallet. If you have an account at a cryptocurrency exchange, then customer support can be contacted by your beneficiary after death.
If a Coinbase user passes away, their next of kin will be guided through a process by a Coinbase analyst who will provide one-on-one assistance. If a Gemini user passes away, their account can only be transferred out if the death certificate and power of attorney is provided.
A Gemini representative said, “We aim to make this process easier in the future, so we’re currently working on integrating account beneficiaries functionality into our platform.”
Update your plan and your wallet
Cold wallets need TLC, too. Ensure that your assets will go to the right people by keeping your estate plan updated with firmware updates and providing up-to-date instructions so beneficiaries can easily access these funds after you’re gone.
Mejias says that crypto has “the potential to be a very explosive thing” because investors could make a lot of money in a short period of time. He added that, within the next 5-10 years, there is potential for exponential growth in value.