Misplaced Passwords Lock Millionaires Out of Their Bitcoin Fortunes
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Stefan Thomas, a German-born programmer who lives in San Francisco, has two more guesses to find a password that’s worth about $ 220 million as of this week.
With the password, he can unlock a small hard drive known as the IronKey, which contains the private keys for a digital wallet of 7,002 bitcoin. While the price of Bitcoin fell sharply on Monday, it is still up more than 50 percent than it was a month ago when it exceeded its all-time high of around $ 20,000.
The problem is, years ago, Mr Thomas lost the paper on which he jotted down the password for his IronKey, which gives users 10 guesses before capturing and encrypting the content forever. Since then, he has tried eight of his most widely used password phrases – to no avail.
“I would just lie in bed and think about it,” said Mr Thomas. “Then I’d go to the computer with a new strategy and it wouldn’t work and I’d be desperate again.”
Bitcoin, which has been extraordinary and volatile for the past eight months, has made many of its holders very rich in a short space of time, despite the coronavirus pandemic devastating the global economy.
However, the unusual nature of cryptocurrency has also resulted in many people being locked out of their Bitcoin fortunes due to lost or forgotten keys. They had to watch helplessly as the price rose and fell sharply and could not benefit from their digital wealth.
Of the existing 18.5 million Bitcoin, around 20 percent – currently valued at around $ 140 billion – appear to be in lost or otherwise stranded wallets, according to cryptocurrency data company Chainalysis. Wallet Recovery Services, a company that helps find lost digital keys, said it received 70 requests a day from people seeking help recovering their wealth, three times as many as a month ago.
Bitcoin owners locked out of their wallets speak of endless days and nights of frustration as they tried to gain access to their wealth. Many have owned the coins since Bitcoin’s inception a decade ago when no one trusted that the tokens would be worth anything.
“Over the years I’ve spent hundreds of hours getting back into those wallets,” said Brad Yasar, a Los Angeles entrepreneur who has some desktop computers that contain thousands of bitcoin that he received during the reporting period created or dismantled the beginnings of technology. While these Bitcoin are now worth hundreds of millions of dollars, many years ago he lost his passwords and moved the hard drives that contain them out of sight in vacuum-sealed bags.
“I don’t want to be reminded every day that what I have now is a fraction of what I could have, what I’ve lost,” he said.
The dilemma is a stark reminder of Bitcoin’s unusual technological foundations that set it apart from ordinary money and give it some of its most vaunted – and riskiest – properties. With traditional bank accounts and online wallets, banks like Wells Fargo and other financial firms like PayPal can provide users with the passwords for their accounts or reset lost passwords.
However, Bitcoin does not have a company that provides or stores passwords. The creator of the virtual currency, a shadow figure named Satoshi Nakamoto, said the central idea behind Bitcoin is to allow anyone in the world to open a digital bank account and hold the money in a way that no government can prevent or regulate .
This is made possible by the structure of Bitcoin, which is controlled by a computer network that agrees to follow software that contains all the rules for the cryptocurrency. The software contains a complex algorithm that can be used to create an address and associated private key that is known only to the person who created the wallet.
The software also enables the Bitcoin network to verify the correctness of the password in order to allow transactions without seeing or knowing the password itself. In short, the system allows anyone to create a Bitcoin wallet without registering with a financial institution or doing identity verification.
This has made Bitcoin popular with criminals who can use the money without revealing their identity. It has also attracted people to countries like China and Venezuela, where authoritarian governments have been known to raid or close traditional bank accounts.
However, the structure of this system did not take into account how difficult it is for people to remember and secure their passwords.
“Even sophisticated investors have been unable to manage private keys at all,” he said Diogo Monica, co-founder of a start-up called Anchorage that helps companies secure cryptocurrencies. Mr Monica founded the company in 2017 after helping a hedge fund regain access to one of their Bitcoin wallets.
Mr Thomas, the programmer, said he was attracted to Bitcoin, partly because it was beyond the control of any country or company. When he lived in Switzerland in 2011, he received 7,002 Bitcoin from an early Bitcoin fanatic as a reward for the animated video “What is Bitcoin?”, Which introduced many people to the technology.
That year he lost the digital keys for the wallet with the Bitcoin. Ever since then, when the value of Bitcoin went up and down and couldn’t get his hands on the money, Mr. Thomas has gotten the idea that people should be their own bank and hold their own money.
“This whole idea of being your own bank – let me put it this way, do you make your own shoes?” he said. “The reason we have banks is because we don’t want to deal with all of the things that banks do.”
Other Bitcoin believers have also recognized the difficulties of being their own bank. Some have outsourced the work of holding Bitcoin to startups and exchanges that secure the private keys for the virtual currency supplies.
However, some of these services also had major problems securing their keys. Many of the largest Bitcoin exchanges over the years – including the once famous Gox exchange – have lost or stolen private keys.
Gabriel Abed, 34, a Barbados entrepreneur, lost around 800 Bitcoin – now valued at around $ 25 million – when a colleague reformatted a laptop in 2011 that contained the private keys for a Bitcoin wallet.
Mr Abed said this did not diminish his enthusiasm. Before Bitcoin, he and his fellow islanders did not have access to affordable digital financial products such as credit cards and bank accounts, which are easily accessible to Americans. It was almost impossible to get a PayPal account in Barbados, he said. The openness of Bitcoin gave him full access to the digital financial world for the first time.
“The risk of being my own bank comes with the reward of being able to access my money freely and being a world citizen – it’s worth it,” Abed said.
For Mr. Abed and Mr. Thomas, losses from mishandling of the private keys were partially offset by the enormous profits they made from the bitcoin they could hold onto. The 800 bitcoin that Mr. Abed lost in 2011 were a small fraction of the tokens he has bought and sold since then. For example, he recently bought 100 hectares of oceanfront property in Barbados for over $ 25 million.
Mr Thomas said he also managed to keep enough bitcoin – and remember the passwords – to give him more wealth than he knows how to do. In 2012, he joined a cryptocurrency startup, Ripple, that wanted to improve Bitcoin. He was rewarded with Ripple’s home currency, XRP, which rose in value.
(Ripple recently ran into legal trouble, partly because the founders had too much control over the creation and distribution of the XRP coins.)
Regarding his lost password and inaccessible Bitcoin, Mr. Thomas has put the IronKey in a secure facility – he won’t say where – in case cryptographers find new ways to crack complex passwords. If he keeps it far away he tries not to think about it, he said.
“I got to a point where I was like, ‘Let it be in the past, just for your own sanity,'” he said.