If you have a tough time with the idea of putting even a dollar of your net worth into a digital cryptocurrency — Bitcoin, Litecoin, Ethereum, and the like — no sensible person would blame you.
Aside from the price fluctuations, there’s the question of who’s protecting those digital assets. Is it an institution like QuadrigaCX, an exchange for cryptocurrency run from its founder’s laptop, which reportedly lost $140 million in customer funds after the founder died in India in December? Or one like Tokyo-based Coincheck, which had $532 million in cryptocurrency stolen by hackers in January 2018?
“Every time I see one of these exchanges get hacked, or the founder take off with money in some kind of scam, it’s another reminder of how immature this industry is,” says Matthew Walsh, a former Fidelity Investments vice president who helped launch a private fund that invested in cryptocurrency there. “It’s bordering on a joke how immature the infrastructure is — and how dangerous it is.”
But for a growing group of venture capital firms and startup companies in Boston, the dangerous and mostly unregulated realm of cryptocurrency represents an opportunity. They see these digital currencies — which can store value and operate independently of government-controlled monetary systems — eventually becoming as safe for investors as a Bank of America money market fund. That, however, is going to require a lot of new technology. Which they plan to build and sell.
Walsh’s new venture capital firm, Castle Island Ventures, is among them. After he and cofounder Nic Carter left Fidelity, they raised $30 million to invest in what Walsh says is a “whole new category of infrastructure” required to make cryptocurrency safer and more reliable.
“The reason we launched the fund is we think a lot of these cryptocurrencies will be investible assets,” Walsh says — even if they don’t feel that way to most mainstream investors today.
Castle Island has already invested in six startup companies, Walsh says, and other local firms like General Catalyst, First Star Ventures, Highland Capital Partners, and Underscore VC have also been writing checks to fledgling cryptocurrency companies.
Highland and Underscore helped incubate a startup called Arwen, founded by a Boston University computer science professor and her doctoral student.
“We’re in the early days,” says Arwen CEO Sharon Goldberg. “But let’s go back to 1999 and using credit cards on the Internet. Nobody wanted to put their credit card number into a website. But you do today, because you trust the encryption. You see that little lock in your browser.”
Goldberg is taking a sabbatical from teaching to build the company, which has eight employees and earlier this month moved out of Underscore’s space into its own office.
She points out that cryptocurrency is designed to be a “decentralized” system — there’s no central bank regulating how much of it there is, just software code running on computers. Yet if you want to exchange one kind of cryptocurrency for another, or turn cryptocurrency into dollars or yen, you need to entrust that transaction to a centralized exchange. “Centralized exchanges are the way to trade this decentralized currency,” Goldberg says. “It’s strange.”
So Arwen is creating a layer of technology that would enable you to convert one currency into another securely, even if the exchange gets hacked or goes offline in the middle of a trade. Arwen’s technology is based on something called an “atomic swap,” which Goldberg explains using the metaphor of a briefcase full of cash. If two people intend to swap briefcases filled with two different kinds of currency, the risk is that you hand your briefcase to the other person and they run off. An atomic swap ensures that each person get the other person’s briefcase, even if the other person tries to split.
Late last month, Arwen launched a “sandbox” environment for demonstrating the technology, and Goldberg says the company is talking with prospective customers. “The majority of our customer calls are outside of the US,” Goldberg says. “In Japan, for instance, there are just a massive number of companies creating ways to buy cryptocurrencies.”
Why is the United States behind? “Regulation is stronger here, and other institutions are more trustworthy,” she says.
Arwen is working on “an important problem” and it could prove “a key missing piece needed to get wider adoption of crypto assets as a real investment asset class,” says Drew Volpe of Boston-based First Star Ventures.
Volpe’s firm last year put money into Everbloom, which is building its own cryptocurrency exchange that tries to solve the issues of trust and reliability “from the ground up.” Everbloom, he explains, is a decentralized exchange that never has to take ownership of the asset itself — similar to Arwen’s approach, the trades happen “trader to trader” using the same atomic swap idea.
Two things could happen to make holding and trading cryptocurrencies more trustworthy, observes Boris Revsin, managing director of Republic Labs, a firm that has made recent investments in the cryptocurrency sector.
One is that trusted financial services brands like Fidelity or Charles Schwab will launch cryptocurrency-related products and services and “offer recourse if something terrible happens” to your money, he says.
But the other is that non-brand name exchanges that today are not trustworthy could start to incorporate technology from Arwen or other companies like it, and begin to build trust with investors.
Either of those scenarios, Revsin says, could encourage more asset managers and investors to move some of their assets into cryptocurrency.
In case you haven’t been tracking it closely, the price of Bitcoin is down almost 60 percent from February 2018. But over two years, the price has risen 240 percent, and more than 800 percent over three years. It’s a risky place to keep your wealth today — but investors and entrepreneurs are betting that just as credit card transactions on the Internet became more trustworthy, that will change.
A little matter like death shouldn’t come between your family and your KIN.
Ripple just lost half a billion dollars in market cap, at least until someone finds Matthew Mellon’s key. The unexpected death left hundreds of millions of dollars in blockchain limbo, and his family is scrambling to find a way to access them.
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The banking heir (and early XRP adopter) had been struggling with opiate addiction, and was apparently on his way to a rehab facility. Somewhere along the way he stopped for a trip on Ayahuesca, and a heart attack cut his trip short.
It’s probably not the first crypto-fortune to vanish into thin air. Unless Mr. (or Ms.) Nakomoto is living a very frugal lifestyle, it seems quite likely that the inventor of Bitcoin has already passed on, leaving about a million unclaimable bitcoins—not to mention the corresponding fortunes in Bitcoins Cash, Gold, Private, and so on.
More coins are lost to carelessness than hacks, and as early adopters get older (and wealthier) it’s becoming more important to highlight the best practices for preserving your coins after you die.
With that in mind, here are a few ways to ensure that you don’t keep HODLing through the afterlife.
How to preserve your coins, in case you die tomorrow
The vast majority of crypto-wallets are not well secured, for the simple reason that their balances are too low to worry about. But even pocket-change is worth holding onto, as some early adopters learned the hard way.
The simplest thing to do is to leave your money on an exchange. That sounds like terrible advice toserious players, but Coinbase is a lifesaver for crypto-newbies. It certainly helped the family of one Colorado hodler:—after the young man died unexpectedly, the family brought his death certificate to recover his Coinbase Vault.
A better safeguard might be to share your private keys with your loved ones—depending on how much you trust them. BIP39 words make it easy to store wallet data, even on innocent-looking scraps of paper—just make sure your family knows where to look for them.
One thing to avoid: Flash drives are not particularly resilient, and ledgers have uncertain lifespans. If you want something to last a few decades, pen and paper, or metal, will do the trick.
How to preserve your coins, in case you die next year
These systems are not ideal, for obvious reasons. For one thing, some people aren’t willing to wait that long for their inheritance, and it’s a bit tempting when grandpa keeps the key to his fortune on the back of a receipt. More to the point, things can get lost, go missing or catch fire—and if that happens, you definitely don’t want to be telling an insurance adjuster that you kept a million dollars on a Post-It.
If you have more time to prepare, a safe deposit box is probably your next best bet, unless you have a few hundred bucks to spend on a fireproof safe. It may seem counterintuitive to store “the future of money” in an old-fashioned bank, but that’s a lot less silly than letting a fortune disappear when you die.
The Gemini twins use a similar failsafe. Instead of leaving their wallet in a single bank, the Winklevosses locked their Bitcoin fortune on a paper wallet and ripped up the key.The fragments were distributed across several bank vaults. Reassembling it would take quite a few bank robberies….or the greatest video game quest of all time.
One thing to remember: unlike deposits, bank boxes are not insured. If they get robbed, the money’s gone. There are a few ways to make things more secure—you could leave an encrypted wallet in the bank and tell the password to your lawyer or spouse.
How to preserve your coins, in case you die in a decade.
Most of these ideas are makeshifts—they rely on trusting someone else to follow the rules after you’ve already kicked it. Most of us can’t get far without relying on a lawyer or a bank—but crypto is supposed to get us away from trusting third parties.
But what if there were a way to put your will in code?
Instead of using a regular wallet, imagine storing your money in a smart contract instead—which can be coded with the provisions of your will. You’d have the Master Key, which you can use to spend money whenever you want. But if misfortune befell the owner, the wallet could also be opened with the right combination of private keys. Perhaps all of your children would have to open it together, or half of them plus your lawyer, or all the kids and grandkids combined.
That may sound futuristic, but it’s closer than you’d think. One company, MyWish, is already creating worry-free smart contracts on the NEO blockchain, covering everything from wills to prenuptial agreements. If you don’t like NEO, Bitcoin can handle wallets with up to twenty signatures, and Ethereum can be even more complex.
But then you’d have another problem to worry about: if something happens to your kids, what happens to their private keys?
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