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Storing All Your Bitcoins In One Wallet Is A Bad Idea

Interest has piqued in a bitcoin wallet that’s lain dormant for four years. This week’s movement of the funds it contains, worth close to $850 million, has sparked intense debate over whose address it might be.

Regardless of which whale holds the rights to it, the wallet’s very existence demonstrates the drawbacks of holding a lot of bitcoins in one address.

Mt Gox, Silk Road, And The Mystery Of The Whale-Sized Wallet

Gawping at the fortunes of the super-rich is a universal pastime with a storied past. In centuries gone by, the poor would watch in envy as the rich rattled past on their horse-drawn carriages clad in the finest scarlet robes.

Today, the rich retain much of their fortune in digital form, and the closest we get to inspecting it is on a blockchain explorer. In many other respects though, little has changed.

Observers have been transfixed, over the past 72 hours, by the movement of funds from a wallet containing 111,000 BTC and an identical number of BCH.

A lot of the attention has focused on the identity of the wallet’s owner, whose funds have been attributed to Silk Road or Mt Gox – the usual suspects in other words. Craig Wright also claimed ownership of the wallet in a lawsuit, though like many of his claims, this one has been granted no credence.

The open nature of blockchains is an inherent part of their design; rich or poor, whale or minnow, everyone’s transactions are equally transparent in a block explorer. While democratic, this system does have its downsides, such as when wishing to move a large amount of bitcoin without attracting scrutiny.

Don’t Keep All Your Bitcoins In One Basket

The attention that the 111,000 BTC/BCH wallet has gathered highlights some of the pitfalls to keeping large quantities of coins in a single address. For one thing, the cost of failure is insanely high. Lose the private key and you’ve lost your fortune.

From a risk management perspective then, it would seem sensible to break a large wallet down into smaller parts. From a privacy perspective, it also makes sense to move smaller quantities of coins at one time rather than attract attention by shifting six-figure amounts of bitcoin in one go.

Aside from pondering the mystery of the wallet’s owner, observers have been rapt in case a tranche of those coins is sent to an exchange wallet. In the past, EOS sending large quantities of ETH to Bitfinex, for example, has been enough to spark panic among holders fearing a major dump.

Whales have probably got better things to do with their time than send hundreds of millions of dollars of bitcoin to an exchange wallet just to spook traders. It is a quirk of bitcoin’s design, however, that such an event is even possible.

As of today, 83 wallets have received just under 1,000 BTC apiece as the wallet’s owner distributes their estate. This may be the last time their wealth is analyzed so openly by so many.

This story originally appeared in Bitcoin. Image courtesy of Shutterstock.

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