Oct 11, 2023
In this
episode, we will talk about self-custodied bitcoiners (not those
who have their coin on an exchange or with a third
party). Some
bitcoiners share their seed phrase with their spouse or adult
children. Or perhaps they share their cloned wallet with those trusted
individuals.
It’s temptingly easy, essentially
frictionless to share your seed phrase. But, as
we’ll discuss, it can be insecure for reasons you may not think
of.
Sharing your seed phrase can be
dangerously
inflexible and not future-proof.
Relationships change
One
reason that this plan is not flexible is because relationships
change. Married couples can become divorced or widowed. You may
have a falling-out with a loved one. Your
relationship with your child may be good now, but the relationship
could become strained or even
estranged. If this
happens, you may not want them knowing your seed phrase. That’s
like giving the keys to the kingdom to someone you don’t trust
anymore.
They’ll won’t keep it secure
Say
you give your seed phrase to your spouse or adult son. No matter
how wonderful they are, your loved one may not realize how
important it is to keep your seed phrase safe. It’s not that they
have bad intentions, they may just
have bad operational security.
Imagine if they tape your seed phrase to the refrigerator so they
don’t forget! Besides exposing it, they may lose your seed phrase
altogether.
Don’t
think that you’ll be successful in training or teaching your
trusted loved one. Remember,
self-custody is like a completely foreign language to
them. When you first
started with bitcoin, how many months or years did it take for you
to understand how it all works? Your spouse or
son might not want to learn about bitcoin, so they might take a
photograph of the seed phrase or put it on a password manager
app.
What
about giving them a clone hardware wallet instead? All they need to
do is remember the PIN to open it. This still isn’t a great idea
for the same reasons we just
discussed. Keeping the hardware
wallet up to date is a job. There may be
updates every couple of months, and your spouse or son needs to
remember to manage those
updates.
Besides, there is the risk of hardware failure.
If
your loved one doesn’t have the seed phrase and the hardware wallet
is the only way to access your bitcoin, you’re looking at
catastrophic loss.
Even more robust external hard drives fail. Such technology
could be outdated and difficult to open after many years.
You can't take back a secret
Once
you’ve shared the seed, you can’t take it back. Think back to
grade school: you tell someone your deepest secret and then realize
that kid is a blabbermouth! You can’t undo what’s been
done. Same with
sharing your seed phrase. What if your relationship with that
trusted person changes? You’ll need to
create a new wallet and transfer your funds, otherwise your
“secret” is with an untrustworthy
person.
We
see this with our non-bitcoin clients. They make a
treasure map or write a letter of instruction telling their trusted
person where everything is
located. Once you
create that treasure map or letter, you have to keep it up to
date constantly. Life changes could occur making it
inapplicable. Similarly, if you don’t trust that person anymore, you need to
move everything and make new maps and letters.
Now
you know why it is not secure to share your seed phrase.
Hopefully this helps you
to make the best bitcoin inheritance plan for your
situation.
I am
working on my bitcoin book, and I hope
to get it out there
soon! In the meantime, check out my book, “How to
Hire an Executor”, available on Amazon. If you are a
bitcoiner, you may want to consider hiring a professional executor
to navigate this complex component of your
estate.