If cats have nine lives then Bitcoin must be a completely different animal. The digital currency has already been declared dead over 85 times and counting by skeptics, naysayers, and mainstream media alike. But while your bitcoins will probably still exist in cyberspace long after you are dead, what can users do to ensure that their digital wealth is not only preserved but ends up in the right hands post-mortem?
Can Bitcoin Die?
First, let’s look at whether Bitcoin can, in fact, die. Major apocalyptic events and global cataclysms aside, the Bitcoin network cannot be completely shut down as it has no central point of failure. In other words, there is simply nothing to attack. It’s like trying to shut down the internet or slay a hydra, whose head (node) just regenerates and multiplies after getting chopped off.
This is due to its 5,000 plus network nodes being distributed across 89 different jurisdictions worldwide. Thus, in theory, anyone interested in truly destroying Bitcoin will only have to make sure that the number of nodes falls to zero, pry the copies of the Bitcoin Core software from the thousands — if not millions — of users, and disregard the fact that other cryptocurrencies on different blockchains will be waiting in the cut. In reality, however, this is virtually impossible.
So can Bitcoin die? Not really. But if it does, the demise will probably resemble something similar to what happened to MySpace after the advent of Facebook resulting from a mass exodus of users, even though Bitcoin will still continue to exist, albeit in a comatose state.
You’re Dead…Now What?
One must first discuss and notify their heirs about their digital wealth. Hiding it is relatively easy: simply don’t tell anyone about it — and voila — the chances of being mugged for your private keys significantly diminish. But if family members or other beneficiaries are clueless about your digital stash, then there better be a QR-code reader in the afterlife. Otherwise, your coins are lost forever.
Steven Michaels, founder of Bitcoin Estate Plan (BEP), a service that “automatically delivers bitcoin wallet access instructions to your heirs upon your death or incapacitation,” explained to Bitcoin.com:
“Most people haven’t thought about passing on access to their digital lives, which — now that data is literally money with the advent of bitcoin — will result in substantial loss of knowledge, data and wealth for future generations. This is problematic on many levels as it denies future generations the benefits of our efforts and experiences.”
Moreover, since Bitcoin transactions are not only decentralized but also pseudonymous, your loved ones cannot simply reach out to “Bitcoin support” like they would a bank to claim your assets. Your bitcoins will still exist, but without your private key, the coins will be effectively frozen, and no one will be able to access them.
Thus, some preparation will be required if you would like pass on your bitcoins post-mortem. You can do this independently by discussing and making arrangements with your beneficiaries and/or hire estate planning third-parties that will carry out your last wishes. In fact, a whole industry of companies exists around the concept of digital estate planning, though estate planning for bitcoin is just getting off the ground. Michaels says:
“The goal of BitcoinEstatePlan.com is to educate people about how to go about securing and passing on their data and providing a way that can bypass traditional middlemen like executors and the expensive probate process. We are also there to assist them should they want to take advantage of our services.”
The service will periodically send you an email or call you to confirm that you are still alive. If no response is received after a set number of attempts, the system will deliver the instructions for accessing your bitcoins to the intended recipient.
[Note from the author: Deathswitch is a similar service but has recently shut down operations.]
Another method — and probably the most straightforward — would be to create a paper wallet and leave it in a safety deposit box. Now, only those who have access to the box will be able to use the funds with the enclosed paper. Nevertheless, there are some risks to consider with this approach.
“Anybody can store a password or passphrase in a home safe or password manager, but now you have to watch that safe or service because you still have a single point of failure,” warns Michaels. “A more secure method of protecting your passwords/private keys is to implement a ‘shared secret’ or a ‘split key’ with a recovery process that can bring those together when needed.”
This “split key” is also known as a multiple-signature wallet, where two out of three private keys (or any other combination of your choosing) are needed to access funds. So giving one key to your wife and another one to the mediator, for example, ensures that your family retains access even if your own key is lost or forgotten.
Another option is using lock-time transactions, which is essentially an automated form of BEP using the blockchain instead of a third-party. These are transactions that are submitted to the network but are not executed until the set time of the transaction is reached. Though, this method also entails some risk; for more details, go here.
Death & Taxes
“Nothing can be said to be certain, except death and taxes,” Benjamin Franklin famously said; and following the official declaration from the IRS back in 2014, Bitcoin has been deemed a commodity that’s subject to capital gains tax. This also applies to inherited bitcoins.
Thus, when the heir sells the inherited coins for fiat currency, their value will be determined based on the current market value against their value at the time of the benefactor’s death. This also means that any increase in value between the time the benefactor acquired them and up until death is not taxed, which is certainly good news for the beneficiary.
“Bitcoin will force people to appreciate that data is now money, and they will begin to seek out these types of services,” adds Michaels. “Fortunately, there are tools and services like ours but, most importantly, there are educational efforts to help people recognize that this is a serious concern that they should begin planning for today.”
Know of any other methods to manage your digital wealth post-mortem? Share and comment below!