How Losing Your Private Key Is Disastrous For Your Bitcoin Wallet

Nigeria recently bans cryptocurrency transactions. I know because I am from Nigeria. I am not sure of any other countries that ban it or not, simply because am not interested in bitcoin. One reason why it was banned in Nigeria is because of its volatility and the secrecy of coin-based and other crypto-based ledgers. All I will say is that cryptocurrency investors have hearts of gold. I am not that risk-averse.

Limitations And Pitfalls Of Crypto-based Ledgers

Blockchain is the first distributed ledger to create 'Genesis Block''. Investments in cryptocurrencies are highly speculative, usually positively because the value of bitcoin is just rising higher and higher. No one is sure how this value is arrived at because it has nothing to do with technology or economy. Again I personally believe it is too speculative, which makes some investors love it.

If you hold cryptocurrency, you need a digital ledger, (a kind of wallet) to hold your fund. This wallet contains the encrypted digital identifiers which verify your right and ownership of the wallet. The digital identifiers are a set of pairs of keys, known as private and public keys. The digital keys are identifiable passwords. With these pairs, you can carry out whatever transactions you desire on your wallet. Most transactions are mainly transfers to and from others ledgers (trading).

The problem is that if you lose your private key, you lose access to your wallet, and of course to your fund. The sad issue is that the cryptocurrency data vault is decentralised, and there is no central authority to help you recover your private keys. This to me looks like a day-light robbery.

The New York Times reported that out of the 18.5 million bitcoin, about 20%, amounting to $140 billion worth of bitcoin is lost due to lost private keys (forgotten passwords). It says it could be more.

Private Key Loss Conundrum

The private key loss conundrum is common on any applications that run on any asymmetric key cryptography. This works on a pair of keys as stated above (public & private), one (public) to encrypt any message on the wallet, and the other (private) to open up (decrypt) the message. The pair of keys is to protect the investor. This is also a decentralised system. You will have no further access if your keys are lost or 'forgotten'.

Asymmetric key cryptography is very secure between the sender and receiver of messages. The public key has a centralised ledger and can be shared with anyone. whereas a private key is known solely to the owner of the wallet. The public key is pulled to encrypt messages before sending it out. And the receiver will use his private key to decrypt the message. Investors are not supposed to share their private key.

Password Managers And Encrypted Hardware

In finding solutions to the issue of lost passwords and keys, people use password managers and encrypted software solutions. All well and good if the secrecy can be maintained, but there could be a problem if this hacked into, or the master password known to another person. All the data and probably the fund as well, are then compromised.

The encrypted hardware can also fall prey to theft. Again all the data could be compromised if this happens. It is not that better than the software solution, because both are at equal risk of theft.

Some people write down or print out their passwords and save the papers somewhere supposedly secure. If the paper is lost or destroyed, say in a fire, again passwords are lost forever.

It doesn't make sense that lost private keys cannot be recovered because of the decentralised ledger system.

In order to prevent loss of private keys that cannot be recovered, some are promoting authentication without a password. This is another bad security risk to a bitcoin wallet because cyberlife is protected by a password. In short, those proposing access to a digital wallet without a password know that it is just an idea, a dream that cannot be fulfilled.

We will await the evolution of private and public keys to see how the problem of lost keys can be resolved.

The Takeaways

Bitcoin volatility, in terms of jumping up and down in value, is another issue to scare those who are risk-averse away from investing in Bitcoin.

And for those who do, money can be lost due to lost or forgotten passwords encrypted on private keys.

The issue of not being able to retrieve lost private keys is like setting money on fire. It does not make sense. It seems that this is a deliberate attempt to rob investors.

Therefore utmost caution is required to invest in bitcoin.