While success in cryptocurrency investing is far from assured, death, sadly, is. Accordingly, it is vital that investors in Bitcoin and other cryptocurrencies are prepared for the unique estate-planning factors that apply to digital assets.
The following steps should be addressed immediately by cryptocurrency investors to ensure that their digital assets are effectively passed on to their heirs or beneficiaries.
1. Record Private-Key Custody & Other Access Details
Unlike bank accounts that can be accessed postmortem, access to digital assets typically requires a variety of private information. This information — and an investor’s digital assets — may be lost forever if an investor fails to record it or share it with a trusted third party before they die.
To avoid this, it is crucial that investors physically record the following private access information and provide for custody of this information to their estate representatives:
Most cryptocurrencies use a public-private key system to ensure that transactions are valid. While the public key is made public every time the investor buys or sells cryptocurrency, only the investor knows the private key.
Private keys are essential to verify ownership and access digital assets and should be recorded. Gaining access to a private key is similar to gaining ownership of a bank account so it is vital that private keys are kept safe.
Creating a physical copy of a private key and securing it in a bank safety deposit box insulates the private key from hacking and may provide the safest means to protect it.
Cryptocurrencies are traded on online platforms commonly known as exchanges. Investors that fail to secure their digital assets in hardware wallets — discussed below — typically have their cryptocurrencies stored on default digital wallets provided by an exchange.
It is important that the username, password and security question information for exchanges be recorded to retrieve digital assets from exchange wallets.
Many cryptocurrency exchanges also require that investors use two-factor authentication to prove their identity when accessing their account and transferring digital assets.
Two-factor authentication is typically accomplished via a mobile application that provides a unique code to be entered into the exchange. Investors who use two-factor authentication should be advised to record their username, password and security question information.
2. Move Custody to Hardware Wallets
Once cryptocurrencies are purchased on an exchange, they are automatically stored on that exchange’s default wallet where they can be accessed electronically by the investor.
Digital wallets, especially those used by exchanges, are susceptible to hacking. Investors should transfer their digital assets to a hardware wallet.
Hardware wallets can be purchased online and are, generally, encrypted flash drives that require a password and/or PIN code to be accessed.