Bitcoin has been in the news a lot lately. It has been praised by Elon Musk and Jack Dorsey and derided by Paul Krugman and Warren Buffett. For those of you who are unaware, bitcoin is what is known as a “cryptocurrency” or, under Texas law, a “virtual currency.” Bitcoin does not have a physical item associated with it; it lives wholly in the digital world. In light of the unique characteristics of bitcoin, its ownership and transfer have unique aspects as well, which are explored here.
Bitcoin was created in 2009 by an unknown person who went by the pseudonym Satoshi Nakamoto. In those early days, a bitcoin had almost no value, each bitcoin was worth only a few cents. As of the writing of this article, however, a single bitcoin is worth approximately $40,000. Bitcoin experiences incredible volatility, including a high of over $60,000 in April of 2021 to lows near $30,000 in July of that same year. The first known items commercially purchased with bitcoin were two Papa John’s pizzas for 5,000 bitcoins each (back when each bitcoin was worth only a few cents). At today’s value, those 10,000 bitcoins are worth approximately $400,000,000. That’s some expensive pizza!
Bitcoin uses cryptography, the same mathematical application used to encode secret messages, to track every bitcoin transaction. Cryptography ensures that an individual can only spend each of his or her bitcoins once, thus avoiding the ‘double spending’ problem associated with early attempts at a virtual currency. Bitcoin also uses a “blockchain” or “distributed ledger” that all users have access to and that tracks every bitcoin transaction.
The way an individual buys, sells, and otherwise uses bitcoin is by having the two “keys,” a public key and a private key, associated with each account. An individual shares his or her public key with the world. The public key, often referred to as a “wallet,” is the account, or address, where people send you bitcoin. The private key is the code that keeps that wallet encrypted and prevents others from spending the bitcoins in your wallet. These “keys” are just a long string of numbers and letters. As of this writing, the public key with the largest balance of bitcoins is the Binance Wallet, their public key is 34xp4vRoCGJym3xR7yCVPFHoCNxv4Twseo.
For those holding bitcoin directly, the loss of the private key is catastrophic. There is no government, bank, or institution that controls bitcoin. One cannot take his driver’s license down to the local branch of Bitcoin Inc. and have the private key reset. The loss of the private key means those coins are lost forever.
However, there are alternative ways to hold bitcoin. One can hold bitcoin in an account with a third-party provider, like a brokerage account. Here, an account is opened with a virtual currency provider. Once the account is established, only the username and password is needed to access the account, which is much easier than remembering public and private keys. It is likely that the usual method of recovering a password, via email recovery or a phone call to the third-party provider, would be enough to allow one to regain control of any third-party account.
One can also hold bitcoin derivatively via an exchange traded fund that tracks the value of bitcoin (and other virtual currencies), similar to the manner in which ETFs track the S&P 500 or Dow Jones Industrial Average. In 2021, the Toronto Stock Exchange approved an ETF that tracks the value of bitcoin (TSX: BTCC). Owning an ETF that tracks the value of bitcoin would be like owning any other security.
For someone holding bitcoin who wants to pass it down to the next generation, particular care should be taken. If holding the bitcoins directly, the current owner will need to give the new owner both the public and private keys. As we have seen, the loss of the private key can be catastrophic. However, one should never put their private key in a public document, like a Will that is going to be probated, as that would allow anyone in the world to access the bitcoin in question. It is paramount then, that bitcoin keys be kept somewhere safe, like in a fireproof safe or safety deposit box, and that the next generation is aware of the bitcoins and where to find the keys.
If bitcoins are held in a third-party account, safely storing the username and password, like any other online account, should ensure that the next generation can access the account. Additionally, an executor or account beneficiary should be able to take control of an account after the death of the original owner with either letters testamentary or a death certificate.
While still a fringe, volatile, and alternative investment, bitcoin is growing in popularity and may one day become a common method of storing wealth. However, it is important to be aware of the special planning considerations of owning and eventually passing bitcoins. For more information on how you can ensure your virtual currency or other digital assets are effectively integrated into your estate plan, contact Farner & Perrin, LLP.