Risk is everywhere. It surrounds us all the time, in every field of our lives. Most people underestimate risk or quite right ignore it. Definitely the current hedonistic-liberal society doesn't put much emphasis on risk, but ignorance is not bliss, and ignoring the risks will mean that something very bad will happen along down the road.

Risk is like an immaterial realm that surrounds us, its is the possible bad events that could happen in the future. If you imagine the arrow of time to be like a branch in a tree that branches out as you go into the future. As you make a choice, you have many options that you can choose from, and most of the time only a few of them is good, while the others are bad. Well then in this analogy the risk is the unknown uncertainty, that the other branches could lead too.

To give you an example:

• When you wake up from the bed at morning you have 2 probable choices out of many:
  • Stay at home and go back to sleep
  • Go to work, but then:
    • You either successfully arrive at work
    • Or you get hit by a bus and die

Now these are the paths that could exist, of course there are many more paths, probably infinite choices, some are more probable some are less, but each choice carries a kind of uncertainty with it, well that is the risk what we call risk. You can't know for sure which choice will carry what kind of risk, but you can estimate it and then choose the option that carries the least amount of risk.

Risk Management

It is very important for an intelligent person to manage his own risk. For that we must first quantify it. Well I think the general formula is this:

RISK = - Probability of bad event * Amount of loss if bad event happens

If we are talking about finance, it's quite obvious. What is the probability that I will lose money? And how much will I lose if I do? And then multiply the two together.

Your goal is to minimize the risk, that is the rational thing to do. It makes absolutely no sense to be exposed to big risk, unless there is a reward attached to it.

But when we are talking just about wealth preservation, and not investing, then the primary goal is to preserve the wealth, and not necessarily grow it, that is just optional. It is more important to keep the money than to multiply it, but the money has to be risked in order to be multiplied.

Calculating Risk

Well it's really hard to calculate risk since there are not many statistics around. While it's easy to calculate your risk of exposing yourself to a car accident, it's very difficult to calculate your financial risk. There are experts for this, but even you can roughly estimate it.

For example if you are worried about hackers stealing your Bitcoins, well it's pretty hard to sample the probability of your wallet getting hacked, especially when all other victims have probably done different kinds of mistakes that resulted from them being hacked, so we can't establish a controlled variable, the estimation would be inaccurate.

But we could approach this from another angle, I don't think it can be quantified, but you can feel with your instincts that certain protocols of storing wealth are more safer than others. Let's do a thought experiment for this.

Thought experiment

Let's say you have 50,000$ that you gained from cryptocurrencies, and you are in a dilemma whether you should store that money in a bank or leave it in Bitcoin. So this 50,000$ is perfectly legitimate money that is after-tax, you did everything legally, and you obtained it from Bitcoin mining, just for the sake of this example, and you have 2 choices:

• Should you put it in a Bank , or
• Should you keep it in Bitcoin

Bank

Ok so it's perfectly white money obtained legally, however every sum above 10,000$ is investigated regardless, so your money will probably be analyzed, and there is a quite big risk that your account can get frozen and you can be a victim of civil asset forteiture, just like that. It doesn't matter if you did everything legally, your Bitcoin address could be tainted with drug money when you exchanged that through a Bitcoin exchange, and although the risk is lower if you had good KYC, nontheless it is there, that the funds can be seized.

We know that a civil asset forfeiture is pretty much permanent, you will never see that money again, you can get into a lengthy legal battle to recover that money, but the lawyers will probably cost you more, so it's a 100% loss. We don't know the probability of this though, so the risk factor here is:

Confiscation Risk = -X * 100%

But we know that the probability is not 0, in fact it's quite common, of course many people could be involved in shady activities and that is why their money is stolen, but take a look at Burt, he was a normal guy, and he got fucked hard by civil asset forfeiture just for swapping BTC into USD:

• http://www.burtw.com

And there are other events too:

• https://reason.com/archives/2016/06/30/could-the-irs-empty-your-bank

So we see people's bank accounts constantly getting seized after they deposit bigger sums of money that have a questionable origin. And this happens everywhere, most of them don't even get reported, I mean if a poor old grandma could lose everything, then imagine how many people get fucked with this tyrannical law:

• https://reason.com/blog/2017/05/30/court-to-grandma-you-shouldnt-lose-your

I'd say the probability of civil asset forfeiture even if the Bitcoin revenue is legitimate, is around 20%. So I think every person out of 5 has or will have in the future, their wealth seized by a Totalitarian Government. So with this estimation it looks like this:

Forfeiture Risk = 0.2 * -50,000$ = -10000 $

This means that you already lost 10,000$ hypothetically even if you never become a victim of civil asset forfeiture, and if you do, then you lose all of it.

Then you have the bail-in risk, which is again a 100% loss scenario, even the Cyprus bail-in was a 50% haircut, but the next one could be a 100% one since the risk of the Banks is even higher, and they have the authority to bail in the funds of their customers if they face bankruptcy.

Although the probability of this is lower, kinda giving you a very rough example, if a financial collapse happens like every 7-8 years, and one is definitely due next year, or even this year, then the probability of experiencing this today would be 0.005479452. The next collapse can easily result in a massive bail-in program, one way or the other the banks will be rescued, and it will cost the citizens a lot. So add this to the bucket:

Bailin Risk = 0.005479452 * -50000$ = -273.97260274$

Then you have the hack/ credit card theft risk, but that is minor in a bank account, since TX can be reversed, but only in a certain time window, so it kinda sucks, but I will just not count this in, because the other ones are already overwhelming.

So your total risk with a Bank account would be roughly: -10274 $, which is 20% of your wealth.

Now that is a lot of fucking risk for money that is sitting only idle. Since we won't count in the rewards, but as you know a yearly 1% bank interest is nothing.

Bitcoin

Now instead of calculating the risk of storing the money in Bitcoin, we should instead ask ourselves, will the risk will be lower in Bitcoin or not. Because if it is, then it is only rational to keep the money in Bitcoin instead.

• Asset forfeiture:
  • Well that risk is eliminated in Bitcoin entirely if you hold your BTC in your own wallet where you control the private key. If you are stupid enough to store your BTC in a centralized wallet, then it’s really no different than a Bank but with all the other disadvantages.
• Bail-in risk:
  • Again, there is no bail-in if you store your Bitcoin on your own wallet, safely.

So it looks like the risk of storing 50,000$ in BTC is zero. Well not so fast. While the hacking risk can be mostly ignored in a Bank since it’s insured and too-big-to-fail, in Bitcoin it can’t be. Furthermore there could be technical glitches. And the market price could go down, so there are new kinds of risks here.

But regardless we only need to determine whether the risk will be higher than 20% or not.

So let’s take them 1 by one:

• Sending to a wrong address: Well if you do then it’s a 100% loss, but BTC has a 32 bit checksum, so the probability of that is 1 out of 4.3 billion, so we will just discount this. Plus if you copy paste the address and there is no reason why it would be buggy, it’s probably never going to happen to you.

• Memory bug calculating the wrong address and sending it there (or other signing bug): Well the wonder of BTC is that it is not an online interface. You can sign the transaction offline, and then move it to an online wallet. Assuming that the signer software on the offline PC and the one on the online PC are genuine, they would never let through an invalid TX, nor would the blockchain accept it. However if accidentally a character is flipped in the memory then again the odds of sending to an invalid address is the same, but if it sends to another address in the same wallet, then that can be just visually inspected. I assume that if you send like 50,000$ in 1 transaction you quadruple-check it that you make sure it sends it to the right address, so in this case the risk is of this is also negligible, because verifying the same TX on different computers is already a good checkpoint to detect a bug like this.

• Software integrity problem: Well for larger sums, I really think people should triple or quadruple verify the integrity of their software, using hash checksums, and GPG signatures that wallet providers give out. Also cross verifying the fingerprint of the GPG signature from multiple websites is also a good idea. I think the odds of using a malwared Bitcoin walled is pretty low, and even if it’s a malware, if it’s executed on a trusted environment, like an offline PC, then it still can’t leak out private keys. Even if it’s a malware wallet that sends out your private key the moment you sign the transaction, via a secret network channel. Well if you do the signing on an offline PC, then even this malware wallet would work exactly like a genuine one, and it would have no way of leaking the private key. So isolating softwares can already eliminate trojan/keylogger risks.

• Software bug: Again there could be zero day bugs in a software, that could compromise the private key generation and the signing mechanism. I think people should always use a stable release of any software, and not always the latest one, especially if all kinds of changes happened in the latest release that affect the core parts of the software. I think the risk of this can easily be mitigated by being conservative and cautious.

• Malware: Well the solution to this is very simple. Ditch Windows, and start using Linux if you are serious about avoiding malware. Then again you should not click on all kinds of links, be more careful with the websites you visit, and never give root/admin access to untrustworthy software. Combine this with offline cold storage, and compartimentalizing workspaces through virtual machines and things like that. I think the risk of malware related private key exfiltration is pretty low.

• Market risk: Well it is true that Bitcoin’s price swings up and down 50% all the time, so you could easily lose a lot of money that way, however even then the price generally recovers. I can’t really see the price plummet back to 100$. And the probability of even a 50% loss is slim that would stay there. But the rewards usually cover the losses here, unless you start to liquidate your Bitcoin holdings at a low price. An unrealized loss is not a big deal. And Bitcoin has far more upside potential than downside. Everyone was crying who bought at 1000$ back in 2013, and you only had to wait 3 years and they recovered all their losses. So it is possible that nobody loses here if they hold all the way through and ignore the drawdown.

• Wallet/Password Loss: I think the far biggest risk in Bitcoin is the fact that people lose their password/wallet. I have seen this so many times. Everyone is talking about hackers and scammers, but the really biggest risk is that people lose their wallet , their computer crashes, their hard-drive burns down and their lose their wallet. Well this is quite easy to mitigate, just keep 4-5 backups of your wallet. I have like 10 backups on USB sticks, CD, and even on cloud storage, heavily encrypted of course. So this is not even a risk, because only dumb people fall for this, and what can I say, it is the stupidity tax.

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CONCLUSION

So overall the risk conclusion is pretty obvious. While Bitcoin carries a lot of technical challenges, it has different risks compared to a Bank, however all the risks that BTC carries the bank carries it too, it’s just that they are under the umbrella of the insurance ponzi system, which is unsustainable by the way. You can’t collectivize risk, that only makes the risk grow, it has to be segregated.

In Bitcoin the risk is segregated, if an idiot loses 5000 BTC because he didn’t backup his wallet, we don’t have to pay into a insurance ponzi scheme to rescue his sorry ass. Meanwhile in the banking sector the systemic risk is huge and imminent, it will make the entire system collapse at some point.

The “too big to fail” concept is a very moronic risk management tactic. Collective risk makes all things collapse since it removes individual responsibility.

So Bitcoin is not just immune from collective risks, but it actually provides so many options, that you can reduce your own risk by orders of magnitudes compared to the traditional banking system.

The malware/technical risk is really not that big, and that is also present in the banking system, where it can be much higher.

And the wallet loss risk, is really just the curse of the stupid people. It’s segregated, so only stupid people who don’t backup their stuff suffer from it, thus assuming you are an intelligent person, you don’t.

So it looks like to me that the risk of storing money in Bitcoin is by orders of magnitudes lower than storing it in a Bank Account.

This is why I store most of my wealth in cryptocurrencies, it’s just the smart thing to do in my opinion.

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Disclaimer: The information provided on this page or blog post might be incorrect, inaccurate or incomplete. I am not responsible if you lose money or other valuables using the information on this page or blog post! This page or blog post is not an investment advice, just my opinion and analysis for educational or entertainment purposes.

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Sources:
https://pixabay.com

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