7 min read

5️⃣ Top 5 Ways to Lose your Bitcoin

Discover the top 5 ways people lose Bitcoin, including scams, custodian risks, self-custody mistakes, malware threats, and the pitfalls of day trading. Learn how to safeguard your crypto assets effectively.
5️⃣ Top 5 Ways to Lose your Bitcoin

You've seen the stories of people digging through mountains of garbage to find lost Bitcoin

But this isn't how most people lose their bitcoin, here are the top 5 ways people lose their Bitcoin:

Scams and Ponzi Schemes

"Doubling your bitcoin" is the most profitable scam on the internet.

Here's how it works:

As soon as you send bitcoin to someone else you can never get it back

This is great because it means that you own the bitcoin that you have the keys to

But it's dangerous because if you send bitcoin to the wrong person it's gone, no take-backsies.

Once you send your 1 BTC to the scammer promising to give you 2, the scammer owns that bitcoin

And that scammer might be living in Elbonia - the cops might not be able to find them and you could have no way of recovering your money

You might be thinking this is such an obvious scam who would fall for it

The scammers post this message all over the internet for free and if they trick even a single person they'll make tens of thousands of dollars 

But if you have an even basic understanding of crypto you should be able to spot that promises to double your Bitcoin are an obvious scam

What you might not be able to spot as is a ponzi scheme like FTX or Celsius 

Why do intelligent people fall for Ponzi schemes? 

The psychology is fascinating.

Even smart people get duped. 

Take FTX, even savvy investors like Kevin O'Leary fell for Sam's charisma and the complexity of crypto tokens like FTT.

The promise of quick easy money can cloud our judgment making it easy to ignore red flags.

Ponzi schemes exploit our trust. 

We tend to lower our guard when others have "vetted" the investment.

Ponzi's also create a false sense of security through fake success stories and manipulated data 

Showing revenue numbers instead of profits and hiding how the company actually makes money is very common.

When everything seems too good to be true, it usually is.

But does that mean you shouldn't trust any third party institution? 

Of course not. 

There are a lot of honest companies in the space, but you need to understand the risks of using them.

Custodian Risk 

If you've been in bitcoin for a while you've heard the phrase "not your keys, not your coins"

More than 90% of people who own bitcoin or crypto leave their money on exchanges 

This has turned out to be a huge problem in the cases of Mt. Gox and FTX where the exchange is insolvent.

But it's even a problem with reputable companies like Coinbase.

When your Bitcoin is sitting on Coinbase, it's only as safe as your Coinbase account

If your Coinbase password is "password" you can go ahead and wave goodbye to all your Bitcoin 

The first step to securing your account is stop using that password they gave you in 20 years ago in elementary school. 

It's not secure anymore.

Go get a password manager like 1Password and let it create a secure password for you.

Next go learn about 2 factor authentication, use and app like Authy to store your codes.

Never use text messages for 2 factor authentication, you don't want to get sim swapped.

Watch this video to learn more about 2FA

If your exchange supports it, consider setting up withdrawal whitelisting. That way, even if your account gets hacked, the hacker won't be able to send your crypto to an address they control

If you're using the exchange's API, make sure to keep your keys safe so hackers can't make trades and withdrawals on your behalf

Once you've done all that you can sleep with some of your coins on an exchange.

So Bitcoin exchanges are dangerous but those ETFs are safe right?

Counterparty risk is the Wall Street term for when you're working on a group project and that one group member (every group has one, you know who I'm talking about) deletes the powerpoint right before the presentation

In this case the group project is protecting your money so you can use it in a few years or hold it to retirement

And the guy who you're trusting not to mess it all up for you is the ETF manager and custodian

If you buy most of the ETFs they have no idea how to actually hold Bitcoin so they're trusting Coinbase and other exchanges to do it for them

So you're like hey man don't delete this powerpoint it's important

And they're like okay got it for sure for sure 

And then they dip out and ask their buddy to make sure the powerpoint doesn't get deleted

To be fair, their buddy is an expert at not deleting powerpoints but it's also like come on what you had one job

The exception to this rule is the Fidelity ETF that's held in Fidelity's custody solution

No matter what, you're trusting these institutions not to lend out your money and create another FTX or Celsius scenario

And if you ever want the Bitcoin out of the ETF, you can't have it. 

Instead you get the cash value - if you want to buy actual Bitcoin you need to go to an exchange

These ETFs aren't perfect, but the companies behind them are massive systemically imporant companies so, overall, these risks are small

Now we understand why letting someone else custody your Bitcoin is risky, but what if I told you self custody is even more dangerous?

Self Custody Risk

If you had left your Bitcoin on Coinbase for the last 10 years, you'd still have all your Bitcoin

But if you took self custody of your Bitcoin on some hard drive 10 years ago you might still be digging through a landfill to find it 

In self custody you can lose your Bitcoin in three major ways

1) You can generate a bad seed phrase 

2) You can lose your seed phrase 

3) You can make big mistakes along the way

Let's go through each of those issues one at a time and understand what can go wrong

Step 1: Use a hardware wallet
Hardware wallets generate secure seed phrases.

If you generate a seed phrase by rolling your own dice and you don't roll enough dice your whole setup will be compromised 

If that doesn't make sense watch this video

And if you're like that sounds complicated who the hell would do that - you're exactly right

The more complicated and non standard your set up is the harder it will be to recover if something goes wrong 

Use a hardware wallet and let it generate the seed phrase.

Step 2: Don't lose your seed phrase

To keep your seed phrase safe, back it up in metal plates. I use these. 

You shouldn't store generational wealth on a piece of paper in your sock drawer

And if you're storing an amount of money that it would ruin your life if you lost you should use a multisig

Instead of storing all that money on one hardware wallet, put it on three and involve a trusted third party like Casa or Unchained Capital.

Understand Multisig

Step 3: Don't mess it up 
Self custody is a powerful tool and it requires active maintenance

Keep your hardware device firmware up to date by using it a few times a year

Consolidate your UTXOs when fees are low to keep your coins fresh 

How to Consolidate Bitcoin UTXOs

And don't do anything dumb like take a picture of your seed phrase and put it on the internet. 

Once you get that all sorted out, the only thing you have left to worry about is every hacker on earth trying to steal your money.


Viruses are everywhere

There are even viruses that can infect what you're seeing on the screen of your computer

This is why it's so important to double check the addresses that you're sending and receiving Bitcoin to on a hardware device

Most hardware devices have secure elements and are never connected to the internet - so they are safe from malware 

But the biggest issue is with keyloggers

A keylogger virus records every keystroke you take on your computer

It's like a ghost in your computer that snitches on everything you do

This includes your passwords, your bitcoin addresses, and your bank information. 

With that data, hackers can take advantage of your situation and steal your bitcoin.

To stop these hackers in their tracks use software like Malwarebytes your computer on a regular basis to make sure you're not infected

If you don't recognize where a link is taking you, don't click on it.

Malware is always going to exist, the best thing we can do is be aware and take steps to fight it

The final way you'll lose your bitcoin is the most common way people lose bitcoin

Your biggest risk is...yourself!


Day trading in crypto is like day trading on steroids

Everyone wants to buy low and sell high sometimes on price movements that happen in only a few hours or even a couple minutes

Sounds easy right?

Well it's not.

Day trading isn't only risky because of Bitcoin's violent price swings and 24/7 market structure 

It's also because it plays on our emotions like fear and greed

Every little spike in price and make it feel like you're missing out

That's FOMO - fear of missing out and it's a day trader's biggest enemy

There's transaction fees, taxes, and exchange fees that eat at your profits and magnify your losses over time

Even the most skilled day trader in the world needs an astronomical amount of luck to make money in the long run 

Educating yourself, understanding the risks and knowing when to step back are the most important things to learn.

The goal of investing is to grow your wealth in the long run by buying great assets - it's the opposite of day trading

The fact of the matter is an average of only 1.6% of day traders are profitable in a given year

Don't be a dummy and day trade all your bitcoin away

Be emotionless. Be smart. Learn how to automate all your trades:

Dm me on Twitter/X if you guys have any questions

See you next week