What is Permanent Loss and How Does it Affect Crypto?
While we think that cryptocurrency is truly the currency of the future, many naysayers state that in order for this dream to become a reality, cryptocurrency needs to first solve its permanent loss problem. But what is permanent loss in crypto? And is there a solution?
Permanent loss is a multi-faceted problem with no easy solution. Read on to learn how it applies to cryptocurrency and explore potential ways to overcome it in the future.
What is Permanent Loss?
Permanent loss is exactly what it sounds like, permanently losing access to your crypto. This can happen in a multitude of ways, via a lost seed phrase, a lost hard wallet, or even during a hack.
Believe it or not, permanent loss is a problem unique to cryptocurrency that doesn’t exist in traditional digital finance. While, of course, you can still lose cash, any sort of digital transaction in fiat is reversible. Not only that, but many banks carry insurance against hacks, robberies, and even fraudulent charges. Meaning you will never truly lose access to your digital bank account.
The same can’t be said for crypto, and it’s a story we have heard many times. A man deletes a password and loses access to his Bitcoin, and loses a fortune. Or perhaps the man who wants to search the dump in the UK for his hard drive containing Bitcoin—the list goes on.
Unfortunately, permanent loss is a thing in cryptocurrency, and seeing the large number of scams and hacks present in the space has quickly led individuals to believe that the world will never be prepared enough for this loss to truly embrace crypto. We don’t think this is the case though, as there are many ways to deal with personal loss, and as we already said, cash can be a permanent loss too, it will just take time, and education to teach individuals how to balance the risk of permanent loss associated with cryptocurrency with the benefits.
4 Options for Offsetting the Permanent Loss Factor of Crypto
As we mentioned above, there are ways to lower your risk of permanent loss when entering the cryptocurrency world. While not all of these are enough on their own, they can be used as crutches to help lower overall risk. Keep in mind, there is no way to truly eliminate the risk of permanent loss when dealing with cryptocurrency.
1. Use a Software Wallet
When someone first starts investing in cryptocurrency, we recommend they use a software wallet. While these wallets aren’t 100% safe (in fact, we recommend switching to a hardware wallet once comfortable), they can help bridge the tech gap for new investors.
Software wallets are usually associated with a company that can help you recover your account if you lose your seed phrase. They also often have customer service and insurance against lost deposits. While there isn’t much privacy when you have a well-known software wallet like Binance or Coinbase, they can give you a crutch until you are strong enough to stand on your own.
2. Purchase Cryptocurrency Insurance
It is a bit of a new industry, but there are cryptocurrency insurance options popping up around the world. While they only insure exchanges for now, we are sure there will eventually be an option for the average investor—it is only a matter of time. Circuit, one of a handful of cryptocurrency insurance firms, states they are working now to come up with a solution that will lower the risk of permanent loss for the average individual, though even the CEO, Harry Donnelly, acknowledges that the risk of permanent loss is never truly eliminated with cryptocurrency.
3. Increase Crypto Loss Education
Much of the permanent loss in cryptocurrency comes with the rampant scams in the space. If you aren’t getting a Facebook message telling you to send crypto to a far-off prince, then you are getting infested with Bitcoin-controlled ransomware, or becoming a victim of a wrench attack—the list goes on.
Without insurance, these losses are forever, since transactions can’t be reversed on decentralized blockchains. But it’s important to recognize that most of these scams happen because the victim isn’t educated on how cryptocurrency or these scams work. Increasing education on cryptocurrency is the number one defense against this type of permanent loss.
Of course, there are always new scams popping up, so the education needs to be continued for as long as the individual holds cryptocurrency. And even then, they still might be scammed by the best actors, but hopefully, there will be fewer criminals in space as time goes on and individuals become more educated.
4. Permanent Loss Risk Goes Down With Time
That brings us to our next point. While permanent loss is a huge problem right now, as cryptocurrency becomes more mainstream, more secure, and individuals are educated more, the rewards of scams will decrease. As the rewards decrease, hackers will exit the space and find a new scam to use to steal money. Therefore, over time, cryptocurrency in general will become safer. Sure, there will still be hacktivists and other advanced crypto criminals, but hopefully, increased education will help protect individuals from these criminals as well.
Is the Risk of Permanent Loss Worth It?
At this point, after discussing all the ways permanent loss affects cryptocurrency, you may be wondering if it is even worth it to pursue a future with crypto. In our opinion, the upsides of a cryptocurrency like Bitcoin far outweigh the downsides, and we know our limit in terms of education and safely storing our holdings. But we also know that this risk isn’t for everyone. While you can offset your risk by using a software wallet, know that permanent loss will always be a risk with cryptocurrency, and as a result, it isn’t for everyone.
While we hope permanent loss will become less of a risk in the future, it is something to keep in mind if you are wanting to invest. Even if you are just buying a small bit of Bitcoin.
