How to Protect Your Bitcoin in A Divorce?

11 MIN READ
How to Protect Your Bitcoin in A Divorce

Bitcoin and cryptocurrencies in general represent one of the most lucrative opportunities of the last decade. Nothing comes close to the level of growth cryptocurrencies have delivered, and today, can represent significant wealth. If you ask yourself how to protect your Bitcoin in a divorce and keep it out of the settlement, store it in digital cold wallets that aren't associated with your name. Using anonymous cold wallets can prevent your spouse's legal team from discovering these funds, thus keeping them out of the settlement process.

This represents an opportunity, then. While physical assets are more or less impossible to hide, whether property, a boat, watches, or anything else you may have wealth invested in, Bitcoin is the opposite. By selling those physical assets and buying Bitcoin, you reduce the share of your wealth, which is vulnerable to a divorce settlement. If done in a reasonable period in advance of any legal proceedings, it can be very difficult for anyone to connect you to those funds. In many cases, no one will even be aware of the existence of those funds, remaining completely outside of your legal negotiations.

However, keep in mind that many divorce lawyers are finding ways around this, asking for signed affidavits or requiring parties to swear in court that they do not have cryptocurrency assets hidden away.

What is Bitcoin?

Before learning how to protect your Bitcoin in a divorce, it is important to understand what Bitcoin and other cryptocurrencies are, and why they can be so useful to you. Cryptocurrencies are digital assets, meaning they are assets like your home, your car, stocks, shares, and anything else that you own that has value. But it is their technology, and how it works, that are the key to their usefulness.

Bitcoin came first, launching in January 2009, but all cryptocurrencies follow the same pattern and use similar technology, so the story of Bitcoin applies to Ethereum and other cryptocurrencies you may be looking at or holding. The key to cryptocurrencies and why they are becoming so popular is the way they work, which uses an underlying technology to drive every transaction, called a blockchain.

Understanding blockchain

The blockchain stores the digital asset, often called a token, that is a Bitcoin, Ethereum, or other crypto, along with every transaction ever made. That is, despite Bitcoin's inferred anonymity, it is the most transparent form of currency that exists today. You can examine any Bitcoin transaction and trace its history right back to the first transactions ever made. All that information is in the blockchain.

But what is not in that information is any names of who made transactions. It simply records the wallet addresses of where each Bitcoin is transferred. This is helpful, because unless there is physical evidence that connects you to a specific Bitcoin wallet, there is nothing that can connect you to Bitcoin held in that wallet. So, if you liquidate assets, put the money into Bitcoin and hold wealth in a Bitcoin wallet that cannot be traced to you, it can be kept out of reach of a divorce agreement. But is that sensible? If you are looking to store significant wealth, is it a safe option?

Cryptocurrency security

This is the other aspect of how Bitcoin works, which makes it such a useful vehicle for storing your wealth. That transparency, in being able to see every transaction made, is an essential part of the security of the system, believe it or not. The key is how blockchain works. It is what is known as a distributed ledger. That means it is not stored in a single place.

Instead, Bitcoin uses an entire network of computers called nodes that all host and update the blockchain itself. Each node is owned and operated by individuals, and for a transaction to take place, it must be recorded and verified by multiple separate nodes. Once multiple nodes have verified and recorded the information, the Bitcoin is transferred to the wallet address in the transaction, and the blockchain updates are written across the network so each node’s blockchain data matches. Nodes are constantly synchronizing, so the system has an inbuilt failsafe that immediately notices any type of rogue change to the ledger that has not been approved by other nodes.

This is what makes Bitcoin so secure. You cannot fake a transaction. Not only is blockchain fully encrypted (where the name cryptocurrency comes from), but even if you could theoretically break a specific node and change the data, it won’t match the other nodes and will never be verified. To hack Bitcoin, you would need to break the encryption on the blockchain and change the data on the blockchain at every node in existence, simultaneously. With around 18,000 public nodes in operation located around the world, it is an impossible task.

This makes Bitcoin more secure than any Internet banking app or pretty much any other form of currency in the world. That is why it is a very useful vehicle for wealth storage, its easy to access, very confidential and highly secure. Knowing how to value Bitcoin using simple tools makes it easy to plan a wealth strategy too.

Where does the value come from?

Bitcoin has made headlines over the years for its seemingly ever higher value, going from nothing to being worth $60,000 or more in 15 years. But what gives a cryptocurrency value? Here, the name can be a little misleading. Think of Bitcoin as you would gold, rather than a currency like the dollar. Gold is worth money because it is rare, there is only so much of it ever taken from the ground, and that rarity drives its value.

Bitcoin is also a limited resource. There can only ever be 21 million Bitcoin, it is limited by the mathematics that creates them. Like gold, it is also much harder to create a Bitcoin the closer you get to that limit. Creating Bitcoin is accomplished by solving mathematical equations, it is even referred to as mining, to continue the similarity with Gold.

So, as an asset that is limited in availability, has the tightest security of any asset you can think of, is highly anonymous to protect holders, and is relatively easy to buy and liquidate back into local fiat currency through services like PlasBit, it becomes clearer why these digital assets have tangible value.

Together, these properties not only make Bitcoin a valued asset, they are also why Bitcoin offers something different for anyone seeking to store wealth securely. However, if you have Bitcoin, or are looking to use Bitcoin to store funds, it is important to understand how to protect your Bitcoin in a divorce, so that you can retain your funds where possible.

How to Protect Your Bitcoin in A Divorce

Dealing with Bitcoin during a divorce

For anyone holding digital currencies of any kind, the biggest challenge during divorce is to keep those assets out of the divorce agreement. While you cannot lie about the assets you have if asked a direct question, if the existence of your Bitcoin remains unknown, you don’t have to volunteer the information.

If you are on the other side of the divorce, then the challenge is not just what is being held, but how much it is worth. Tracking Bitcoin or any other cryptocurrency is difficult, but that is only the beginning. Assessing the value of any digital currency holdings is a continuous challenge due to volatility, and of course, not really knowing what is contained within any wallet. The private key-only access makes it very difficult to assess any person's cryptocurrency assets, which represents a significant challenge for any legal team in a divorce.

However, for those owning Bitcoin, the key strategy is privacy. If no one knows you have Bitcoin, it cannot become part of the divorce settlement. This is key to understanding how to protect your Bitcoin in a divorce but it is not as easy as you may think.

Avoiding detection – Keeping Bitcoin out of a Divorce Settlement

One of the advantages of Bitcoin is that it is held in digital wallets. Whether a software or hardware solution, these wallets are secured using a private key and don’t have any attachment to a particular person or physical address. This leads to people believing that Bitcoin is anonymous; that is, no one can trace Bitcoin or other cryptocurrencies back to their owner.

While they can be anonymous, the general way we buy, use, and store cryptocurrency does leave trails that can identify you as the owner. One of the biggest challenges when learning how to protect your Bitcoin in a divorce is maintaining the anonymity that so many assume comes with Bitcoin. The good news is that there are things you can do right now to change that, and it is definitely something you should think about implementing.

Understanding the digital trail

There are two ways in which cryptocurrency can be connected to an individual. The first is through transactions. Bitcoin and other digital currencies operate what is known as a distributed ledger. On it, every single transaction ever made in the currency is recorded. So, while no individual is named as owning something, the path of ownership of a bitcoin can be traced through its transactions, right back to purchases in an exchange.

At some point, you need to use your dollar funds to buy your cryptocurrency, but this is the weak point, where you can be connected to specific Bitcoin purchased via funds you transferred to a cryptocurrency exchange. It is important, then, to diversify your cryptocurrency holdings. That is, don’t rely on the wallet provided by an exchange. Move your digital funds to cold wallets to make tracing as difficult as possible. These are essentially digital drives that use a combination of software on a computer and a private key to access funds. When not connected to a computer, they are completely offline and cannot be traced in any way. Plug them in, fire up the software, and enter your private key. Your Bitcoin can be accessed and transferred as with any other wallet. These offline cold wallets are the most secure approach to keeping Bitcoin, and if you are wondering how to protect Bitcoin in a divorce, they would be the best weapon you have.

However, there is a second way in which your digital assets can be traced, and this is paperwork or notes you keep at home. This could be transaction logs on a computer, phone app or printed out, wallet addresses, and so on. Through these, ownership can be verified, and your cryptocurrencies can then become part of the divorce agreement. A physical wallet could potentially be vulnerable in this discovery method, too, so thought must be put into how to securely store such wallets should you choose to use them.

Protecting your Bitcoin

By ensuring anonymity and avoiding these traceable connections to your Bitcoin wallets, it becomes very difficult to identify wealth stored in Bitcoin and make a verified connection between a Bitcoin wallet and you as an individual. Using offline, cold storage wallets and ensuring that you eliminate paper trails or app connections to any online wallet, you can avoid any detection of your digital assets.

In this way, you can protect your Bitcoin and avoid your cryptocurrency holdings becoming part of any divorce settlement.

Your legal responsibilities during a divorce

It is important to remember that if asked directly, you cannot lie about such assets, However, because of the nature of Bitcoin wallets, no one but the holder of the private key, usually yourself, can view the contents. It is, therefore, impossible for any valuation of those assets unless you give access to them or provide the valuation.

Bitcoin, as with other digital currencies, is extremely volatile, so an exact valuation is always a challenge. If forced to reveal your holdings, it is possible to err on the conservative side and still come out ahead during the settlement.

Using a Prenup to Protect your Bitcoin

If you have significant cryptocurrency holdings before getting married, you may want to include them in a prenup. However, knowing how to protect Bitcoin in a divorce in this way means understanding the legalities of cryptocurrency assets and how financial law applies.

While most of us are familiar with the term prenup, there are, in fact, both prenuptial (before marriage) and postnuptial (after marriage) agreements that limit the claim on specific assets should a couple divorce. These agreements can save a lot of stress and difficulties during a divorce, but if you are thinking specifically about Bitcoin and other cryptocurrencies, then it becomes more complex.

Valuation challenges because the asset is so volatile, and the legality of a digital currency in financial law means that simple agreements are not always suitable when trying to protect Bitcoin in a divorce. A prenuptial agreement that includes relevant clauses regarding any digital assets such as Bitcoin can provide the protection you are looking for, but in some cases you may accrue wealth during a marriage and wish to protect that. For instance, just a little over a decade ago one Bitcoin was worth a few dollars. Now its tens of thousands. If you bought them before getting married, until recently there would be no need to consider Bitcoins a valuable asset needing protection. Now though, if you have significant Bitcoin holdings, a postnuptial agreement might be appropriate.

Whether you are looking at pre or post-nuptial agreements, it is worth having a legal professional draft the document for you to ensure that what you want to happen will actually happen.

Dividing any Bitcoin you declare

If your Bitcoin and cryptocurrency holdings become part of the divorce settlement, then you will need relevant paperwork to present as part of the evaluation. This will include transaction records from your exchange, the wallet address for those Bitcoin or your PlasBit account details and other documentation that may be relevant, although never relinquish your private key.

By keeping your private key confidential, you retain full control of your Bitcoin, and more importantly, your wallet remains completely secure. You can arrange a transfer of Bitcoin to your spouse when required, there is no reason to give them access to your own wallet.

What about Inherited Bitcoin?

When looking at how to protect your bitcoin in a divorce, does the way you acquired them make a difference? The short answer is no, if you received Bitcoin in an inheritance, or have been gifted them by someone, then they would be divided equally between both partners during a divorce.

Again, this can be done simply by transferring half the Bitcoin to a new wallet that your spouse holds the private key for. Here, valuation doesn’t really matter; transfer half the number of Bitcoins in the wallet, and that avoids the fluctuations in value that make assessing a Bitcoin’s worth so challenging.

Conclusion

Digital currencies like Bitcoin can be a great tool to use during a divorce. By liquidating physical assets such as property and buying Bitcoin and other cryptocurrencies with he proceeds, you can make it extremely difficult to assess your true net worth, and that can help protect yourself during the negotiations over a divorce agreement.

Thanks to anonymity and volatility, both finding and assessing the value of your digital assets is especially challenging for divorce lawyers. In addition, with Bitcoin only launching in 2009, and only becoming liquid enough to use in this way in the last decade, there are very few legal teams that will have the experience or expertise to really delve into your Bitcoin holdings.

By taking advantage of private wallets or using offline, cold storage wallets, it can be extremely difficult to connect you to a pool of wealth that is held as digital currency assets like Bitcoin, ensuring that your funds are protected during the divorce process.

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