Bitcoin Wallets. Part 2: Securing Your Private Keys
by Helga Danova | May 19, 2014 | Crypto News
In part one of this two part series, we talked about the basics of how Bitcoin wallets work and what your public and private keys mean when it comes to defining which bitcoins are yours. By the end of that post, it should have been quite obvious that private keys are the thing you need to guard with your life in the world of Bitcoin. Your bitcoins are only really yours if you’re the only person who has the private keys attached to those bitcoins, which is why Bitcoin wallet security is an important topic to study. Although Bitcoin wallet security has been a rather difficult issue to tackle in the early days of cryptocurrency, there are solutions in the works that should help everyone and their grandmothers keep their private keys secure.
If you really want to make sure that your private keys are secure, then you shouldn’t store them on the Internet at all. Having said that, there is a little bit of extra convenience that comes with storing your bitcoins or altcoins on a website such as CEX.IO. If you are going to use some kind of web wallet, then you need to make sure that two-factor authentication is turned on for your account. This means that you will need to type in a code that is only available on your personal mobile phone every time you try to login to your account or send a payment. If you are using a web wallet where the web wallet service has access to your private keys, then you should make sure not to keep very many bitcoins on those accounts. Handing over private keys to third parties hasn’t ended well for the majority of the people who have done it over the past few years.
Multi-signature Bitcoin Addresses
Another option to look at when you’re looking for better security in an Internet-connected wallet is multi-signature addresses. With this special kind of Bitcoin address, there are actually multiple private keys that need to be used in order to send a transaction. You could give one to a trust third party, keep one on your phone, give one to a friend, or keep one offline. Requiring signatures from two of three private keys associated with one of these multi-signature Bitcoin addresses is usually the default option. These kinds of addresses could eventually be used to create Bitcoin banks where a third-party (the bank) will call you to confirm a transfer of bitcoins before they sign off on a transaction for you. This would be analogous to bank transfers right now where they’ll call you up and ask you about any suspicious activity on your account before actually making the transfer.
Cold storage is where you want to put most of your bitcoin savings. You can view your web wallet or hot wallet as your walking around money, and your cold storage is what you would normally keep in a savings account. Cold storage means that the private keys are stored offline and they were created by a computer that has not been connected to the Internet. Some people think it’s fine to create a cold storage wallet on a computer that’s already online, but you can never be too careful when it comes to securing the largest portion of your bitcoin holdings. There are many different types of cold storage, but you should be generally safe as long as your private keys are not touching the Internet. Some people like to purchase secondary laptops, tablets, or other computers solely for the purposes of storing their offline bitcoins.
Paper wallets are perhaps the most interesting form of cold storage because they help people fully understand what it means to secure one’s bitcoins. As mentioned before, the private key is what needs to be guarded over everything else, and the paper wallet takes that idea to the next level. Paper wallets are usually generated with software on an offline computer where a public key and private key are created and then printed out onto a piece of paper. The paper wallet also usually comes with QR codes that represent the public and private keys for ease-of-use. Whenever you wish to put some bitcoins into cold storage from your mobile phone, you can simply scan the QR code of the public key on your paper wallet and send your bitcoins to that offline wallet. You would then be storing storing your bitcoins in a piece of paper. Most people think that it’s not possible to hold bitcoins in their hands, but you can get pretty close with a paper wallet!
Although we’ve already mentioned Bitcoin wallets that are actually stand-alone laptops or tablets, there is another kind of hardware Bitcoin wallet that is still in development. These devices are actually attachments for desktop computers, mobile phones, and laptops that allow people to get the best of both worlds when it comes to convenience and security with Bitcoin. The most well-known example of a Bitcoin hardware wallet is perhaps the TREZOR. This is a device that connects to a computer through the USB port. It works with Bitcoin clients and browser plugins on that computer in order to sign Bitcoin transactions in a secure manner. The private keys are stored in the separate hardware wallet, while the public keys are accessible on the Internet-connected computer. This means payments can be received and tracked on the computer with no changes. The only time a user interacts with the hardware wallet is when they wish to send a payment. When sending a payment from a Bitcoin wallet connected to a secondary hardware wallet, the Bitcoin software wallet will ask to confirm the transaction with the offline device connected to the computer. Basically, the details of the transaction are sent to the offline hardware device, and then a button is pressed on the USB device to sign the transaction and send it back to the computer. The transaction can then be broadcast to the Bitcoin network.
Create Backups for Your Private Keys
While protecting your keys from hackers and other bad actors should definitely be high on your priority list, you should also make sure that you don’t become your own worst enemy. Although thefts of bitcoins are usually the stories that make the headlines, there are also plenty of people out there who have lost their bitcoin fortunes by simply misplacing their private keys. Whether you decide to store your bitcoins in a paper wallet, hardware device, or anything else, it’s important to make sure that you have plenty of backups in case something goes wrong. Having at least three copies of your private keys is usually a good idea, and you may want to think about breaking a private key up into multiple pieces of paper and placing them in different safety deposit boxes around the country. This may seem like a paranoid idea right now, but sometimes it makes sense to leave a copy of the keys to your bitcoin savings in an actual safe or vault.
Still Searching for the Holy Grail
Although we have not found the perfect wallet that combines convenience and security for Bitcoin users, it is definitely becoming obvious that a solution is on the way. It’s likely that some sort of secondary device will be needed, and this device will replace the normal wallets that people keep in their pockets these days. Some will say that it’s crazy to expect people to purchase a secondary hardware device just to store their bitcoins, but the fact of the matter is that these devices will probably also store future forms of identification and login information for various websites. It may not be that convenient to securely store bitcoins right now, but it looks like it will become much easier as time goes by.
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