Bitcoins are stored in Bitcoin addresses. They are protected using very secure cryptography and algorithms. The security of one’s Bitcoins depends on how well they can safeguard their security key. Users utilize Bitcoin wallets to keep their keys safe. The keys are long numbers one cannot possibly recall. There are a variety of wallets one can use each with its advantages and disadvantages.
Wallets can be divided into two classes: web wallets and client-side wallets. Web wallets are hosted by a website and require no software usage on the user’s part. Client-side wallets use software installed by the user. Web wallets can be accessed from any computer with access to the internet. The website will manage your keys for you, and their security needs to be trustworthy. If anything happens to the site; whether it is shut down or hacked, your Bitcoins will be lost. In a client-side wallet, the Bitcoin keys are entirely owned by the user.
The user needs to protect his/her keys from malware and viruses himself. The keys need to be transferred from one computer to another in case the user needs to access his Bitcoins from another computer.
Web wallets and client-side wallets are protected using one ECDSA key. The P2SH address is secured by three ECDSA keys. It is called a 2-of-3 signature address since it requires two of the three addresses to access the Bitcoins. Depositing Bitcoins is the same as a conventional address but withdrawing Bitcoins is where the security lies. To enhance security, a user can give a third one key meaning that they cannot withdraw your Bitcoins alone, and you have extra leverage. If you lose one key, you can still access your funds using the P2SH address. Another benefit is that multiple trusted parties can each have one key to decrease the chances of each individually accessing your Bitcoins.
Without a Bitcoin wallet, it is impossible to receive or make any Bitcoin payments. Before getting Bitcoins, one will need to have a Bitcoin wallet. Bitcoin wallets are responsible for storing private keys, which are required to access a Bitcoin address, thereby making it possible to spend funds. These wallets come in varied forms, tailored for different types of devices.
Bitcoin is a modern digital equivalent of cash, and increasingly more and more merchants are accepting them as payment. Like in real life wallets, Bitcoin wallets need to be secured to avoid loss of funds. With such excellent features, Bitcoins come with significant security concerns. If correctly used, Bitcoin wallets provide tremendously high levels of security. It is wise to remember that the safety responsibility of Bitcoin wallets lies with the owner. This post analyzes the best practices for ensuring the security of Bitcoin wallets.
Every service that is designed to store funds online should create a substantial level of prudence and caution. In the past, many online exchanges and wallets faced plenty of safety breaches that always resulted in the loss of money. In today’s world. Such services mostly still do not ensure sufficient safety and insurance for money storage like how physical banks do. It requires great caution, research, and attention in choosing such services. For increased security, it is of the essence to incorporate a two-factor authentication.
Using a Bitcoin wallet is the same with using a real life wallet with cash. In the real world, it would not seem reasonable to store a thousand dollars in a wallet. Generally, the best practice for a Bitcoin owner is to ensure only small amounts small amount for everyday uses in the wallet on the computer, server or mobile. The remaining bigger portion of the funds should be left in a more secure environment.
Like in real life situations, backups always act as lifesavers in Bitcoin wallets. A Bitcoin wallet backup will ensure protection against unseen computer failures and many human errors that may turn out to be expensive in the end. It is advisable that the backup should be stored in a place with utmost safety. Backups also ensure easy recovery of encrypted Bitcoin wallets. This is in the case of a lost or stolen mobile or computer. Some of the best Bitcoin wallet backup practices include:
• Entire Wallet Backup – For enhanced security reasons, most of the Bitcoin wallets use many concealed private keys internally. A Bitcoin wallet owner should consider backing up their entire wallet rather than backing up of only the visible Bitcoin address. Failure to which may result in an inability to recover most of the funds in the backup.
• Online Backups Encryption – Any backup, which is stored online, has a high vulnerability to theft from hackers. In comparison to the real world, computers connected to the internet also face a risk of malware programs. Intrinsically, the best practice for Bitcoin wallet owners is to encrypt entirely any backup that is exposed to the web.
• Multiple Secure Backups – It is crucial for Bitcoin users to create multiple backups that are well secured for their wallets. Multiple backups reduce the risk of money loss substantially.
• Several Secure Locations – In addition to the creation of multiple backups, it is highly recommendable for Bitcoin wallet users to consider more than one place for their backups. A single location translates to heightened risk levels. Several secure locations make it less likely for any negative event to prevent secure wallet recovery.
• Regular Backups – Regular backups are essential for keeping the wallet up-to-date. Users who back up their wallets on a regular basis ensure that all the new Bitcoin addresses created and recent change addresses for Bitcoin are successfully included in the backup.
A wallet or smartphone encryption allows a user to set a password for any fund withdrawals. Encryption is useful for providing protection against theft. However, encryptions may not protect the wallet from keylogging software or hardware. Here are some of the best practices for wallet encryptions.
• Password Remembrance – A Bitcoin wallet user should make sure never to forget their passcodes. Forgetting of the password may lead to the permanent loss of funds in the wallet. Unlike for banks, Bitcoin offers limited password recovery options. Even with many years of not using the password, a user should always remember their password. Users may also consider keeping a paper copy of their passwords in a safe place like a vault.
• Strong Passwords – Any password that is made up of recognizable words may be conceived frail, making it easy to break. Strong passwords normally contain numbers, letters, and punctuation marks. Besides, the password should have at least 16 characters in it. Users may need to utilize a program made for generating passwords. Noticeably, strong passwords may be hard to remember, and therefore, a user should take care in memorizing the password correctly.
Take It Offline
Offline Bitcoin wallets are also referred to as cold storages. These cold storages provide a user with the highest possible safety level for their savings. Offline storage involves storing the wallet in a properly secured place, which has no connections to the network. When properly utilized, cold storages offers significant protection against the vulnerabilities of the computer. It is also considered a good practice when a Bitcoin user combines offline wallets with encryptions and backups. Below is an overview of some of the approaches to cold storage.
Offline Transaction Signing
This approach entails two different computers sharing some parts of the same Bitcoin wallet. One of the computers must not be connected to the internet. This computer should hold the entire wallet, and can sign transactions. The other computer should have an internet connection and holds a watching wallet only. The watching wallet is capable of only creating unsigned transactions. This way, a user can use the following steps to issue new transactions securely.
1. The user should create a new transaction on the network-connected computer and use a USB key to save it.
2. Use the offline computer to sign the transactions.
3. Use the online computer to send the offline signed transaction.
Because the online computer is not able to sign transactions, it cannot be utilized for withdrawing any funds in the case it is compromised.
Hardware wallets offer a user with a right balance between heightened security and ease of use. Hardware wallets are small devices, which are originally designed to serve as a wallet and nothing else. These devices ensure the protection of the user from online thieves and computer vulnerabilities. This is because no software can be installed on them. Hardware wallets also support backups making it easy for a user to recover their wallets and funds in the case they lose the device.
It is of vital importance for users to update their software regularly to the latest version. A user who utilizes the newest version available for their Bitcoin software can receive significant safety and stability fixes and updates. It is recommendable to install the latest updates of all other software on mobile or computer for a safer Bitcoin wallet environment.
Control Private Keys
This is one of the crucial aspects, which Bitcoin users should look for when choosing a service offering Bitcoin wallets. For security purposes, it is advisable for a user to use a wallet where they control their private keys. Users with full control of their private keys, also have complete control of their funds. This eliminates the need for third parties to offer security.
Multi-Signing for Theft Protection
Bitcoin incorporates a multi-sign feature, which allows a transaction to require multiple independent approvals to be successfully sent. This can be optimally utilized by an organization where members have access to the treasury, while only allowing a withdrawal to occur when three of the five members sign the transaction. Some of the online wallets also offer multi-signature wallets. Multi-signing allows a user to maintain control over their money, while still preventing access of a thief by compromising a single server or device.
The safety of Bitcoin coin wallets primarily lies on the measures a user takes to protect their funds. A backup plan for family or peers is essential to avoid permanent loss of funds. Overtly, a user should make the locations of their wallets and passwords known to a trusted kin, to ensure there is hope of recovering the funds when the user is gone. All the above measures, if taken with the appropriate seriousness, can make a significant difference in the security of both the Bitcoin wallets and the funds in it.