Difference between revisions of "Storing bitcoins"

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As bitcoin is a digital asset, it can be very un-intuitive to store safely. Historically many people have lost their coins but with proper understanding the risks can be eliminated. If your bitcoins do end up lost or stolen then there's almost certainly nothing that can be done to get them back.
 
As bitcoin is a digital asset, it can be very un-intuitive to store safely. Historically many people have lost their coins but with proper understanding the risks can be eliminated. If your bitcoins do end up lost or stolen then there's almost certainly nothing that can be done to get them back.
  
tl;dr The best way to store bitcoin is to either buy a [[hardware wallet]] or install a [[Multisignature|multisignature wallet]]. Have your wallet create a [[Mnemonic phrase|mnemonic recovery phrase]], write it down on paper and store it in a safe place. The wallet should be backed by your own [[full node]].
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tl;dr The best way to store bitcoin is to either use a [[hardware wallet]], a [[Multisignature|multisignature wallet]] or a [[Cold storage|cold storage wallet]]. Have your wallet create a [[seed phrase]], write it down on paper and store it in a safe place (or several safe places, as backups). The wallet should be backed by your own [[full node]].
  
 
== Introduction ==
 
== Introduction ==
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* Protection against accidental loss
 
* Protection against accidental loss
 
* Verification that the bitcoins are genuine
 
* Verification that the bitcoins are genuine
* Privacy / protection against spying
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* Privacy and protection against spying
 
* Protection against theft
 
* Protection against theft
 
* Easy access for spending or moving bitcoins
 
* Easy access for spending or moving bitcoins
  
The art and science of storing bitcoins is about keeping your private keys safe, yet them still being easily available to you when you want to transact with them. It also requires verifying that your recieved bitcoins are real, and stopping an adversary from spying on you.
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The art and science of storing bitcoins is about keeping your private keys safe, yet remaining easily available to you when you want to make a transaction. It also requires verifying that you received real bitcoins, and stopping an adversary from spying on you.
  
[[File:Mnemonic-seed-still-life.jpg|300px|thumb|alt=An example mnemonic phrase written on paper|Example mnemonic phrase on paper.]]
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[[File:Mnemonic-seed-still-life.jpg|300px|thumb|alt=An example seed phrase written on paper|Example seed phrase on paper.]]
  
 
=== Protection from accidental loss ===
 
=== Protection from accidental loss ===
  
In the past many people have accidentally lost bitcoins because of failed backups, forgotten hard drives or corrupted SSD devices. Through bitter experience it was found that one of the most practical storage mediums is '''pencil and paper'''. The private keys of a bitcoin wallet are encoded into [[Mnemonic phrase|random words from a dictionary]] which can be written down. If the your hard drive crashes you can find the paper with the [[mnemonic phrase]] and restore the entire wallet. All good wallet software ask their users to write down the [[Mnemonic phrase|mnemonic recovery phrase]] of the wallet. It is worthwhile to keep copies in several locations so that even if your home burns down and nothing remains you can still recover the bitcoins.
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In the past many people have accidentally lost bitcoins because of failed backups, mistyped letters, forgotten hard drives, corrupted SSD devices, or numerous other slip ups.  
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The key to protecting yourself from data loss of any kind is to have redundant backups so that if one is lost or destroyed, you still have others you can use when you need them. All good wallet software asks their users to write down the [[seed phrase|seed recovery phrase]] of the wallet as a backup, so that if your primary wallet is lost or damaged, you can use the seed recovery phrase to restore access to your coins. If you have more than one backup location, they should be in places where various disasters won't affect both of your backups. For example, its much better to store two backups in a home safe and in a safe deposit box (as long as your seed is protected by a passphrase) than to store two backups in your bedroom and one in your garage.
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Also important is regularly verifying that your backup still exists and is in good condition. This can be as simple as ensuring your backups are still where you put them a couple times a year.
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The best practices for backing up a seed is to store the seed using '''pencil and paper''' or '''metal seed phrase backup''' and storing in multiple secure locations. See [[Seed_phrase#Storing_Seed_Phrases_for_the_Long_Term]] for details.
  
 
=== Verification and privacy ===
 
=== Verification and privacy ===
  
Storing a [[mnemonic phrase]] only stores [[Private key|private keys]], it cannot tell you if you have actually received bitcoins and in what quantity. For that you need wallet software.
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Storing a [[seed phrase]] only stores [[Private key|private keys]], but it cannot tell you if or how many bitcoins you have actually received. For that you need wallet software.
  
If you received cash banknotes or gold coins to be stored, you wouldn't accept them without verifying that the banknotes were genuine and that the gold was real. The same is true with bitcoin, payments must be genuine or else you may be slipped counterfeit bitcoins and be left out of pocket. The most secure kind of wallet is one which verifies all the rules of bitcoin, known as a [[full node]]. For recieving large volumes it is essential to use wallet software backed by a [[full node]]. If bitcoin is digital gold, then a [[full node]] is your own person goldsmith who checks that received bitcoin payments are actually real. Lightweight wallets which don't check all of bitcoin's rules are only appropriate for receiving smaller amounts or when you trust the sender. See the article about [[full node|full nodes]].
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If you received cash banknotes or gold coins as payment, you wouldn't accept them without inspecting them and verifying that they are genuine. The same is true with bitcoin. Wallet software can automatically verify that a payment has been made and when that payment has been completed (by being mined into a number of blocks). The most secure kind of wallet is one which independently verifies ''all'' the rules of bitcoin, known as a [[full node]]. When receiving large volumes, it is essential to use wallet software that connects to a full node you run yourself. If bitcoin is digital gold, then a full node is your own personal digital goldsmith who checks that received bitcoin payments are actually real. [[Lightweight node|Lightweight wallets]] have a number of security downsides because they don't check all of bitcoin's rules, and so should only be used for receiving smaller amounts or when you trust the sender. See the article about [[full node|full nodes]].
  
Your wallet software will also need to learn the history and balance of its wallet. For a lightweight wallet this usually involves querying a third-party server which leads to a privacy problem as that server can spy on you by seeing your entire balance, all your transactions and usually linking it with your IP address. Using a [[full node]] avoids this problem because the software connects directly to the bitcoin p2p network and downloads the entire [[blockchain]], so any adversary will find it much harder to obtain information. See also: [[Anonymity]]
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Your wallet software will also need to learn the history and balance of its wallet. For a lightweight wallet this usually involves querying a third-party server which leads to a privacy problem as that server can spy on you by seeing your entire balance, all your transactions and usually linking it with your IP address. Using a full node avoids this problem because the software connects directly to the bitcoin p2p network and downloads the entire [[blockchain]], so any adversary will find it much harder to obtain information. See also: [[Anonymity]]
  
So for verification and privacy, a good storage solution should be backed by a [[full node]] under your own control for use when recieving payments. Note that the [[full node]] wallet on an online computer can be a watch-only wallet that does not have the ability to actually spend or steal the bitcoins.
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So for verification and privacy, a good storage solution should be backed by a [[full node]] under your own control for use when receiving payments. The full node wallet on an online computer can be a watch-only wallet. This means that it can detect transaction involving addresses belonging to the user and can display transaction information about them, but still does not have the ability to actually spend the bitcoins.
  
 
=== Protection from theft ===
 
=== Protection from theft ===
  
Possession of bitcoins comes from keep your ability to keep the private keys under your exclusive control. Any malware or hackers who learn what your private keys are can create a valid bitcoin transaction sending your coins to themselves, effectively stealing your bitcoins. The average person's computer is usually vulnerable to malware so that must be taken into account when deciding on storage solutions.
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Possession of bitcoins comes from your ability to keep the private keys under your exclusive control. In bitcoin, keys are money. Any malware or hackers who learn what your private keys are can create a valid bitcoin transaction sending your coins to themselves, stealing your bitcoins. The average person's computer is usually vulnerable to malware, so that must be taken into account when deciding on storage solutions.  
  
[[Mnemonic phrase]]s can store any amount of bitcoins. It's a weird idea to possibly have enough money to purchase the entire building just sitting on a sheet of paper without any protection. For this reason many wallets make it possible to encrypt a mnemonic phrase with a password. See [[Mnemonic phrase#Two-Factor_Mnemonic_Phrases]]
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Anybody else who discovers a wallet's [[seed phrase]] can steal all the bitcoins if the seed isn't also protected by a secret passphrase. Even when using a passphrase, a seed should be kept safe and secret like jewels or cash. For example, no part of a seed should ever be typed into any website, and no one should store a seed on an internet-connected computer unless they are an advanced user who has researched what they're doing.
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[[Seed phrase]]s can store any amount of bitcoins. It doesn't seem secure to possibly have enough money to purchase the entire building just sitting on a sheet of paper without any protection. For this reason many wallets make it possible to encrypt a seed phrase with a passphrase. See [[Seed phrase#Two-Factor_Seed_Phrases]]
  
 
=== Easy access ===
 
=== Easy access ===
  
Some users may not need to actually move their bitcoins very often, especially if they [[Bitcoin as an investment|own bitcoin as an investment]]. Other users will want to be able to quickly and easily move their coins.
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Some users may not need to actually move their bitcoins very often, especially if they [[Bitcoin as an investment|own bitcoin as an investment]]. Other users will want to be able to quickly and easily move their coins. A solution for storing bitcoins should take into account how convenient it is to spend from depending on the user's needs.
  
== Discussion of wallet solutions ==
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=== Summary ===
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In summary: bitcoin wallets should be backed up by writing down their [[seed phrase]], this phrase must be kept safe and secret, and when sending or receiving transactions the wallet software should obtain information about the bitcoin network from your own [[full node]].
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== Types of wallets ==
  
 
=== Hardware wallets ===
 
=== Hardware wallets ===
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''Main article: [[Hardware wallet]]''
  
 
[[Hardware wallet]]s are special purpose security-hardened devices for storing Bitcoins on a peripheral that is trusted to generate wallet keys and sign transactions.
 
[[Hardware wallet]]s are special purpose security-hardened devices for storing Bitcoins on a peripheral that is trusted to generate wallet keys and sign transactions.
  
A [[hardware wallet]] typically holds the private keys in its internal storage and is designed to be malware resistant. The device signs the transactions internally and only transmits the signed transactions to the computer. The separation of the private keys from the vulnerable environment allows the user to spend bitcoins on an untrustworthy computer with reduced risk. Hardware wallets can be very user friend and are a top solution for holding private keys.
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A [[hardware wallet]] holds the seed in its internal storage and is typically designed to be resistant to both physical and digital attacks. The device signs the transactions internally and only transmits the signed transactions to the computer, never communicating any secret data to the devices it connects to. The separation of the private keys from the vulnerable environment allows the user to spend bitcoins without running any risk even when using an untrustworthy computer. Hardware wallets are relatively user-friendly and are one of the best ways to store bitcoins.
 
 
Unfortunately as of November 2017 no hardware wallet on the market can be easily connected to a [[full node]], so using them usually involves a lightweight wallet, therefore not verifying the rules of bitcoin and querying a third-party server which can spy on you. Hardware wallets are also physical objects that can be found and which prove that you probably own bitcoins, this is worth considering when for example crossing borders. They also cost more than software wallets.
 
  
Main article: [[Hardware wallet]]
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Some downsides are that hardware wallets are recognizable physical objects which could be discovered and which give away that you probably own bitcoins. This is worth considering when for example crossing borders. They also cost more than software wallets. Still, physical access to a hardware wallet does not mean that the keys are easily compromised, even though it does make it easier to compromise the hardware wallet. The groups that have created the most popular hardware wallets have gone to great lengths to harden the devices to physical threats and, though not impossible, only technically skilled people with specialized equipment have been able to get access to the private keys without the owner's consent. However, physically-powerful people such as armed border guards upon seeing the hardware wallet could force you to type in the PIN number to unlock the device and steal the bitcoins.
  
 
=== Multisignature wallets ===
 
=== Multisignature wallets ===
  
A multisignature wallet is one where multiple private keys are required to move the bitcoins instead of a single key, avoiding a single point of failure. These private keys can be spread across multiple machines in various locations with the rationale that malware and hackers are unlikely to infect all of them. The multisig wallet can be of the m-of-n type where any m private keys out of a possible n are required to move the money. For example a 2-of-3 multisig wallet might have your private keys spread across a desktop, laptop and smartphone; any two are required to move the money but the loss of any one does not result in loss of money especially because they can be restored from paper backup.
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''Main article: [[Multisignature]]''
 
 
Multisignature wallets have the advantage of being cheaper than hardware wallets since they are implemented in software and can be downloaded for free, as well as being convenient as all keys are online and the wallet user interfaces are typically easy to use. Wallet software [[Electrum]] and [[Armory]] can create multisig wallets. Hardware and multisignature wallets can be combined by having a multisignature wallet with the private keys held on hardware wallets. After all a single hardware wallet is still a single point of failure.
 
  
Main article: [[Multisignature]]
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A multisignature wallet is one where multiple private keys are required to move the bitcoins instead of a single key. Such a wallet can be used for requiring agreement among multiple people to spend, can eliminate a single point of failure, and can be used as form of backup, among other applications.
  
=== Hot wallets ===
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These private keys can be spread across multiple machines in various locations with the rationale that malware and hackers are unlikely to infect all of them. The multisig wallet can be of the m-of-n type where any m private keys out of a possible n are required to move the money. For example a 2-of-3 multisig wallet might have your private keys spread across a desktop, laptop, and smartphone, any two of which are required to move the money, but the compromise or total loss of any one key does not result in loss of money, even if that key has no backups.
  
A hot wallet refers to keeping single-signature wallets with private keys kept on an online computer. Most bitcoin wallet software out there is a hot wallet. The bitcoins are easy to spend but are maximally vulnerable to malware or hackers. Hot wallets may be appropriate for small amounts and day-to-day spending.
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Multisignature wallets have the advantage of being cheaper than hardware wallets since they are implemented in software and can be downloaded for free, and can be nearly as convenient since all keys are online and the wallet user interfaces are typically easy to use.  
  
Main article: [[Hot wallet]]
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Hardware and multisignature wallets can be combined by having a multisignature wallet with the private keys held on hardware wallets; after all a single hardware wallet is still a single point of failure. Cold storage and multisignature can also be combined, by having the multisignature wallet with the private keys held in cold storage to avoid them being kept online.
  
 
=== Cold storage wallets ===
 
=== Cold storage wallets ===
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''Main article: [[Cold storage]]''
  
 
A cold wallet generates and stores private wallet keys offline on a clean, newly-installed [https://en.wikipedia.org/wiki/Air_gap_(networking) air-gapped] computer. Payments are received online with a watch-only wallet. Unsigned transactions are generated online, transferred offline for signing, and the signed transaction is transferred online to be broadcast to the Bitcoin network.
 
A cold wallet generates and stores private wallet keys offline on a clean, newly-installed [https://en.wikipedia.org/wiki/Air_gap_(networking) air-gapped] computer. Payments are received online with a watch-only wallet. Unsigned transactions are generated online, transferred offline for signing, and the signed transaction is transferred online to be broadcast to the Bitcoin network.
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This allows funds to be managed offline in [[Cold storage]]. Used correctly a cold wallet is protected against online threats, such as viruses and hackers. Cold wallets are similar to hardware wallets, except that a general purpose computing device is used instead of a special purpose peripheral. The downside is that the transferring of transactions to and fro can be fiddly and unweilding, and less practical for carrying around like a hardware wallet.
 
This allows funds to be managed offline in [[Cold storage]]. Used correctly a cold wallet is protected against online threats, such as viruses and hackers. Cold wallets are similar to hardware wallets, except that a general purpose computing device is used instead of a special purpose peripheral. The downside is that the transferring of transactions to and fro can be fiddly and unweilding, and less practical for carrying around like a hardware wallet.
  
Main article: [[Cold storage]]
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=== Hot wallets ===
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''Main article: [[Hot wallet]]''
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A hot wallet refers to keeping single-signature wallets with private keys kept on an online computer or mobile phone. Most bitcoin wallet software out there is a hot wallet. The bitcoins are easy to spend but are maximally vulnerable to malware or hackers. Hot wallets may be appropriate for small amounts and day-to-day spending.
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A user might have a ''spending account'' hot wallet for day-to-day convenient spending with the majority of their funds on a ''savings account'' which is stored with much more security (cold storage / hardware wallet / multisignature).
  
 
== Bad wallet ideas ==
 
== Bad wallet ideas ==
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Custodial wallets are where an exchange, broker or other third party holds your bitcoins in trust.
 
Custodial wallets are where an exchange, broker or other third party holds your bitcoins in trust.
  
The number one rule to storing bitcoin is this: if you don’t hold the private keys, you don’t actually own the assets. There are many many historical examples of loss due to custodial wallets: Bitcoinica, Silk Road, Bitfloor, [[Collapse of Mt. Gox|MTGOX]], Sheep Marketplace, BTC-e, Bitstamp, Bitfinex, Bithumb, Cryptsy, Bter, Mintpal and many more<ref>https://bitcointalk.org/index.php?topic=576337</ref>
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The number one rule to storing bitcoin is this: if you don’t hold the private keys, you don’t actually own the assets. There are many historical examples of loss due to custodial wallets: Bitcoinica, Silk Road, Bitfloor, [[Collapse of Mt. Gox|MTGOX]], Sheep Marketplace, BTC-e, Bitstamp, Bitfinex, Bithumb, Cryptsy, Bter, Mintpal and many more<ref>https://bitcointalk.org/index.php?topic=576337</ref>
  
 
==== "Isn't it just like keeping your money in a bank?" ====
 
==== "Isn't it just like keeping your money in a bank?" ====
  
:There are trade offs with everything, but let me explain why trusting Coinbase with Bitcoin is ''not'' the same as trusting a bank with dollars:
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''The following is a quote of waxwing on reddit<ref>https://www.reddit.com/r/Bitcoin/comments/5py495/brian_armstrong_controlling_your_own_wealth_as_a/dcve9xx/?context=3</ref>:''
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:There are trade offs with everything, but trusting Coinbase with your Bitcoin is ''not'' the same as trusting a bank with your dollars:
  
:Suppose 5 people are needed to access the funds, within Coinbase, e.g. the CEO, the lead engineer, 3 others, whatever. Suppose one day they wake up and decide to be evil and move all the Bitcoin to some private account of theirs, and perhaps make up a story in the press about how they've been "hacked". You have a serious problem, as you might find there is a protracted legal battle (see MtGox), but you can't actually retrieve the funds unless in some way the company is re-stocked with Bitcoin, or perhaps an equivalent in fiat.
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:Suppose 5 people are needed to access the funds, within Coinbase, e.g. the CEO, the tech lead engineer and 3 other senior employees. Suppose one day they wake up and decide to be evil and move all the Bitcoin to some private account of theirs, and perhaps make up a story in the press about how they've been "hacked". You have a serious problem, as you might find there is a protracted legal battle (see MtGox), but you can't actually retrieve the funds unless in some way the company is re-stocked with Bitcoin, or perhaps an equivalent in fiat.
  
:If on the other hand you controlled the funds with a majority of keys in a multisig, then it would always effectively be your bitcoin. But it also means that if you get hacked, you lose.
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:If on the other hand you controlled the funds with a majority of keys in a multisig i.e. you own both of the two needed keys of a 2-of-3 multisig, then it would always effectively be your bitcoin, even though the third key may belong to a trusted third party custodian. But this also comes with the responsibility that if you get hacked, you lose all your funds. That is why it's prudent, in a 2-of-3 multisig where you have the two needed keys, to have them in separate systems/locations. If one of them fails, you can go to the custodian to supply the third key and transfer your funds again to safety. But the custodian alone, cannot touch your funds just by virtue of having the third key.
  
:Now, if your bank gets hacked similarly - 5 key operatives in the bank decide to swipe your money and pretend it was external hackers - SWIFT transfers are made to accounts in Russia and China; here it will always ultimately be at the discretion of legal agencies whether you "actually" still have the money that is stolen. Because dollars are not real, they can be created at a whim, and while reversing international transfers is not ''quite'' so simple, very often that reversal can be achieved (e.g. recent SWIFT hank at bangladesh<ref>https://www.wired.com/2016/05/insane-81m-bangladesh-bank-heist-heres-know/</ref><ref>https://en.wikipedia.org/wiki/Bangladesh_Bank_robbery</ref> bank; $1 billion stolen, all but $80 million "recovered" (just means wire transfers reversed)). Added to that consider insurance, so even when transfers can't be reversed, the money can be "found". If too many banks get hacked all at once the Federal Reserve and the govt together can make up some "fund" that magically reassigns balances any time they like, with sufficient political will (that's essentially what was happening in 2008 TARP etc).
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:Now, if your bank gets hacked similarly - 5 key operatives in the bank decide to swipe your money and pretend it was external hackers - SWIFT transfers are made to accounts in Russia and China. Here it will always ultimately be at the discretion of legal agencies whether you "actually" still have the money that is stolen. Because dollars are not real, they can be created at a whim<ref>https://en.wikipedia.org/wiki/Fractional-reserve_banking</ref>, and while reversing international transfers is not ''quite'' so simple, very often that reversal can be achieved (e.g. recent SWIFT hack at bangladesh<ref>https://www.wired.com/2016/05/insane-81m-bangladesh-bank-heist-heres-know/</ref><ref>https://en.wikipedia.org/wiki/Bangladesh_Bank_robbery</ref> bank; $1 billion stolen, all but $80 million "recovered" (just means wire transfers reversed)). Added to that consider that fiat money is insured, so even when transfers can't be reversed, the money can be "recovered". If too many banks get hacked all at once the Federal Reserve and the government together can make up some "fund" that magically reassigns balances any time they like, with sufficient political will (that's essentially what was happening in 2008 TARP etc).
  
 
:So far no insurance company has ever paid out on a Bitcoin company's claim. Worth considering also.
 
:So far no insurance company has ever paid out on a Bitcoin company's claim. Worth considering also.
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:You might say, since it's risky both ways, why not trust Coinbase? Aren't they more competent in security than me?
 
:You might say, since it's risky both ways, why not trust Coinbase? Aren't they more competent in security than me?
  
:Almost certainly, but this argument has two massive holes in it: (1) because they ''concentrate'' funds they are a massive target for hackers, while you are not - at all. (2) they are a ''trusted third party'' so the situation is strictly worse - not only do you have to trust their security skills, but you also have to trust them not to steal (modulo multisig, as mentioned above) (edited to add: as well as literal stealing, there is things like political confiscation, don't forget).<ref>https://www.reddit.com/r/Bitcoin/comments/5py495/brian_armstrong_controlling_your_own_wealth_as_a/dcve9xx/?context=3</ref>
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:Almost certainly, but this argument has two massive holes in it: (1) because they ''concentrate'' funds they are a massive target for hackers, while you are not - at all. (2) they are a ''trusted third party'' so the situation is strictly worse - not only do you have to trust their security skills, but you also have to trust them not to steal (modulo multisig, as mentioned above) (edited to add: as well as literal stealing, there is things like political confiscation, don't forget).
  
 
=== Web wallets ===
 
=== Web wallets ===
  
Web wallets have all the downsides of custodial wallets along with all the downsides of hot wallets (exposed private keys), as well as all the downsides of lightweight wallets (not verifying bitcoin's rules, someone could send you a billion bitcoins and under certain conditions the dumb web wallet would happily accept it)
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Web wallets have all the downsides of custodial wallets (no direct possession, private keys are held by a third party) along with all the downsides of hot wallets (exposed private keys), as well as all the downsides of lightweight wallets (not verifying bitcoin's rules, someone could send you a billion bitcoins and under certain conditions the dumb web wallet would happily accept it)
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Someone who needs the easy access of a web wallet should download a lightweight wallet like [[Electrum]].
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Main article: [[Browser-based wallet]]
  
 
=== Paper wallets ===
 
=== Paper wallets ===
  
So-called [[paper wallets]] are an obsolete and unsafe method of storing bitcoin which should not be recommended to newbs to use. They simply store a single private/public keypair on paper. They promote [[address reuse]] and require unweildy and complicated live OS system boots to be safe, they risk theft by printers and typically rely on [[Javascript cryptography]].
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So-called [[paper wallets]] are an obsolete and unsafe method of storing bitcoin which should not be recommended to beginners. They simply store a single private/public keypair on paper. They promote [[address reuse]] and require unwieldy and complicated live OS system boots to be safe, they risk theft by printers, and typically rely on [[Javascript cryptography]].
  
Paper wallets also do not provide any method of displaying to the user when money has arrived, users are typically driven to use third-party blockchain explorers which can lie to them and spy on them.
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Paper wallets also do not provide any method of displaying to the user when money has arrived. There's no practical way to use a [[full node]] wallet. Users are typically driven to use third-party blockchain explorers which can lie to them and spy on them.
  
A much better way to achieve the job that paper wallets do is to use [[mnemonic phrase|mnemonic phrases]] instead.
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A much better way to accomplish what paper wallets do is to use [[seed phrase]]s instead.
  
 
Main article: [[Paper wallets]]
 
Main article: [[Paper wallets]]
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=== Cloud storage ===
 
=== Cloud storage ===
  
This means storing your encrypted (or not) wallet file on a cloud storage solution such as Dropbox.
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This means storing your encrypted (or not) wallet file on a cloud storage solution such as Dropbox, or emailing them to yourself on gmail. This very similar to trusting a custodial wallet service, and is not recommended for the same reasons<ref>https://www.reddit.com/r/Bitcoin/comments/8i6via/28_btc_stolen_10_btc_reward_please_help/</ref>. You might say you use encryption for two-factor authentication, but uploading the wallet to the cloud reduces this to one-factor.
  
 
=== Removable media ===
 
=== Removable media ===
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* https://www.reddit.com/r/Bitcoin/comments/6nj0eb/reminder_beware_of_data_rot_always_make_paper/
 
* https://www.reddit.com/r/Bitcoin/comments/6nj0eb/reminder_beware_of_data_rot_always_make_paper/
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* https://tedjonesweb.blogspot.co.uk/2017/08/do-not-use-flash-memory-ssd-drives.html
  
* https://tedjonesweb.blogspot.co.uk/2017/08/do-not-use-flash-memory-ssd-drives.html
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Those articles recommend using GPG for encryption or a printer, instead a better solution is [[seed phrase]]s.
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=== "Physical" Bitcoins ===
  
Those articles recommend using GPG for encryption or a printer, instead a better solution is [[mnemonic phrase|mnemonic phrases]].
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Physical Coins and other mechanism with a pre-manufactured key or seed are not a good way to store bitcoins because they keys are already potentially compromised by whoever created the key. You should not consider bitcoin yours if its stored on a key created by someone else. It only becomes yours when you transfer the bitcoin to a key that you own.
  
 
== Other ideas ==
 
== Other ideas ==
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=== Time-locked wallets ===
 
=== Time-locked wallets ===
  
An interesting unconventional solution. The idea is to use [[Timelock|time-lock contracts]] to create a wallet which cannot be spent from until a certain date. One possible use-case might be by a gambling addict who locks up money for paying bills for a month, after a month has passed and their time-lock wallet is opened they use that money for paying bills instead of gambling.
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An interesting unconventional solution. The idea is to use [[Timelock|time-lock contracts]] to create a wallet which cannot be spent from until a certain date. One possible use-case might be by a gambling addict who locks up money for paying bills for a month, after a month has passed and their time-lock wallet is opened they use that money for paying bills instead of gambling. This is the equivalent proposal towards compulsive shoppers to freeze their credit card in a block of ice, so when they feel the urge to immediately buy something they see on the TV, they will need to wait for the block to melt until they can retrieve the credit card to be able to place the order. This hopefully gives them the time to cool off, and reconsider an otherwise meaningless purchase.
  
 
Time lock wallets don't exist yet except for simple [https://coinb.in/#newTimeLocked javascript pages] which rely on [[Javascript cryptography]] and are therefore not safe.
 
Time lock wallets don't exist yet except for simple [https://coinb.in/#newTimeLocked javascript pages] which rely on [[Javascript cryptography]] and are therefore not safe.
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It's sometimes said that all this security is worthless because the $5 wrench attack can be used.
 
It's sometimes said that all this security is worthless because the $5 wrench attack can be used.
  
Stored bitcoins are not secured by [[mnemonic phrase]]s, [[hardware wallet]]s, [[multisignature]], passwords, hash functions or anything like that; they are secured by ''people''.
+
There are two ways to beat this attack: by hiding or by defending yourself.
 +
 
 +
Stored bitcoins are not secured by [[seed phrase]]s, [[hardware wallet]]s, [[multisignature]], passwords, hash functions or anything like that; they are secured by ''people''.
  
 
Technology is never the root of system security. Technology is a tool to help people secure what they value. Security requires people to act. A server cannot be secured by a firewall if there is no lock on the door to the server room, and a lock cannot secure the server room without a guard to monitor the door, and a guard cannot secure the door without risk of personal harm.<ref>[https://github.com/libbitcoin/libbitcoin/wiki/Risk-Sharing-Principle Libbitcoin wiki Risk Sharing Principle]</ref>.
 
Technology is never the root of system security. Technology is a tool to help people secure what they value. Security requires people to act. A server cannot be secured by a firewall if there is no lock on the door to the server room, and a lock cannot secure the server room without a guard to monitor the door, and a guard cannot secure the door without risk of personal harm.<ref>[https://github.com/libbitcoin/libbitcoin/wiki/Risk-Sharing-Principle Libbitcoin wiki Risk Sharing Principle]</ref>.
  
Bitcoin is no different. The technology discussed on this page is only a tool to tip the scales in the defender's favour. Following from this principle, the way to beat the $5 wrench attack is to bear arms. Either your own, or employ guards, or rely on the police forces and army; or whatever may be appropriate and proportionate in your situation. Because if someone completely physically overpowers you then no technology on Earth can save your bitcoins.
+
Bitcoin is no different. The technology discussed on this page is only a tool to tip the scales in the defender's favour. Following from this principle, the way to beat the $5 wrench attack is to bear arms. Either your own, or employ guards, or use a safety deposit box, or rely on the police forces and army; or whatever may be appropriate and proportionate in your situation. If someone physically overpowers you then no technology on Earth can save your bitcoins. You can't be your own bank without bank-level security.
  
 
See Also: [https://twitter.com/i/moments/942083114385281024 Guns + Bitcoin Hardware Wallets]
 
See Also: [https://twitter.com/i/moments/942083114385281024 Guns + Bitcoin Hardware Wallets]
  
 
== Further reading ==
 
== Further reading ==
 +
 +
* [https://github.com/BlockchainCommons/SmartCustodyWhitePapers/blob/master/%23SmartCustody-_Simple_Self-Custody_Cold_Storage_Scenario.md SmartCustody: Simple Self-Custody Cold Storage Scenario]
 +
 +
* https://bitzuma.com/posts/a-gentle-introduction-to-bitcoin-cold-storage/
  
 
* https://medium.com/@lopp/thoughts-on-secure-storage-of-bitcoins-and-other-crypto-assets-210cadabb53d
 
* https://medium.com/@lopp/thoughts-on-secure-storage-of-bitcoins-and-other-crypto-assets-210cadabb53d
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* Two-factor authentication on custodial wallets doesn't work as well as you might think https://medium.com/@CodyBrown/how-to-lose-8k-worth-of-bitcoin-in-15-minutes-with-verizon-and-coinbase-com-ba75fb8d0bac
 
* Two-factor authentication on custodial wallets doesn't work as well as you might think https://medium.com/@CodyBrown/how-to-lose-8k-worth-of-bitcoin-in-15-minutes-with-verizon-and-coinbase-com-ba75fb8d0bac
  
* https://bitzuma.com/posts/a-gentle-introduction-to-bitcoin-cold-storage/
+
* This is why you shouldn’t use texts for two-factor authentication https://www.theverge.com/2017/9/18/16328172/sms-two-factor-authentication-hack-password-bitcoin Hacking 2FA based on SMS is easy.
 +
 
 +
* [[Backup and Storage Methods]]
  
 
==References==
 
==References==

Revision as of 23:06, 11 April 2020

This page is a discussion of the different ways of storing bitcoins, whether for investment purposes or as a medium of exchange.

As bitcoin is a digital asset, it can be very un-intuitive to store safely. Historically many people have lost their coins but with proper understanding the risks can be eliminated. If your bitcoins do end up lost or stolen then there's almost certainly nothing that can be done to get them back.

tl;dr The best way to store bitcoin is to either use a hardware wallet, a multisignature wallet or a cold storage wallet. Have your wallet create a seed phrase, write it down on paper and store it in a safe place (or several safe places, as backups). The wallet should be backed by your own full node.

Introduction

Storage of bitcoin can be broken down in a few independent goals:

  • Protection against accidental loss
  • Verification that the bitcoins are genuine
  • Privacy and protection against spying
  • Protection against theft
  • Easy access for spending or moving bitcoins

The art and science of storing bitcoins is about keeping your private keys safe, yet remaining easily available to you when you want to make a transaction. It also requires verifying that you received real bitcoins, and stopping an adversary from spying on you.

An example seed phrase written on paper
Example seed phrase on paper.

Protection from accidental loss

In the past many people have accidentally lost bitcoins because of failed backups, mistyped letters, forgotten hard drives, corrupted SSD devices, or numerous other slip ups.

The key to protecting yourself from data loss of any kind is to have redundant backups so that if one is lost or destroyed, you still have others you can use when you need them. All good wallet software asks their users to write down the seed recovery phrase of the wallet as a backup, so that if your primary wallet is lost or damaged, you can use the seed recovery phrase to restore access to your coins. If you have more than one backup location, they should be in places where various disasters won't affect both of your backups. For example, its much better to store two backups in a home safe and in a safe deposit box (as long as your seed is protected by a passphrase) than to store two backups in your bedroom and one in your garage.

Also important is regularly verifying that your backup still exists and is in good condition. This can be as simple as ensuring your backups are still where you put them a couple times a year.

The best practices for backing up a seed is to store the seed using pencil and paper or metal seed phrase backup and storing in multiple secure locations. See Seed_phrase#Storing_Seed_Phrases_for_the_Long_Term for details.

Verification and privacy

Storing a seed phrase only stores private keys, but it cannot tell you if or how many bitcoins you have actually received. For that you need wallet software.

If you received cash banknotes or gold coins as payment, you wouldn't accept them without inspecting them and verifying that they are genuine. The same is true with bitcoin. Wallet software can automatically verify that a payment has been made and when that payment has been completed (by being mined into a number of blocks). The most secure kind of wallet is one which independently verifies all the rules of bitcoin, known as a full node. When receiving large volumes, it is essential to use wallet software that connects to a full node you run yourself. If bitcoin is digital gold, then a full node is your own personal digital goldsmith who checks that received bitcoin payments are actually real. Lightweight wallets have a number of security downsides because they don't check all of bitcoin's rules, and so should only be used for receiving smaller amounts or when you trust the sender. See the article about full nodes.

Your wallet software will also need to learn the history and balance of its wallet. For a lightweight wallet this usually involves querying a third-party server which leads to a privacy problem as that server can spy on you by seeing your entire balance, all your transactions and usually linking it with your IP address. Using a full node avoids this problem because the software connects directly to the bitcoin p2p network and downloads the entire blockchain, so any adversary will find it much harder to obtain information. See also: Anonymity

So for verification and privacy, a good storage solution should be backed by a full node under your own control for use when receiving payments. The full node wallet on an online computer can be a watch-only wallet. This means that it can detect transaction involving addresses belonging to the user and can display transaction information about them, but still does not have the ability to actually spend the bitcoins.

Protection from theft

Possession of bitcoins comes from your ability to keep the private keys under your exclusive control. In bitcoin, keys are money. Any malware or hackers who learn what your private keys are can create a valid bitcoin transaction sending your coins to themselves, stealing your bitcoins. The average person's computer is usually vulnerable to malware, so that must be taken into account when deciding on storage solutions.

Anybody else who discovers a wallet's seed phrase can steal all the bitcoins if the seed isn't also protected by a secret passphrase. Even when using a passphrase, a seed should be kept safe and secret like jewels or cash. For example, no part of a seed should ever be typed into any website, and no one should store a seed on an internet-connected computer unless they are an advanced user who has researched what they're doing.

Seed phrases can store any amount of bitcoins. It doesn't seem secure to possibly have enough money to purchase the entire building just sitting on a sheet of paper without any protection. For this reason many wallets make it possible to encrypt a seed phrase with a passphrase. See Seed phrase#Two-Factor_Seed_Phrases

Easy access

Some users may not need to actually move their bitcoins very often, especially if they own bitcoin as an investment. Other users will want to be able to quickly and easily move their coins. A solution for storing bitcoins should take into account how convenient it is to spend from depending on the user's needs.

Summary

In summary: bitcoin wallets should be backed up by writing down their seed phrase, this phrase must be kept safe and secret, and when sending or receiving transactions the wallet software should obtain information about the bitcoin network from your own full node.

Types of wallets

Hardware wallets

Main article: Hardware wallet

Hardware wallets are special purpose security-hardened devices for storing Bitcoins on a peripheral that is trusted to generate wallet keys and sign transactions.

A hardware wallet holds the seed in its internal storage and is typically designed to be resistant to both physical and digital attacks. The device signs the transactions internally and only transmits the signed transactions to the computer, never communicating any secret data to the devices it connects to. The separation of the private keys from the vulnerable environment allows the user to spend bitcoins without running any risk even when using an untrustworthy computer. Hardware wallets are relatively user-friendly and are one of the best ways to store bitcoins.

Some downsides are that hardware wallets are recognizable physical objects which could be discovered and which give away that you probably own bitcoins. This is worth considering when for example crossing borders. They also cost more than software wallets. Still, physical access to a hardware wallet does not mean that the keys are easily compromised, even though it does make it easier to compromise the hardware wallet. The groups that have created the most popular hardware wallets have gone to great lengths to harden the devices to physical threats and, though not impossible, only technically skilled people with specialized equipment have been able to get access to the private keys without the owner's consent. However, physically-powerful people such as armed border guards upon seeing the hardware wallet could force you to type in the PIN number to unlock the device and steal the bitcoins.

Multisignature wallets

Main article: Multisignature

A multisignature wallet is one where multiple private keys are required to move the bitcoins instead of a single key. Such a wallet can be used for requiring agreement among multiple people to spend, can eliminate a single point of failure, and can be used as form of backup, among other applications.

These private keys can be spread across multiple machines in various locations with the rationale that malware and hackers are unlikely to infect all of them. The multisig wallet can be of the m-of-n type where any m private keys out of a possible n are required to move the money. For example a 2-of-3 multisig wallet might have your private keys spread across a desktop, laptop, and smartphone, any two of which are required to move the money, but the compromise or total loss of any one key does not result in loss of money, even if that key has no backups.

Multisignature wallets have the advantage of being cheaper than hardware wallets since they are implemented in software and can be downloaded for free, and can be nearly as convenient since all keys are online and the wallet user interfaces are typically easy to use.

Hardware and multisignature wallets can be combined by having a multisignature wallet with the private keys held on hardware wallets; after all a single hardware wallet is still a single point of failure. Cold storage and multisignature can also be combined, by having the multisignature wallet with the private keys held in cold storage to avoid them being kept online.

Cold storage wallets

Main article: Cold storage

A cold wallet generates and stores private wallet keys offline on a clean, newly-installed air-gapped computer. Payments are received online with a watch-only wallet. Unsigned transactions are generated online, transferred offline for signing, and the signed transaction is transferred online to be broadcast to the Bitcoin network.

This allows funds to be managed offline in Cold storage. Used correctly a cold wallet is protected against online threats, such as viruses and hackers. Cold wallets are similar to hardware wallets, except that a general purpose computing device is used instead of a special purpose peripheral. The downside is that the transferring of transactions to and fro can be fiddly and unweilding, and less practical for carrying around like a hardware wallet.

Hot wallets

Main article: Hot wallet

A hot wallet refers to keeping single-signature wallets with private keys kept on an online computer or mobile phone. Most bitcoin wallet software out there is a hot wallet. The bitcoins are easy to spend but are maximally vulnerable to malware or hackers. Hot wallets may be appropriate for small amounts and day-to-day spending.

A user might have a spending account hot wallet for day-to-day convenient spending with the majority of their funds on a savings account which is stored with much more security (cold storage / hardware wallet / multisignature).

Bad wallet ideas

Custodial wallets

Custodial wallets are where an exchange, broker or other third party holds your bitcoins in trust.

The number one rule to storing bitcoin is this: if you don’t hold the private keys, you don’t actually own the assets. There are many historical examples of loss due to custodial wallets: Bitcoinica, Silk Road, Bitfloor, MTGOX, Sheep Marketplace, BTC-e, Bitstamp, Bitfinex, Bithumb, Cryptsy, Bter, Mintpal and many more[1]

"Isn't it just like keeping your money in a bank?"

The following is a quote of waxwing on reddit[2]:

There are trade offs with everything, but trusting Coinbase with your Bitcoin is not the same as trusting a bank with your dollars:
Suppose 5 people are needed to access the funds, within Coinbase, e.g. the CEO, the tech lead engineer and 3 other senior employees. Suppose one day they wake up and decide to be evil and move all the Bitcoin to some private account of theirs, and perhaps make up a story in the press about how they've been "hacked". You have a serious problem, as you might find there is a protracted legal battle (see MtGox), but you can't actually retrieve the funds unless in some way the company is re-stocked with Bitcoin, or perhaps an equivalent in fiat.
If on the other hand you controlled the funds with a majority of keys in a multisig i.e. you own both of the two needed keys of a 2-of-3 multisig, then it would always effectively be your bitcoin, even though the third key may belong to a trusted third party custodian. But this also comes with the responsibility that if you get hacked, you lose all your funds. That is why it's prudent, in a 2-of-3 multisig where you have the two needed keys, to have them in separate systems/locations. If one of them fails, you can go to the custodian to supply the third key and transfer your funds again to safety. But the custodian alone, cannot touch your funds just by virtue of having the third key.
Now, if your bank gets hacked similarly - 5 key operatives in the bank decide to swipe your money and pretend it was external hackers - SWIFT transfers are made to accounts in Russia and China. Here it will always ultimately be at the discretion of legal agencies whether you "actually" still have the money that is stolen. Because dollars are not real, they can be created at a whim[3], and while reversing international transfers is not quite so simple, very often that reversal can be achieved (e.g. recent SWIFT hack at bangladesh[4][5] bank; $1 billion stolen, all but $80 million "recovered" (just means wire transfers reversed)). Added to that consider that fiat money is insured, so even when transfers can't be reversed, the money can be "recovered". If too many banks get hacked all at once the Federal Reserve and the government together can make up some "fund" that magically reassigns balances any time they like, with sufficient political will (that's essentially what was happening in 2008 TARP etc).
So far no insurance company has ever paid out on a Bitcoin company's claim. Worth considering also.
You might say, since it's risky both ways, why not trust Coinbase? Aren't they more competent in security than me?
Almost certainly, but this argument has two massive holes in it: (1) because they concentrate funds they are a massive target for hackers, while you are not - at all. (2) they are a trusted third party so the situation is strictly worse - not only do you have to trust their security skills, but you also have to trust them not to steal (modulo multisig, as mentioned above) (edited to add: as well as literal stealing, there is things like political confiscation, don't forget).

Web wallets

Web wallets have all the downsides of custodial wallets (no direct possession, private keys are held by a third party) along with all the downsides of hot wallets (exposed private keys), as well as all the downsides of lightweight wallets (not verifying bitcoin's rules, someone could send you a billion bitcoins and under certain conditions the dumb web wallet would happily accept it)

Someone who needs the easy access of a web wallet should download a lightweight wallet like Electrum.

Main article: Browser-based wallet

Paper wallets

So-called paper wallets are an obsolete and unsafe method of storing bitcoin which should not be recommended to beginners. They simply store a single private/public keypair on paper. They promote address reuse and require unwieldy and complicated live OS system boots to be safe, they risk theft by printers, and typically rely on Javascript cryptography.

Paper wallets also do not provide any method of displaying to the user when money has arrived. There's no practical way to use a full node wallet. Users are typically driven to use third-party blockchain explorers which can lie to them and spy on them.

A much better way to accomplish what paper wallets do is to use seed phrases instead.

Main article: Paper wallets

Cloud storage

This means storing your encrypted (or not) wallet file on a cloud storage solution such as Dropbox, or emailing them to yourself on gmail. This very similar to trusting a custodial wallet service, and is not recommended for the same reasons[6]. You might say you use encryption for two-factor authentication, but uploading the wallet to the cloud reduces this to one-factor.

Removable media

This refers to storing wallet files on removable media like SSD or hard drives.

Refer to the warnings from these two links:

Those articles recommend using GPG for encryption or a printer, instead a better solution is seed phrases.

"Physical" Bitcoins

Physical Coins and other mechanism with a pre-manufactured key or seed are not a good way to store bitcoins because they keys are already potentially compromised by whoever created the key. You should not consider bitcoin yours if its stored on a key created by someone else. It only becomes yours when you transfer the bitcoin to a key that you own.

Other ideas

Time-locked wallets

An interesting unconventional solution. The idea is to use time-lock contracts to create a wallet which cannot be spent from until a certain date. One possible use-case might be by a gambling addict who locks up money for paying bills for a month, after a month has passed and their time-lock wallet is opened they use that money for paying bills instead of gambling. This is the equivalent proposal towards compulsive shoppers to freeze their credit card in a block of ice, so when they feel the urge to immediately buy something they see on the TV, they will need to wait for the block to melt until they can retrieve the credit card to be able to place the order. This hopefully gives them the time to cool off, and reconsider an otherwise meaningless purchase.

Time lock wallets don't exist yet except for simple javascript pages which rely on Javascript cryptography and are therefore not safe.

Consulting

If you intend to store a very large amount of bitcoins, for example in a business, you should consider paying for security consulting.

The 5 dollar wrench attack

xkcd comic on the 5 dollar wrench attack.

It's sometimes said that all this security is worthless because the $5 wrench attack can be used.

There are two ways to beat this attack: by hiding or by defending yourself.

Stored bitcoins are not secured by seed phrases, hardware wallets, multisignature, passwords, hash functions or anything like that; they are secured by people.

Technology is never the root of system security. Technology is a tool to help people secure what they value. Security requires people to act. A server cannot be secured by a firewall if there is no lock on the door to the server room, and a lock cannot secure the server room without a guard to monitor the door, and a guard cannot secure the door without risk of personal harm.[7].

Bitcoin is no different. The technology discussed on this page is only a tool to tip the scales in the defender's favour. Following from this principle, the way to beat the $5 wrench attack is to bear arms. Either your own, or employ guards, or use a safety deposit box, or rely on the police forces and army; or whatever may be appropriate and proportionate in your situation. If someone physically overpowers you then no technology on Earth can save your bitcoins. You can't be your own bank without bank-level security.

See Also: Guns + Bitcoin Hardware Wallets

Further reading

References