Protect Your Bitcoin 101

Learn some of the latest methods to protect yourself in the new bitcoin world.

Apr 23, 2021

Each month thousands of bitcoin holders lose access to their bitcoin. James Howells, an IT worker from Newport, lost $475 Million worth of bitcoin (7,500 BTC) when he accidentally threw out the hard drive containing his bitcoin. Many new bitcoin investors have made costly mistakes that have resulted in a loss of funds, but most of the "lost bitcoin" stories you see in the headlines today, could have been easily avoided if they had followed these simple security tips.

We will break down the top 5 methods that investors have discovered to improve their asset security. Enhancing your security will also improve your peace of mind knowing that your bitcoin is safe. Long-time bitcoin holders (hodlers) use these tried-and-true methods to keep their bitcoin protected.

Hardware Wallets: The 1st step you can take to dramatically improve your bitcoin security is to take your bitcoin off the exchange and onto a hardware wallet. A hardware wallet isn't like an everyday wallet. It looks a lot like a thumb drive. Using a hardware wallet may seem like a completely new concept, but these devices are straightforward to use and will significantly increase your security when holding bitcoin. Once you store your bitcoin on a hardware wallet, it means that your bitcoin is "offline." and that you now "self-custody" your bitcoin. This is a big advantage over leaving your bitcoin on an exchange where you are not the custodian. Storing your bitcoin "offline" makes it impossible for someone to hack into it remotely. However, when you leave bitcoin on an exchange, you run the risk that an attacker can access your account or that the exchange loses control of your bitcoin. Neither of these scenarios is possible when storing your bitcoin on a hardware wallet. Even if something happened to the device itself, you won't have to worry because they come with a backup password (AKA seed phrase). If the device is ever lost, stolen, or damaged, you can quickly and easily regain access to your bitcoin.
IMPORTANT: Some hardware producers rigorously test each of their devices, but there are several producers that are highly trusted because they have been tested by bitcoin community members. Trezor, Ledger, and ColdCard are my preferred providers.
Pro-tip: There are many wallet solutions available today, even mobile wallets. However, mobile wallets are not a safe solution when storing your bitcoin for the long term because they generate your private keys (seed phrase) online. (See Resources below for a breakdown on wallet types)
Seed Phrase Storage: Once you boot up your hardware wallet, you will generate your seed phrase (Usually 12 or 24 words). You will have to write this down because it is long and difficult to memorize. When you write it down, use a piece of paper or something durable such as a piece of metal, but make sure you never store this phrase online. Never type it or store it on a computer, smartphone, or tablet. Think of this password as a key to your bitcoin wallet. If you keep this key on an "internet-connected device", you run the risk of having your bitcoin taken or losing access if your data is ever corrupted.
Pro-tip: Store your phrase in a very safe place and never let anyone see it. Whoever controls the keys controls the coins.
Keep your stack private: There are two reasons why you should never tell anyone the exact amount of bitcoin you hold. The first reason is that everyone can see the bitcoin in each wallet on the shared database (bitcoin blockchain). The average person would never know which wallet belongs to which person. However, if you were to tell someone the exact amount of bitcoin you hold, it would significantly reduce your privacy and give someone the ability to search for your wallet in the database for that same amount. (This also allows them to track what you do with your bitcoin). The second reason is, it makes you a likely target for those looking to take your bitcoin. Think of it this way, if you had a good amount of money in a safe or under your mattress at home, you wouldn't tell anyone about it because that would increase the risk that someone would attempt to take it from you. Remember that, even if you own a small amount of bitcoin today, in 10 or 20 years, that small amount could turn into something worth taking, so always keep your bitcoin holdings as private as possible.
Multi-signature: If the amount of bitcoin you're holding in your wallet is starting to make you curious about how to protect it better, you may want to consider using multi-signature (AKA multi-sig). Multi-sig is a security feature that makes it more challenging to move bitcoin out of your wallet, thus more difficult for someone to take. Think of multi-sig like having two keys to a safety deposit box. You need to have both keys, and to open the box, you need to turn them simultaneously. Multi-sig works in the same way. You need two wallets to "sign" a transaction to send it. You can control each key yourself or services that allow you to be in control of one key and another party (Blockstream, Casa, and Unchained Capital) to be in control of the other key. Multi-sig makes you "robbery resistant" as a potential attacker would need your key and the key held by a 3rd party service provider. There is also no limit to how many keys you can require to send the transaction. Some of the more safety concerned users have as many as five keys. Another great feature of multi-sig is that you can set it up where a certain threshold of keys is required to send a transaction. For example, you can have five sets of keys but only need 3 of the 5 to sign for the transaction to be processed, making it extremely difficult for anyone to move bitcoin out of your wallet. It's a more complex process, and increasing complexity increases your odds of making a mistake, so only use this if the amount of bitcoin you hold makes you lose sleep at night.
Multiple Wallets: If using multi-sig feels too complex, but you still want to improve your security, you may consider splitting up your bitcoin into several wallets. You can have as many wallets as you want. Often people will buy wallets from different hardware producers to reduce the risk of relying on a single hardware wallet provider. If you have substantial sums of bitcoin, you may want to consider this as a more straightforward way to increase your bitcoin security by not "putting all your eggs in one basket". It would also improve your privacy because you can severely reduce someone's ability to track down how much bitcoin you are holding.

Bottom Line

There are many ways to reduce your risk when owning bitcoin, but if you had to choose one thing to get started, get into the habit of using a hardware wallet. Hardware wallets will give you the most long-term protection against loss of funds over any other practice. They are also free to use. I personally recommend the Ledger and Trezor entry-level wallets for newcomers. They are currently $60 and they are very easy to use.

Pro Tip: Buy hardware wallets direct from the supplier to improve your security even more. Buying from 3rd parties like Amazon increases the chances of being exposed to an attack.