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Bitcoin Wallets

Bitcoin Wallets and Security

The Bitcoin Journey

Bitcoin Wallets and Security

  • Asking the right questions before starting
  • Thinking about Bitcoin wallets in terms of complexity
  • Security must be adapted

Asking the right questions before starting

When you own bitcoins, the security of your funds is a major concern. The best way to define a security level that is suitable for your situation is to ask yourself a series of questions:
  • Who can access your funds? In other words, do you have sole access to your bitcoins, or does a third party (such as a company) grant you access to your funds?
  • How do you plan to use the bitcoins in that particular wallet? Regularly? For medium-term, or long-term savings?
  • What are your technical skills?
  • What is your security budget?
There is actually no universal answer or solution, so take the time to answer these questions, as it will help tailor your security measures to your needs.

Thinking about Bitcoin wallets in terms of complexity

Here below, we will define several levels of security:
  • Level 0, you use a so-called "custodial service" where you are not the sole holder of your bitcoins. Be aware that this trusted third party can restrict your access to your funds at any time. In this case, your level of financial sovereignty is similar to that of a traditional banking system with a bank account.
  • Level 1, you use a Bitcoin wallet on your phone or computer, where you are the sole holder of your bitcoins and you can easily carry out your transactions. The afore-mentioned tool is referred to as "hot wallet", because the private key is stored on a device with internet access. In this case, it is crucial to back up your mnemonic phrase to regain access to your funds in the event of losing your phone or computer.
For example, you can use Sparrow Wallet as a hot wallet:
sparrow
Sparrow WalletInstalling, configuring and using Sparrow Wallet
  • Level 2, you use a physical wallet, and you have secured your list of 12/24 words. It is often referred to as "cold wallet" because your keys are stored on a device that is not connected to the internet. In this case, you will always need to sign every transaction with your device, which makes your funds less accessible on a daily basis.
For example, you could use a Ledger, a Satochip, or a Tapsigner:
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Ledger Nano S PlusSetup and use of the Ledger Nano S Plus
satochip
SatochipSetting up and using a Satochip smart card
tapsigner
TapsignerSetting up and using a Tapsigner with Nunchuk
  • Level 3, you use a level 1 or 2 wallet, but you added an additional passphrase. In this case, be aware that you need to backup both the list of 12/24 words and your passphrase. Ideally, these two pieces of information are stored in two different places.
To learn more about the use and functioning of the BIP39 passphrase:
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BIP-39 PassphraseUnderstanding how a passphrase works
  • Level 4, you use a set of wallets to create a "multisig" wallet, which means that multiple signatures are required to conduct a transaction. In this case, be aware that each part of the multisig should be stored in different locations. This approach is often considered an advanced use of Bitcoin, primarily for managing large amounts and for corporate purposes.
Of course, different use cases also require different Bitcoin wallets, and there is no one-size-fits-all solution.

Security must be adapted

The amount one is willing to leave on a specific security level depends on each individual. For some, leaving 1 BTC on a hot wallet is reasonable, while, for others, it is the opposite. In any case, when you want to secure a small amount, we advise not to spend too much on security by buying a physical wallet. Besides, keep in mind that overcomplicating the security and accessibility of your bitcoins can be detrimental, especially if you mishandle the backups of your wallets.
In conclusion, direct ownership of one's bitcoins is an essential element to ensure financial sovereignty. It is recommended to use a mobile wallet for daily expenses and an offline, or "cold," physical wallet to store larger amounts. Businesses, on the other hand, should consider using multi-signature systems, or "multisig," for increased and shared security. It is also essential to avoid custodial services, which can replicate some vulnerabilities of the traditional financial system.
With this in mind, we can now move to the next section where we describe how to create a Bitcoin wallet. However, if you wish to further explore the topic of security, you can read this article by DarthCoin.
Quiz
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What is a multisig wallet?