Like in real life, your wallet must be secured. Bitcoin allows to transfer value worldwide easier than ever. Such great features also come with great security concerns. At the same time, Bitcoin can provide very high levels of security if used correctly. Always remember that it is your responsibility to adopt good practices in order to protect your money. Here are some things you should consider.

Be careful with online wallets

Online wallets look like online banks. You are trusting someone to store and protect your bitcoins while you have to remember your password. However, you should always choose such services carefully. As of today, no online wallet provides enough insurance and security to be used to store value like a bank. Using security features like two-factor authentication can also increase the security of your acccounts.

Backup your wallet

Bitcoin services and software allow you to backup your wallet. Stored in a safe place, a backup can protect you against computer failures and many human mistakes.

Backup your entire wallet

Your wallet contains many private keys that receive the change of your transactions in order to protect your privacy. If you only have a backup of your visible private keys, you might not be able to recover a great part of your funds with your backup.

Encrypt online backups

Any backup that is stored online is highly vulnerable to theft. Even a computer that is connected to the Internet is vulnerable to malicious software. As such, encrypting any backup that is exposed to the network is a good security practice.

Use many secure locations

Single points of failure are bad for security. If your backup is not dependent of a single location, it is less likely that any bad event will prevent you to recover your wallet. You might also want to consider using different medias like USB keys, papers and CDs.

Make regular backups

You need to backup your wallet on a regular basis to make sure that all recent Bitcoin change addresses and all new Bitcoin addresses you created are included in your backup. However, all applications will be soon using wallets that only need to be backed up once.

Encrypt your wallet

Encrypting your wallet allows you to set a password for anyone trying to withdraw any funds. This helps protect against thieves, though it cannot protect against keylogging hardware or software.

Never forget your password

You should make sure you never forget the password or your funds will be permanently lost. Unlike your bank, there are no password recovery options with Bitcoin. In fact, you should be able to remember your password even after many years without using it. In doubt, you might want to keep a paper copy of your password in a safe place like a vault.

Use a strong password

Any password that contains only letters or recognizable words can be considered very weak and easy to break. A strong password must contain letters, numbers, punctuation marks and must be at least 16 characters long. Still, this should not prevent you to remember your password.

Offline wallet for savings

An offline wallet, also known as cold storage, provides the highest level of security for savings. It involves storing a wallet in a secured place that is not connected to the network. When done properly, it can offer a very good protection against computer vulnerabilities. It is however very important to test this type of setup before you start to use it with serious transactions. Using an offline wallets in conjunction with backups and encryption is also a good practice. Here is an overview of some approaches.

Offline transaction signing

This approach involves having two computers sharing some parts of the same wallet. The first one must be disconnected from any network. It is the only one that holds the entire wallet and is able to sign transactions. The second computer is connected to the network and only have a watching wallet that can only create unsigned transactions. This way, you can securely issue new transactions with the following steps.

Create a new transaction on the online computer and save it on an USB key.
Sign the transaction with the offline computer.
Send the signed transaction with the online computer.

Because the computer that is connected to the network cannot sign transactions, it cannot be used to withdraw any funds if it is compromised. Armory can be used to do offline transaction signature.

Temporary environment

This approach involves loading a wallet inside a temporary environment. For example, it is possible to boot on a Linux live CD, load a light SPV wallet software with its configuration from an USB key and issue a transaction. When a computer is booted from a trusted read-only environment that is only loaded in memory, malicious code is kept away and no trace of your wallet is left on the hard drive. You should however be very careful with the following points.

Losing funds

A temporary environment is the perfect place to lose funds forever. If your wallet is not correctly loaded from an external permanent storage like an USB key, any changes made in your wallet will be lost permanently. Including the new Bitcoin adresses that might have been created during the temporary session to receive the change of your last transactions.

Password mismatch

Booting in a temporary environment might possibly assign a different layout to your keyboard which will later produce different characters then expected. When using encryption, this can cause password mismatches. You might want to type your password on the screen to prevent problems.

Leaving no trace

As long as a storage media like a hard drive is connected to the computer, there is a small risk that some traces of your private keys can remain. You might want to disconnect any hard drive or disable all swap partitions before loading your wallet.

Multi-signature to protect against theft

Bitcoin includes a multi-signature feature that allows a transaction to require the signature of more than one private key to be spent. It is however only usable for technical users but a greater availability for this feature can be expected in the future. Multi-signature can allow an organization to give access to its treasury to its members while only allowing a withdrawal if 3 of 5 members sign the transaction. It can also allow future online wallets to share a multi-signature address with their users, so that a thief would need to compromise both your computer and the online wallet servers in order to steal your funds.

Small amounts on your mobile

A Bitcoin wallet on your phone is like a wallet with cash. If you wouldn't keep a thousand dollar in your pocket, you might want to have the same consideration for your Bitcoin wallet. You can easily add more funds at any time on your mobile. This way, you can combine security with ease of use.

Think about your testament

Your bitcoins can be lost forever if you don't have a backup plan for your peers and family. If the location of your wallets or your passwords are not known by anyone when you are gone, there is no hope that your funds will ever be recovered. Taking a bit of time on these matters can make a huge difference.

Securing your wallet