Be careful with online services
You should be wary of any service designed to hold your money online. When a third party controls your keys, you rely entirely on their security and honesty, and history has shown that exchanges and online wallets can be hacked, fail, or freeze access to funds. Whenever practical, prefer holding your own keys with other types of Bitcoin wallets. If you do use a custodial service, choose it carefully and enable strong multi-factor authentication whenever available. To recognize common threats, see how to avoid Bitcoin scams.
Small amounts for everyday uses
A Bitcoin wallet is like a wallet with cash. If you wouldn't keep a thousand dollars in your pocket, you might want to have the same consideration for your Bitcoin wallet. In general, it is a good practice to keep only small amounts of bitcoins on your computer or mobile device for everyday use and to keep the remaining part of your funds in a safer environment.
Backup your wallet
Stored in a safe place, a backup of your wallet can protect you against computer failures and many human mistakes. It can also allow you to recover your wallet after your mobile or computer was stolen if you keep your wallet encrypted.
Backup your entire wallet
Some wallets manage many private keys behind the scenes. If your backup only covers the keys currently visible to you, you might not be able to recover all of your funds.
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 does not depend on a single location, it is less likely that any single event will prevent you from recovering your wallet. Consider keeping copies in more than one physical place, using durable storage media.
Make regular backups
Depending on your wallet, you may need to back it up regularly so that recently generated change addresses and newly created receiving addresses are included. Most modern wallets are deterministic, meaning that a single backup of the recovery phrase is sufficient to restore all past and future addresses. Check how your wallet handles backups.
Encrypt your wallet
Encrypting your wallet or your smartphone 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 very limited 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 combines length and unpredictability: a password generated by a password manager, or a long passphrase made from randomly chosen words, is much harder to break than a short password. Because strong passwords are harder to remember, take care to store or memorize yours securely.
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. Using an offline wallet 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 has 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 a removable storage device.
- 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. Offline transaction signing allows an offline device to authorize transactions while an online device broadcasts them.
Hardware wallets
Hardware wallets are the best balance between very high security and ease of use. These are little devices that are designed from the root to be a wallet and nothing else. No software can be installed on them, making them very secure against computer vulnerabilities and online thieves. Because they can allow backup, you can recover your funds if you lose the device.
Keep your software up to date
Using the latest version of your Bitcoin software allows you to receive important stability and security fixes. Updates can prevent problems of various severity, include new useful features and help keep your wallet safe. Installing updates for all other software on your computer or mobile is also important to keep your wallet environment safer.
Multi-signature to protect against theft
Bitcoin includes a multi-signature feature that allows a transaction to require multiple independent approvals to be spent. For example, an organization can give its members access to its treasury while only allowing a withdrawal if 3 of 5 members sign the transaction. Individuals can also use multi-signature setups to keep control over their money while preventing a thief from stealing funds by compromising a single device or location.
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.
