Attention Bitcoiners! Are You Holding Your Bitcoins Safe Enough?

5 Levels Of Bitcoin Security | Which Level Should YOU Be In?

Do you feel uncomfortable about your bitcoins? Are you always feeling the fear to lose them in the back of your head? This means that you should upgrade your Bitcoin security as soon as possible! 

There are thousands of stories about people losing their bitcoins. Made worse by the astronomical amounts it would be worth years later. Can you imagine it’s you? How would you feel when your precious stack get lost or stolen? 

The good news is that you can take it in your own hand. Bitcoin security can vary between very unsafe and extremely secure, and it’s all available to you. All you have to do is educate yourself and take action. In this article we will describe 5 levels of Bitcoin security. You will learn at which level you should be.

How would you feel if you never have to worry about the safety of your bitcoins? You can watch the Bitcoin price skyrocket with joy, because you don’t have the anxiety increasing while the Bitcoin price goes up. Figure out which level of security you need and set it up. Read further to end you stress today!

How Does a Bitcoin Wallet Work?

To understand Bitcoin security, you have to know how a Bitcoin wallet works. The wallet contains a Random Number Generator to generate a secret number. This number is fully random and only known by you and your wallet software. The number is astronomically big (see image below), so it’s impossible to guess.

The wallet will communicate this number to you in de form of 12 to 24 English words. This is your backup seed. You have to write it down and keep it in a safe place. It will always give you acces to your bitcoins. Even if you delete your wallet.

Public- and private key pair

From the seed the wallet creates a master private key (Xpriv). The Xpriv is used to derive a master public key (Xpub). This derivation is one way. It means that you can’t get the private key from the public key. With the master public key you can create a huge amount of public keys. These can be shared with others. They are used to receive money.

As soon as a payment to the public key arrives, it will be registered on the blockchain. To send these funds you need to sign with your private key. The private key isn’t registered anywhere, only in your wallet and your backup. The private key is really your secret where YOU are responsible for. 

Some important points:

• The seed gives direct acces to your bitcoins. If someone get your seed, they get your bitcoins
• With the seed you can always recover your wallet, store it in a safe place as backup
• The private key is only known by you and your wallet, it isn’t registered anywhere
• If hackers or thieves want to steal your bitcoins, they’ll target your private key

5 levels Of Bitcoin Security

People who just get started with Bitcoin often don’t realise the risks and start at one of the lowest levels of Bitcoin security, they keep it on an exchange or on a hot wallet. Once they learn more and their stack grows, they upgrade to safer solutions. 

We really want to urge you to get at least to the 3rd level as soon as possible. This is the place where most realistic threats are eliminated and only the more theoretical and unlikely threats are left. In other words: This is where you enter the ‘safe’ zone. 

Level 1: Bitcoins on an Exchange

You bought Bitcoin on an exchange and left them there? You think they are experts in keeping your bitcoins safe? Get them off today! The history of Bitcoin is full of exchange hacks, rehypothecation (fractional reserve) and insolvencies. 

You are not only putting your bitcoins at risk, you don’t even know whether you own real Bitcoin. The only way to be sure you don’t have ‘paper bitcoin’ is to withdrawal. Only if the coins are send to your wallet, you can verify that they are real. Not your keys, not your coins!

Level 2: Bitcoins on a Hot Wallet

A hot wallet is a Bitcoin wallet that you can download for free on your phone or computer. It’s a great step in the right direction. At least you hold your own keys now! The problem with hot wallets is that your keys are living on an online device. Directly connected to the internet.

If hackers or malware manage to enter your device, they can steal your private key. As long as you use a hot wallet you have to accept that there is a small chance that you wake up and your wallet is suddenly empty. 

The general advice is to only use hot wallets to bring with you for regular payments or to get started with small amounts. You should see a hot wallet as your physical cash wallet. Don’t put too much money into it. You might lose it!

Level 3: Bitcoins on a Hardware Wallet

If you are an ordinary bitcoiner and use a high quality and trusted hardware wallet you are generally fine. There are still some theoretical risks that can become reality if you are a target. Or in the unfortunate situation where your house floods or burns down.

However, If you store your backup seed securely and don’t fall for phishing attacks the chance that your wallet is suddenly empty is extremely low to zero. How to not fall for phishing attacks? Never give your seed to anyone!

Level 4: A Hardware Wallet with Strong Passphrase

If you want to protect both your hardware wallet and your seed against theft, you can set a strong passphrase. A passphrase can be set with all devices on our site. It adds an extra word to the backup seed, which creates a brand new public- and private key pair that is only visible with the passphrase. 

If the device or the seed get stolen, the thief won’t see the bitcoins if he doesn’t know the passphrase. This is the reason why this feature is also called a ‘hidden wallet’. BEWARE: The wallet will also be hidden for you when you lose your passphrase! Be 100% sure to never lose or forget it!

Level 5: Multisignature with Hardware Wallets

The ultimate security level is multisignature. This is a Bitcoin native method to create one Bitcoin address with multiple hardware wallets with all their own seed. These seeds can be distributed over different locations to eliminate single points of failure.

When setting up the multisig address you can set a threshold. This means that you set the amount of devices that must sign to make a transaction. Because this can be set lower than the total amount of devices, you can loose some devices without losing control over your bitcoins!

Multisignature is often used by OG’s, corporations and custody platforms because it gives the ultimate safety and protects against almost all possible attacks.

At Which Level Should You Be?

When should you upgrade to a higher security level? If you are at level 1 or 2 and you can afford a hardware wallet – Immediately! From level 3 you should upgrade if your Bitcoin wealth grows. 

Some people measure in dollar amounts where you should upgrade, but value is subjective. ‘A lot of money’ doesn’t mean the same for everyone. This is how we would approach it:

The most important thing is to listen to your own feeling. Do you feel anxious or stressed about your Bitcoin holding? Upgrade! Your feelings are more important than the table above. You shouldn’t live in stress about your bitcoins, but enjoy your growing freedom and wealth!

Do you want to eliminate your stress and upgrade your Bitcoin security? Click the orange button below and compare the best hardware wallets that support passphrases and multisig!