Although Bitcoin security is one of the most discussed topics in the world of cryptocurrency, there are still those who struggle with it.
Bitcoin is the stuff of controversy after all, and it can be quite challenging to pick out what’s right from what’s false.
As such we’ve come up with a resource that can provide answers to your security questions in the simplest way possible with a focus on the Bitcoin wallet.
Before we jump into the complex matters of security, we should first deal with the fundamentals, wouldn’t you agree?
What is the Bitcoin wallet?
For the sake of the beginners, the Bitcoin wallet is pretty much your Bitcoin account. It is a digital record of the Bitcoin in your possession since Bitcoin doesn’t exist physically.
More to the point, the Bitcoin wallet records your Bitcoin on the Blockchain and creates a separate log of your transactions for personal use.
Each wallet has two keys that you must know.
The Public Key ties the Bitcoin address to the wallet, particularly the Private Key.
Additionally, the Public Key is necessary for the creation of the Bitcoin address. It is false that the Public Key and the Bitcoin address are the same.
It is possible for a single wallet to have multiple Bitcoin addresses while each wallet can only have one Public Key.
People send you Bitcoin thanks to the Bitcoin address.
Aside from the Public Key, a wallet also has a Private Key, which is responsible for recording your Bitcoin to the Blockchain.
The Private Key should not be confused with the password or passphrase. You can send Bitcoin thanks to the Private Key although the key remains secret during the transaction.
If someone decodes your Private Key, they can move Bitcoin from your wallet to theirs without your knowledge or approval, which is why it is essential to protect it at all costs.
Having understood a little about the components and functions of the Bitcoin wallet, the next question we should explore is why you should use Bitcoin? What makes it better than all other currency options?
Why you should use Bitcoin
The Blockchain contains a record of all the Bitcoin in existence going so far as to show a public record of all the transactions.
Essentially, all you need to access all these records is a Blockchain explorer. Because everything is public record, Bitcoin allows its users to enjoy unrivaled transparency.
As if publicizing the records isn’t enough, the Blockchain also guarantees that the records are incorruptible. For clarity, you should know that it is possible to hack into the Blockchain.
However, considering the scale of the Bitcoin Blockchain and the dense layers of encryption covering every single transaction, it is unrealistic and unreasonable to attempt a hack of the Blockchain.
For this reason, the Blockchain is tamperproof, which also means that it is fraud-free since you can neither create nor delete the records.
Secure and anonymous
To use most other currencies, particularly Fiat currencies, your real identity needs to be on the record. However, when it comes to Bitcoin, your identity is not necessary.
To that effect, most people use pseudo-identities. Additionally, no individual or government can lay claim to Bitcoin, meaning that the Bitcoin you own is unregulated personal property.
But why should anyone be excited about such a high level of privacy, security, and anonymity?
If you are familiar with the Snowden Leaks, then you understand the necessity of privacy and anonymity.
Governments are relentlessly and most times illegally following your every move, and since money is needed for everything, there’s practically no easier way to keep tabs on you.
That is why the anonymity granted by Bitcoin is so invaluable.
However, this raises some troubling questions. Is Bitcoin secure and anonymous or are there loopholes?
And if Bitcoin anonymity and security aren’t absolute, are there ways to make them so?
The depth of Bitcoin security and anonymity
If it is possible to hack into the Blockchain, then how can one be assured of security or anonymity?
The truth is even if a major government had the intent to hack into the Blockchain, they would have to deal with more than the encryptions.
There exist plenty of safeguards in place such as checksums, which guarantee the security of the Blockchain.
However, there’s a whole other side of Bitcoin that is not as secure or as anonymous as one would expect, and that is the Bitcoin wallet.
The Bitcoin wallet is the most significant security risk for Bitcoin users, especially regarding privacy and anonymity.
Although they are correlated, the Blockchain and Bitcoin wallet is essentially two different worlds. Technically, the Bitcoin wallet is a system that allows us to interact with the Blockchain and manage Bitcoin.
However, since they share a correlation, the shortcomings of the Bitcoin wallet have an impact on the overall security and anonymity of Bitcoin. So, what are these shortcomings?
Shortcomings of the Bitcoin wallet
The Private Key
The Private Key bears the weight of the Bitcoin wallet, which is why it is its most significant weakness.
Look at it this way; the Private Key is an irreplaceable and unrecoverable string of characters without which you cannot use the Bitcoin in your possession.
Moreover, since it enables the flow of Bitcoin from your account, if someone else gained access to the key, your wallet could be emptied.
The Bitcoin address is traceable
Since the Blockchain contains a record of every transaction, it is possible to notice correlations by tracking patterns of inputs and outputs, which is how hackers single out their potential targets.
That holds even if you use multiple addresses.
Furthermore, there could be a link between your IP address and your Bitcoin address. Each time you send data over a network connection, traces remain in servers, and with repeated usage, patterns emerge.
The threat goes even further when you consider the possibility that your real identity could be linked to your Bitcoin address. If you’re not careful with your transactions, you may unknowingly link your real identity to your Bitcoin address.
For instance, at a coin exchange, while converting your Bitcoin to other forms of currency, you might use an account that’s linked to your credit or debit card, which automatically exposes your identity.
The same applies to business websites and other places where you may post your Bitcoin address for one reason or the other. Seeing how easily your identity could be exposed should answer some of your questions on how you could be de-anonymized while using Bitcoin.
The wallet is hackable
Unlike the Blockchain, it is rather easy to hack into a Bitcoin wallet. For starters, although most Bitcoin wallets have encryption, it is turned off by default.
Unfortunately, most Bitcoin users don’t know that, and they continue using the wallet while under the assumption that the encryption is functional. Aside from that, since Bitcoin wallets are designed and managed by individuals for the sake of profit, there is the possibility of a Bitcoin wallet having a backdoor.
How then should one overcome these and other shortcomings of the Bitcoin wallet?
Ways to secure your Bitcoin wallet
Use cybersecurity tools
As far as cybersecurity tools are concerned, since there isn’t a single one that can handle all your security needs, you need to rely on several.
Even so, there’s a profound difference between using several cybersecurity tools and using multiple cybersecurity devices to solve a single problem.
The focus here lies on the latter.
The next issue becomes coupling two or more different devices to serve the same functions.
Of course, you should consider the relatability of the tools and whether they can even be used for a similar purpose. Beyond that, you should also consider the arrangement of the devices and how to use that to achieve the best result.
Take, for instance, the coupling of VPN and Tor.
A VPN’s strengths lie in privacy and network security.
More to the point, a VPN hides your real IP address and network traffic behind layers of encryption and assigns a different IP address to your device.
Thus, anyone that looks only sees the IP address assigned by the VPN server.
Unfortunately, that means that a VPN lacks in anonymity since the IP is identifiable.
Tor’s strength lies in anonymity. The encrypted network traffic passes through multiple nodes.
The setup of the nodes is such that only the IP address of the previous and next node is identifiable.
Unfortunately, the entry node can identify your real IP and data has to be decoded at the exit node, which defeats the purpose of encryption.
Used independently, you have better security and privacy with a VPN than with Tor. However, it is possible to leverage the strengths of both and eliminate the weaknesses by coupling the two.
Of course, after considering the arrangement, it is more beneficial to use Tor over VPN as opposed to VPN over Tor.
Hide your transactions
Since there is the possibility of de-anonymizing through your transactions, it is advisable to hide them.
Since there are different ways of obscuring your transactions, it is up to you to decide, which is more convenient. We recommend using Coinjoin, which joins together multiple transactions into one, making it impossible to figure out the correlations.
Alternatively, you can hide your transactions by not using Bitcoin.
In this case, you should use Altcoins, where you change your Bitcoin into other cryptocurrencies or Fiat currency, but this carries the risk of exposure at the coin exchange. Incidentally, you could also use an individual exchange where you carry out all your transactions with someone you trust.
Secure the Private Key
We’ve emphasized the importance of the Private Key and how much of a risk it is. So, it should follow that you need to secure your Private Key to safeguard your wallet.
Where possible, you should memorize your Private Key and not create any records of the same. However, that is not possible for everyone, so the challenge is to find a way of safely storing a copy of the key.
It is advisable to create and encrypt a digital copy of the key. Since you can utilize the convenience of the Copy and Paste function, you avoid the risk of keyloggers intercepting your private key.
Such a threat is common in situations where you have to type out the Private Key when needed. Moreover, with a digital copy, you can hide it in an encrypted vault to increase the level of protection.
Encrypt and back up the wallet
If your wallet offers you the option of encryption, then you should do so promptly.
Encryption provides an extra layer of protection for your wallet, which works at least as a deterrent against hackers. Aside from the wallet’s native encryption, you should also find ways to increase the security. For instance, you should hide it in an encrypted vault.
However, before hiding the wallet, you should create a backup of the wallet. Backups are necessary for instances when you lose the wallet in unforeseen circumstances such as the theft of your device.
Use offline wallets
There are different types of Bitcoin wallets, but none are as safe as offline wallets.
Given the option, you should choose offline wallets purely for security.
Offline wallets exist as two independent systems. The first is a device, that is usually air-gapped or somehow cut off from the internet.
The device houses the main body of the wallet and only connects to the internet when necessary, which is a measure that protects it from hacking.
The second system is an interface that’s used during transactions to connect to the main body. Unfortunately, they are often targets for theft, so it is advisable to store it in a vault or safe.
Safeguarding your Bitcoin wallet doubles as reinforcing Bitcoin security. Done right, it could make your Bitcoin completely secure, private and anonymous.
For that to happen, you need to increase your knowledge and understanding of Bitcoin security and cybersecurity in general.
A wealth of information is your best arsenal against cyber attacks.
For instance, you need to understand the techniques used by attackers and how to counter them effectively.
Besides that, you also need to keep your information current since attacks are always evolving.