Anyone who has purchased Bitcoin knows the issue: “How do I best secure my bitcoins?” And it is a serious issue indeed, because many people have experienced losses – either because of their own lack of care or due to some form of theft.
The issue and associated risk can be thought of in another way, as part of the new paradigm that is “being your own bank”. For that’s what Bitcoin is, a completely new financial architecture where you can literally be your own bank. But with such freedom comes a great deal of responsibility.
To transact and hold Bitcoin you need a “wallet” – which is the software or service that connects you to the blockchain and registers/secures your ownership of bitcoins.
There are many different types of wallets, and during this past year there have been many improvements to their security. Breaking such choice down to basics, you have web-based wallets like Blockchain.info – which give you the security of holding your own keys, while making it relatively easy to operate. You have desktop wallets like Electrum, which have gained a good reputation. And of course you have smart phone wallets like Bread Wallet, which open up new possibilities for convenience.
But wallets are divided by other features as well – like whether it operates like a bank, a trusted third party. Services like Coinbase and Circle fall into this category, which require users to provide full ID verification and comply with KYC rules. Such services are clearly attractive to those who feel intimidated by the responsibility of “being their own bank” – but such comes at a cost.
The issue of security is also a variable. You have the obvious levels like two-factor authorisation, using smartphone apps like Google Authenticator or Authy, which generate a one time secondary passphrase on your phone, to be used to confirm login to your account.
Then you have what is known as “multi-signature” security, which requires typically three different sources of authorisation for a transaction.
But the nearest thing to “total” security is what’s termed “offline” storage. This means the wallet or private key is held offline, away from key-logging or other viral security risks. The simplest form of offline security is a paper wallet. This is nothing more than the process of printing your pubic and private keys on to a piece of paper, then securing such paper in a safe place.
While I can see how this works, I’ve never been that impressed with the process, as it comes with significant downsides – like not being able to easily access or transact with such bitcoins.
Up until now, I have maintained my primary secure wallet on a separate USB drive offline – one which holds a full MacOS operating system and just one piece of software – an Electrum wallet.
But just recently I’ve started experimenting with a new form of offline security, the Trezor hardware wallet. I actually ordered this at the time of their original crowdfunding project, paying 1 BTC for it (a bit expensive in light of today’s pricing, but hey, all in a good cause!). But it sat in my drawer for a long time, without me paying too much attention to it.
Anyway, a few days ago I decided to change all that by taking a serious interest in it and moving funds around with it. And I must say, I like what I see.
Basically, the Trezor is a small offline device that is attached to your computer via USB in order to authorise/sign transactions. What makes it secure is that while it does connect to your computer, the process of transaction signing and private key storage is completely walled off from the internet – and all possible dangers lurking out there.
It’s remarkably easy to use. It works in conjunction with a dedicated web-based wallet called MyTrezor, which is no more than a visual display of your account. To make this wallet usable, you simply plug in the Trezor – which has been paired with this wallet when it was first configured.
Receiving funds is as simple as copying the receiving address and giving it to whoever wants to send funds to you. While sending funds requires interaction with the Trezor device itself.
It works like this: You bring up the “send” screen as per usual, enter in the Bitcoin address of the recipient, the amount of Bitcoin, and “send”. At that point you are asked to authorise the payment by entering your PIN, which you do by using a table displayed on the Trezor device itself, as it has a small screen.
Providing the PIN in this way enables Trezor to sign the transaction from its offline location and that’s it – the bitcoins are on their way.
All in all, I think Trezor is an excellent investment for anyone holding a reasonable amount of bitcoins, and who wants the piece of mind that comes with not only being your own bank, but in having a device that maximises your security.
At $119, some people may balk at the price, and if that is so, there is a new device on the market, one that works in a similar way. It’s a preprogrammed USB stick called the Ledger Wallet, which is priced at €29.00.
Wallets have come a long way during 2014, and I’m sure they will get even better during 2015.
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