This is one article of many dedicated to help you along your journey to becoming a Sovereign individual for all things Bitcoin-related. Bitcoin’s value proposition has been discussed and vulgarized many times over so this won’t be the subject of this series. Instead, what we provide are the means to actually fully leverage what Bitcoin has to offer in terms of censorship-resistance, trustlesness, confiscation-resistance and verifiability.
We begin this series with the security basics. You can only truly transact bitcoins while benefiting from the properties mentioned above if they are under your control and only yours. This means that you must detain the private key tied to the funds displayed in the Bitcoin public address. Many alternatives exist, such as software wallets. You can see our analysis and recommendations here. However, this is not the most secure option to store your funds. If you only have a small amount and are just looking to dip your toes, this could be a temporary solution.
A secure method to protect your keys first entails generating them using enough entropy. Read more about public key encryption in Bitcoin here. You could do this yourself, but unless you are well-versed in cryptography, it is not recommended. The easiest way to do so would be through the intermediary of a hardware wallet. Hardware wallets are really efficient and secure considering their low cost. However, if you have a significant amount of bitcoin you should consider additional security measures in order to be certain your funds are safe. If this is the case, drop us a line and we’d be more than happy to help figure out the best solution for you.
Hardware wallets are more secure than other methods to store your bitcoins since the private keys never leave the devices and are not transmitted to other computers. This means that both your private and public keys are handled separately with different sets of microprocessing chips. Most of the hardware wallets use a Secure Element, a special type of microprocessor. They are used in a variety of different devices that implicate payments, authentication and digital signatures. Unlike software wallets, that are more general-purpose, hardware wallets only serve one function: to hold your bitcoins securely.
Hardware wallets only have one purpose, and it’s to secure your bitcoins. The ones we talk about here have been constructed with limited interfaces and without any sort of general-purpose software. This is to limit the surfaces of attack and provide you with a reliable form of security for your bitcoins.
Most hardware wallets are open-source. This means the community can test them out and find malware, bugs and irregularities that may compromise the user’s security. On the other hand, open-source hardware wallets are vulnerable to having their internal logic reverse engineered and are easier to break into if they are physically accessible.
Since your keys never leave the hardware wallets, it is much more secure than holding your bitcoins on a mobile wallet and vastly more secure than keeping funds on an exchange.
There are multiple hardware wallets in the market, but this guide will solely focus on three of them: the Trezor (models One and T), the Ledger Nano S and the Coldcard.
These companies have been working in the industry for quite some time now and have demonstrated a certain amount of trustworthiness since they have been scrutinized by others in the field. The hardware wallets models mentioned above are a good starting point to choose from. Any other new hardware wallet product launched by an unknown company must first be thoroughly verified by independent experts, no matter how appealing their new device may look.
Here’s an overview of the wallets we will be discussing throughout our guides :
Ledger and Trezor are by far the most popular brands on the market which means many users reading this article might have them. The Coldcard is the only credible hardware wallet that is fully air-gapped. This means the device never connects directly to a computer, since it can communicate through a microSD card. This helps avoid any link between your device and potential threats coming from an Internet connection. It is also the only credible hardware wallet that allows the user to generate their own entropy when creating your seed phrase thanks to a dice roll function.
The three models support multisignature schemes, they offer good privacy (except for the Ledger) and are compatible with Electrum Wallet, a fully open-source software.
They are physical devices which have the purpose of generating private keys and storing them on the same device. The private key never leaves the device but still allows for signatures and public keys to be shared with the adequate permissions.
When initializing your device, it will generate a 256-bit seed. This seed is usually deterministic, meaning that your wallet will contain private keys that are all derived from a common seed through the use of a one-way hash function. The BIP-32 standard, also known as a HD wallet, contains keys derived in a tree structure. A parent key can derive several children keys, which then can derive a sequence of other children keys. Thanks to this standard, you can create multiple public keys without having access to the corresponding private keys, so you can issue a different public key for each transaction, improving your security and privacy.
The BIP-39 standard allows you to have a standardized way of displaying your private keys since, instead of having a string of random letters and numbers, you have a sequence of English words, selected from 2048 possible words, that your wallet displays for you to record with a pen and paper. This is crucially important since it is a mnemonic representation of your private keys. This can be used to recreate your seed and then recreate the wallet and all of its derived keys.
It is not possible to guess or randomly generate these 24 words in their specific order. There are 256 bits of entropy, and each bit being either a 0 or a 1, you have 2^256 possibilities, or 115,792,089,237,316,195,423,570,985,008,687,907,853,269,984,665,640,564,039,457,584,007,913,129,639,936 possible combinations for the 24 words. This is like correctly guessing the position of an atom selected from the visible universe.
The BIP-39 standard also allows for an optional passphrase. When used, a stretching function produces a different seed from the same mnemonic. This means that different passphrases lead to different seeds, so you can have a vast set of possible wallets. A passphrase serves to improve your security, since the mnemonic phrase on its own is useless. Here is an illustration of the effect various passphrase lengths would have on the cost of an attacker brute forcing their way into your device.
It also allows you to have some sort of backup wallet which you could use under duress. Since using a passphrase leads to a different seed, you could redirect an attacker to a wallet containing a smaller amount of funds.
It is important to note that if the passphrase is lost or forgotten, so will the funds tied to that seed. You should also avoid storing your passphrase in the same location as your seed since it would defeat the purpose of having one in the first place.
The setup of a hardware wallet is composed of the following steps :
The Ledger Nano S & the Coldcard use what is called a “Secure Element” in the device which is a microchip that acts like a vault and is considered a very secure form of technology. This technology has one major inconvenience, which is that it’s not fully open-source, so to a certain extent there are risks there, even though they are extremely limited.
The Ledger Nano S also has a major privacy issue which doesn’t affect the other devices. By default, all the hardware wallets have privacy issues because they connect to external servers. This can be fixed by using Electrum and connecting it to your own node. However, even though this can be done on Ledger as well, it requires installing a Bitcoin App inside the device and this can only be installed through their software that links to their servers and exposes your device identity to a certain extent.
Both Trezor models available are fully open-source, which is a positive point, since anyone can verify their code and could install everything from source. However, since the code is open and available for anyone to see, it opens a vulnerability that the devices with a “Secure Element” aren’t affected with.
It’s technically possible to extract a seed phrase (24 words) from a Trezor, without having the PIN. By having physical access to the device and connecting it to a computer and running decrypting software on it, one could do so. The decryption can be done under 5 minutes and requires only $100 worth of equipment. This is technically possible but requires access to the hacking software or advanced technical expertise to create the software, which is hard to come by. This is highly unlikely to happen and is unheard of having happened in real life scenarios. You can read more about this here. However, implementing a passphrase is a way to protect against this kind of attack.
The timeless saying in Bitcoin, “Not Your Keys, Not Your Coins”, will ring forever true. The first step to Sovereignty is Ownership. Being in control of your keys is of paramount importance since it is the only way you can truly and freely express yourself in the language that is money. The sooner you begin by taking control of what is yours, the more immediate the liberation from coercive forces and artificial value.
The gratification that comes from holding an incredibly scarce asset begins with a hardware wallet.
The privilege and responsibility of being your own bank - your own Institution, will weigh heavily upon your shoulders, and the time and energy must be taken to do so properly. Build strong so you can see clear.
At Veriphi, we take Bitcoin security and ownership extremely seriously. We want to help empower others by assisting them with the right tools and knowledge so they can embark on the journey to sovereignty through Bitcoin. Take the first step with us and schedule a call with us. We can evaluate your current setup and plan to reach your security goals.