Hardware wallets, mobile wallets, and even online wallets often use a seed phrase to back up your Bitcoin (opens in new tab). These are usually 12-24 single words that, in the correct sequence, can be used to restore your wallet if your device breaks or is lost. However, everyone who has access to your seed phrase will be able to also steal your Bitcoin. It is important to store the seed phrase securely. Plenty of options exist.
Write them on a piece of paper
If you are mostly worried about hackers, you can easily protect yourself by writing the seed on a piece of paper. Don’t print them out or keep a copy of them on any electronic device. You can keep the paper where you store your other valuables or sensitive documents, such as a secret compartment, a safe, or a safety deposit box at a bank. What’s not electronic cant be hacked, right?
Put them in your password manager
If you’re worried more about burglars or the government, a password manager is probably a safer place than your home or a safety deposit box, which the police can easily, and legally, get access to. If you are familiar with PGP, it’s also a great option to safely backup any files.
Divide and distribute!
You might be worried about a mix of attackers who could get hold of your Bitcoin wallet seed and steal your money. This could include burglars, hackers, the government, or even loss by fire or flooding. To defend against everything, you can cleverly distribute your seed.
- Divide your seed equally into three parts of four words each. (If your seed has 13 words, make sure that the third paper includes five words.)
- Write each block of four words on two pieces of paper.
- Place the six pieces of papers in three different locations in a way that if each location is lost, you are still able to recover the full seed.
- If If an attacker finds any of the three locations, they are not able to steal your Bitcoin.
Multi-signature wallets and how to use them
One of the great features of blockchain-based systems is the use of smart contracts. Smart contracts are rules enforced by the network, in particular the network nodes, which anybody can run on their computer.
In a broader sense, Bitcoin transactions are a kind of smart contract. A Bitcoin can only be spent by its owner as identified through their public key hash, e.g. their Bitcoin address.
A more complicated form of smart contracts implemented on the Bitcoin blockchain are multi-signature addresses. These addresses, which start with 3 instead of 1, have “only” been around since 2012, three years after Bitcoin’s inception.
Basic functionality of a multi-signature wallet
When creating a multi-signature wallet (“multi-sig wallet”), you can define how many signatures there should be in total, and how many of them should be required to make a transaction.
The most commonly created wallet-type is a 2-3 wallet, meaning there are a total of three signatures, of which two are needed to sign a transaction.
The functionality is in practice similar to bank accounts that require multiple signatories. But because the blockchain is built not on trust, but on cryptography and consensus, it is impossible to cheat, and no central party can arbitrarily seize your funds.