Version 2: 9th Novermber 2022
Translations: German 🇩🇪
I have previously discussed WHY it’s important to withdraw your bitcoin from exchanges and hold your own keys. Also in this post. This article explains HOW to improve your bitcoin storage, step by step.
I do think the early steps/levels should not be skipped (except level 1), because there is something to learn from each step. For example, people who go straight to a hardware wallet (level 3), often don’t understand the function of private keys and are confused about restoring wallets, and how transactions work. They are at risk of getting scammed, and not taking care of their seed phrases properly. They may also succumb to the illusion that having a hardware wallet means you can’t lose your bitcoin. They also tend to not understand the purpose of the hardware wallet (to keep your private keys off the computer).
People always start with level 1, and many will hopefully progress to level 2. Below, I explain the multiple steps to eventually get you to level 8.
Take a look, and if you need individual help, it’s available.
Coins on the exchange.
For complete beginners who are unsure what they are doing, not interested to learn, and have no one to help them – they can buy bitcoin from an exchange and let the exchange hold their coins. Hopefully, they will move to level 2 quickly as they accumulate more.
Mobile phone or desktop “hot wallet” (i.e. wallet connected to the internet).
Good exposure for those new to Bitcoin – it helps them appreciate what holding your own bitcoin actually is. Easy to demonstrate a transaction back and forth (the exchange to the wallet, then wallet to exchange). It is often eye-opening for someone new to Bitcoin. Creating, deleting, and restoring a hot wallet is also educational. Keeping small amounts on this wallet is ok.
Even for an experienced user, a mobile hot wallet is useful to have for small payments or demonstrations to new Bitcoiners. The bulk of coins should be in more secure storage (see next levels).
I do recommend understanding how Electrum Desktop Wallet works. It has several idiosyncrasies which turn people off, but once they are understood, it works beautifully and is a very powerful solution. You can learn a lot about Bitcoin using this wallet. I recommend learning it with a small amount of bitcoin before or at the same time as progressing to level 3. Here is a page where I store links to videos I and others have made about Electrum Desktop Wallet. Don’t be scared, take your time and learn this software.
Single key hardware wallet.
This is a comprehensive guide.
I do hope most people get to this level of storage at least. If you understand what you are doing, and follow best practices, your security will be excellent.
In addition to this guide, it would be very useful to look at this guide, and then do the exercise in this publication to give you a thorough appreciation of private keys.
To use your hardware wallet, ideally, you should have a dedicated Bitcoin computer for transactions. Here is a guide to help you with that.
Run your own node, and connect your wallet to your node.
See this article for the 6 reasons you should run your own node.
Note that although a node increases your privacy, to get this benefit, you’ll have to make a brand new wallet that has never connected to a random public node.
Make your own air-gapped computer
…and use it to make your own private key with dice. If that’s too fiddly, at least do it the simplified way which is almost as good. Import the new key into your hardware wallet, instead of letting the hardware wallet make the key for you. Do not trust.
Multisignature wallet, with air-gapped computer made in level 5, with or without hardware wallet(s).
At this stage, you should make your keys with dice, explained in level 5. A multisignature wallet is vastly safer than a single signature wallet. But it is also harder to set up and understand. Doing it wrong can lead to loss of coins! But don’t be put off or scared – begin experimenting, and don’t put in funds until you are very confident. Seek guidance if you need it.
Multisignature wallets have many benefits.
- You can split the STORAGE of your keys to reduce the risk of theft.
- You can also keep the keys separated when SPENDING bitcoin; never bringing the keys in one location, and thus reducing your risk. See how by using partially signed bitcoin transactions (PSBTs)
- You can also split the location, computer, and time for the creation of different keys – if any one key is compromised during its creation, then you are not vulnerable.
Mix your coins to maintain privacy. This is very advanced stuff. I may write more articles on this one day. (Update: here is a detailed guide.) An alternative is to understand the Lightning Network, open channels using your node, and use them to spend bitcoin – the privacy you achieve is sufficient and cheap, and you also help the Lightning Network.
Perhaps it’s wrong to call this level 8, because you should be thinking about this from the beginning: Inheritance planning. But it can be most effectively done if you’ve gone through the previous steps.
Make sure people in your will are able to access your bitcoin if you die. There is no single solution for everyone, it depends on many things.
ParmanVault is my self-custody (or shared-custody) solution that incorporates inheritance planning.
Getting to level 8 is a difficult and long process, but it is extremely fun and satisfying! I hope many people can do this. It will be too great a barrier for some; if that’s you, I can offer help.
Static Lightning Address: firstname.lastname@example.org