Most of you reading this already know, but if not here is some guidance.
Not your keys, Not your coins!!!
– literally every Bitcoin Maxi
You may have heard this phrase, but what does this actually mean?
Bitcoin has a unique ability to allow you to physically take possession of your asset while also having the ability to send it over a communication channel. “Physically” might sound strange with a fully digital asset, however this is the best way to think of it. Just like holding a gold coin in your hand. A gold coin that you can send to a person in the other side of the world, near instantly.
Bitcoin is spent by signing a transaction, not unlike you might have once signed a cheque. Your wallet software performs the signing process by using a Key to create a Digital Signature that will tell the Bitcoin network that you would like to move control of that Bitcoin to another person, or to another wallet you have.
Note that I said “move control”. Bitcoin never really moves anywhere, and does not get stored in your wallet, like a physical coin would. The Keys that allow you to authorize and update who controls that particular Bitcoin do. This might seem like splitting hairs, and for most purposes it is. For this discussion, it is important to understand that Wallets have Keys and those Keys sign authorizations to move control of that Bitcoin to someone else.
Obviously, keeping those Keys safe is critical to keeping your savings secure. If someone else has the Keys, they can control your Bitcoin and take it without your permission.
Most of us will buy Bitcoin using an App or an Exchange service. While they might give the look and feel of a wallet, they have the Keys that will move your Bitcoin. When you want to send to someone else, you are asking them to sign on your behalf. These are called custodial services, because they have custody of your Bitcoin Keys and have full control over moving it. Initially, this doesn’t sound like too much of an issue and the user experience is typically very smooth and easy, however this is not how Bitcoin is best used.
Some issues that arise when thinking about custodial services:
- Do they really have my Bitcoin?
- Are their Keys held safe from hackers?
- Are the owners going to abscond with it all, never to be seen again?
- Are the employees of the company trustworthy?
- Will they grant me permission to send my transaction?
Sounds risky, right? It’s better to not need to trust them with all of your eggs in their basket. Owning your Bitcoin removes the need to trust others.
How to own your Bitcoin
Thankfully, this process is actually quite easy.
- Install a non-custodial Bitcoin wallet
- Follow the set setup procedure, and carefully store the backup information (called a seed phrase)
- Hit Receive to generate a new Bitcoin address
- Go to your custodial App / Exchange and hit Send or Withdraw, and use the address generated above
- See the transaction pop up in your new non-custodial wallet and after about 30 or so minutes it will be confirmed as securely transferred. Done!
But hardware?
Fair question. I haven’t mentioned anything about Hardware “wallets” yet. First, there is one more thing you need to understand.
There are two broad categories of Bitcoin wallets:
- Hot Wallets
- Cold Wallets
Hot Wallets are where the software has the Keys readily available to use. This means that they are super convenient because you can quickly send some Bitcoin. This is most commonly used in mobile app wallets. You should consider keeping about the same value in Hot Wallets as you would have cash in your physical wallet. The Keys are stored on the same device, and easily accessed by the software or by malware or viruses. Because the device is internet-connected, there is risk that the Keys might be compromised. You might also drop your phone in the toilet… just sayin (not a huge issue if you securely stored your seed phrase backup).
Cold Wallets are for savings. They are typically harder to use, and that is intentional. Spending your savings should be hard, especially for people other than you! Cold Wallets separate the actual Keys and the process of signing a transaction, from the construction of the transaction and sending it out to the Bitcoin network. The part responsible for signing is never connected to the internet, and therefore less likely to have the Keys extracted by those attempting to steal your dosh.
For most people, Hardware Wallets are the best way to setup a Cold Wallet. Hardware Wallets are better described as “Signing Devices”, because they work in conjunction with Wallet software.
- The Software will construct the transaction, then
- The Hardware Device will sign it, then
- The Software will send it to the Network.
The hardware is a separate device to whatever is running the internet-connected Wallet software. Some Hardware Wallets take this separation to the extreme, and use QR codes or SD Cards to transfer the information. This is known as being “air-gapped” from the internet.
So which one?
Like everything in life, there are compromises. Every Hardware Wallet has it’s own set of tradeoffs. Understanding those tradeoffs is something for you to learn, and a lot of these are nuanced and deeply technical.
For beginner Bitcoiners, who want keep more than “walking around money” safe, Hardware Wallets provide a very good way of doing this. Once you start getting beyond a few months rent, or a cheap car worth, you need to start doing some more learning, and make sure the tradeoffs are understood.
I’m not going to make specific recommendations here, however I own and use all of the Hardware devices that I make cases for. Any of those are a great start, just understand that some are easy “beginner” devices and some are hard core cypherpunk options.
For now, here are some tips:
- ALWAYS buy a Hardware Wallet directly from the Manufacturer (never eBay or Amazon or use one “gifted” to you).
- Look for YouTube tutorials that explain how to use them before you buy. Check out @BTCSessions for quality tutorials.
- When you setup any Wallet, you will need to record a 12 or 24 word “seed phrase”. This is like your master password and can be used to recover your wallet, if a disaster happens. KEEP IT SAFE. KEEP IT OFFLINE. Do not ever type it into your computer / phone, or store it on iCloud / Google Drive. Write it with a pen on paper and store it where no one will see it and risk of damage or loss is as low as possible. Also consider stamping it into steel; Paper burns, rots, fades, and disintegrates over time.
- Practice using the Hardware and Wallet software. Send only a small amount in and out and get familiar with how to use it.
- Practice how to restore from your backup seed phrase with only a small amount in the wallet. Learn this BEFORE you need to recover from a disaster!
Summary
- Buying and leaving your Bitcoin on an Exchange is bad. Own it!
- Research Hardware Wallet options before buying.
- Buy direct. Always.
- Keep your backup seed phrase OFFLINE and PRIVATE and SAFE.
- Practice with a small amount of Bitcoin before storing your life savings.
Best of luck to you! Bitcoin is fun, mind-shifting, and very different to anything you have experienced before, and in surprising ways you’d never imagine. Stick with it and you’ll find out for yourself.