Securing your wallet — knowledge base

Security in the techno-savvy world is very complex. It seems that nearly every day there’s another report of a major hacking or ransomware violation. And as the number of hacks increases, consumer desires for security increase as well.

The promise of blockchain technology and the power of cryptocurrencies is their security. Blockchain makes it impossible for someone to hack into your cryptocurrency and steal it since blockchain is completely secure through the distributed ledger that creates the chain.

While blockchain is the model of internet security, that doesn’t produce a fully secure system for users. There’s a surprising security risk regarding your digital wallet, and few cryptocurrency investors are aware of it.

Only As Secure As

The threat to your digital wallet is not through the blockchain but through the wallet or exchange provider. Information can be tracked and stored at the provider level, including your personal key, and can then be accessed by hackers in order to access your wallet without your permission. Because of the competition for digital wallet usage is growing, companies are seeking more information about their customers. Whether through information provided or through tracking software, companies are learning about their customers more than ever before.

Wallet providers are tracking the information that you provide them. When you sign up for digital wallets with providers or exchanges, the company requires a certain level of information. Email address and name are all included in the data collected. While developers at wallet companies are kept under lock and key for security, the marketing information is not, and therefore can be accessed. However, marketing managers are constantly seeking to track the online activity of their users. Search history, emails, and web activity all provide valuable information about what customers want and what would best be marketed to them.

Therefore, the information that can be easily tracked by your provider includes web activity, searches, and even keystrokes. What’s more, some software used by marketing companies today includes services that allow the researcher to actually see what the user sees. This means that secure private keys generated by wallet holders may not be such secure after all.

Wallet security can be broken down into two independent goals:

In the case that your current wallet hasn’t been protected adequately (e.g. put online with a weaker password):

Description

The following tips can be used as a security guide for new cryptocurrency aficionados:

Cold wallets

If your computer or phone gets stolen or hacked, only a small amount of coins in your everyday wallet will be taken from you. The rest are secured in your super-secret vault (cold storage) that is away from the prying hackers of the web. This results in minimal damage for you and even if your everyday wallet gets robbed, you can go on your merry way. You know, by getting more bitcoins and the like.

A cold wallet generates and stores private wallet keys offline on a clean air-gapped computer. Unsigned transactions are generated online, transferred offline for verification and signing, and the signed transaction is transferred online to be transmitted to the Bitcoin network.

This allows funds to be managed offline in Cold storage. Used correctly a cold wallet is protected against online threats, such as viruses and hackers. Cold wallets are similar to hardware wallets, except that a general-purpose computing device is used instead of a special purpose peripheral.

Securing on paper wallet

A bitcoin paper wallet can be best described as a document containing all the data necessary to generate private keys, effectively forming a “wallet of private keys.” But that is not its only purpose, because a paper wallet can also be used to store bitcoins safely and securely, in which case the paper itself also includes public keys and redeemable codes.

The main purpose of a redeemable code is to use it as a means of funding and “redeeming” funds associated with a certain bitcoin wallet address. However, it is important to note that paper wallets should only be used once because a paper wallet is not a bitcoin wallet intended for daily use.

Paper wallets can serve many purposes. A bitcoin paper wallet makes for a great gift when introducing friends, family, and loved ones to bitcoin. Or you can give someone a paper wallet as a tip, to show your appreciation for something the other person has done. Redeeming a paper wallet as a gift or tip requires recipients to have a bitcoin wallet installed on their computer or mobile device, through which they can import the private key associated with that address.

Hardware wallets

Hardware wallets are special-purpose security-hardened devices for storing Bitcoins on a peripheral that is trusted to generate wallet keys, verify and sign transactions.

A hardware wallet typically holds the private keys in its internal storage and is designed to be malware resistant. The device signs the transactions internally and only transmits the signed transactions to the computer. The separation of the private keys from the vulnerable environment allows the user to spend bitcoins on a compromised computer with reduced risk.

Multisignature wallets

A multisignature wallet is one where multiple private keys are required to move the bitcoins instead of a single key. These private keys can be spread across multiple machines with the assumption that malware and hackers are unlikely to simultaneously infect your laptop, desktop, and smartphone. The multisig wallet can be of the m-of-n-type where any m private keys out of a possible n are required to move the money. For example, a 2-of-3 multisig wallet might have your private keys spread across a laptop, smartphone and paper backup; any two of those are required to move the money but the loss of anyone does not result in loss of money.

Multisignature wallets have the advantage of being cheaper than hardware wallets since they are implemented in software and can be downloaded for free, as well as being convenient as all keys are online and the wallet user interfaces are typically good. Wallet software Electrum, Freewallet and Armory can create multisig wallets.

Hot wallets: minimizing risks

A computer connected to the internet that stores your Bitcoins is often referred to as a “hot wallet”. Though there are several things that can be done to lower the threat, hot wallets are unavoidably risky.

Modern operating systems are highly complex, leading to a large area of attack. They also constantly leak information without the user’s knowledge or consent. It is very hard to ensure your wallet is secure on a computer connected to the internet.

For low-value wallets, the risk may be acceptable but it is recommended not to keep more in a hot wallet than you can afford to lose. For sums beyond that, use one of the more secure methods above (e.g.,.

To minimize risk, take care that the system is free of malware, viruses, keyloggers, remote access tools, and other tools that may be used to make remote copies of your wallet, Bitcoin-related passwords, or Bitcoin private keys. When your computer is compromised, the precautions taken below may provide additional protection.

Securing the Bitcoin-Qt or bitcoind wallet

Bitcoin transactions send Bitcoins to a specific public key. A Bitcoin address is an encoded hash of a public key. In order to use received Bitcoins, you need to have the private key matching the public key you received with. This is sort of like a super long password associated with an account (the account is the public key). Your Bitcoin wallet contains all of the private keys necessary for spending your received transactions. If you delete your wallet without a backup, then you no longer have the authorization information necessary to claim your coins, and the coins associated with those keys are lost forever.

The wallet contains a pool of queued keys. By default, there are 100 keys in the key pool. The size of the pool is configurable using the “-key pool” command-line argument. When you need an address for whatever reason (send, “new address”, generation, etc.), the key is not actually generated freshly but taken from this pool. A brand new address is generated to fill the pool back to 100. So when a backup is first created, it has all of your old keys plus 100 unused keys. After sending a transaction, it has 99 unused keys. After a total of 100 new-key actions, you will start using keys that are not in your backup. Since the backup does not have the private keys necessary for authorizing spends of these coins, restoring from the old backup will cause you to lose Bitcoins.

Creating a new address generates a new pair of public and private keys, which are added to your wallet. Each key pair is mostly random numbers, so they cannot be known prior to generation. If you backup your wallet and then create more than 100 new addresses, the keypair associated with the newest addresses will not be in the old wallet because the new keypairs are only known after creating them. Any coins received at these addresses will be lost if you restore from the backup.

The situation is made somewhat more confusing because the receiving addresses shown in the UI are not the only keys in your wallet. Each Bitcoin generation is given a new public key, and, more importantly, each sent transaction also sends some number of Bitcoins back to yourself at a new key. When sending Bitcoins to anyone, you generate a new keypair for yourself and simultaneously send Bitcoins to your new public key and the actual recipient’s public key. This is an anonymity feature — it makes tracking Bitcoin transactions much more difficult.

So if you create a backup, and then do more than 100 things that cause a new key to be used, and then restore from the backup, some Bitcoins will be lost. Bitcoin has not deleted any keys (keys are never deleted) — it has created a new key that is not in your old backup and then sent Bitcoins to it. A backup is therefore recommended roughly every 50 transactions (or address creations) just to be safe.

Importance of security updates

No software is perfect, and from time to time there may be security vulnerabilities found in your Bitcoin client as well. Be sure you keep your client updated with the latest bug fixes, especially when a new vulnerability is discovered. We maintain a list a known vulnerability on this wiki — you can watch that page to get updates. Note that you don’t need to be running the latest major client version: some clients, including the popular Bitcoin-Qt, have older versions available with bugfix-only updates.

Making a new Bitcoin-Qt or bitcoind wallet

If a wallet or an encrypted wallet’s password has been compromised, it is wise to create a new wallet and transfer the full balance of bitcoins to addresses contained only in the newly created wallet. Examples of ways a wallet may be compromised are through password re-use, minimal strength passwords, computer hack or virus attack.

There are a number of ways to create a new wallet with Bitcoin-Qt or bitcoind but this is a process that has been tested with bitcoind 0.6.3. We use the copy command to minimize the chance of any data loss but you are warned to make backups of any wallet.dat that holds a balance for you.1. Shut down the Bitcoin program.2. Find and make a backup of the “compromised” wallet.dat file and rename it, perhaps adding a short description:wallet.dat -> wallet-compromised.datDepending on your OS, the wallet file will be located at Windows: %APPDATA%\Bitcoin\Linux: ~/.bitcoin/Mac: ~/Library/Application Support/Bitcoin/3. Start the Bitcoin program and it will create a new wallet.dat. You may then encrypt the wallet as desired and make a new backup.4. Once you’ve made a new wallet, you can obtain one or more addresses and copy them into a text editor. After obtaining the new address(es), shut down the Bitcoin program, make a backup of the new wallet.dat file and copy it to a new file named wallet-new.dat.5. Copy the wallet-compromised.dat file back to wallet.dat, start the Bitcoin program and transfer your balance to the new address(es) you put in your text editor. Once the balance is back to 0 for your compromised wallet, you may want to wait a couple of minutes or for confirmation or check block explorer to be sure the transactions have been broadcasted. Then you may shut down the Bitcoin program.6. Rename wallet.dat to wallet-compromised.dat.7. Rename wallet-new.dat to wallet.dat.

You should now have a new wallet with all the bitcoins from the old wallet.

Debian-based Linux

Store all into an encrypted folder (Tomb)

Tomb is a simple tool to manage encrypted storage on GNU/Linux. Among its features are bind-hooks to set up a tomb’s contents in the place where other programs expect them, for example in our case mount -o bind the .bitcoin directory in a user’s home.

First, install tomb from https://files.dyne.org/tomb (homepage is on http://www.dyne.org/software/tomb)

Among the requirements: zsh, cryptsetup, pinentry-curses, gnupg, sudo.

Recommended: wipe, dcfldd, steghide, qrencode.

Then create a tomb (we name it bitcoin) with three commands:

tomb dig -s 100 bitcoin.tomb tomb forge bitcoin.tomb.key tomb lock bitcoin.tomb -k bitcoin.tomb.key

Then open it

tomb open bitcoin.tomb

This will require you to input again the password you selected.

Once open the tomb contents are in /media/bitcoin.tomb

Move there your bitcoin wallet:

mv ~/.bitcoin /media/bitcoin.tomb/my-safe-wallet

Then create a file “/media/bitcoin.tomb/bind-hooks” and put a single line:

my-safe-wallet .bitcoin

Which means that every time the tomb is open, the directory my-safe-wallet needs to be bound to ~/.bitcoin. Just make sure an empty ~/.bitcoin directory exists in your home.

Now close the tomb and store its keys safely, make sure you memorize the password. Have a look at Tomb’s documentation, there is a number of things you can do like steganography or printing out keys on a paper to hide and such.

That’s it. Every time you like to access your wallet open the tomb and the .bitcoin will be in place. One can also store the bitcoin binary inside the tomb and even start the bitcoin client using the exec-hooks. Tomb’s manual page “man tomb” explains the possibilities.

The advantage of this approach over an encrypted home is that it becomes extremely portable across computers and even online shells: a Tomb is just a file and its key can be stored far away, on different shells, USB sticks or mobile phones.

Secure the whole user home directory

The first step is to make a new user. In order for that new user to have an encrypted home directory, you’ll first need the encryption utility. Run:

sudo apt-get install ecryptfs-utils

Now you’re ready to create a new user

sudo adduser --encrypt-home new_user_name

You’ll need to come up with a secure new password for that user.

When you get to the prompt ‘Enter the new value, or press ENTER for the default’, just keep hitting ENTER.

Then switch user to the new user. To get to the new user you can use the switch user icon for your system, which on Ubuntu is in the ‘System/Quit’ screen, or if there is no switch icon on your system you can log out and log back in as the new user.

Since the home folder of this user is encrypted, if you’re not logged in as that user, data that is saved there can’t be browsed, even by a root user. If something goes wrong with your system, and you need to decrypt the new user’s files, you’ll need its decryption key.

ecryptfs-unwrap-passphrase

It will ask you for your user’s password and give you the decryption key. WRITE DOWN OR SAVE THE CODE IT RETURNS because you will need it if you ever have to pull your data off while the OS is not working. (You can run it again later if you need to, but run it now so that you can get your data if your Linux install gets botched.)

The encrypted folder data is not encrypted while it’s in memory, and so if it’s ever sent to the swap partition it can be stolen from there unless that too is encrypted — be aware that this will mean you cannot use Hibernate anymore, as the bootloader won’t be able to restore the hibernation data.

ecryptfs-setup-swap

Then click on a folder in the new user to display the file browser, then keep going up folders until you see the new user home directory, then right-click to bring up the Properties dialog, then click on the Permissions tab, then in the Others section, set the folder access to None.

For secure browsing, open Firefox, and then go into the Edit menu and click Preferences. Starting from the left, click on the General tab, and in the ‘Startup/When Firefox starts’ pop up menu, choose ‘Show a Blank Page’. Then click on the Content tab, and deselect ‘Load images automatically’ and deselect ‘Enable JavaScript’. Then click on the Privacy tab, and in the ‘History/Firefox will’ pop up menu, choose ‘Never remember history’. Then click on the Security tab, and in the Passwords section, deselect ‘Remember passwords for sites’ and deselect ‘Use a master password’. Then click on the Advanced tab, then click on the Update tab, and then in the ‘Automatically check for updates to’ section, deselect ‘Add-ons’ and ‘Search Engines’.

When JavaScript is disabled, the Linux download page will not download automatically, so you’ll have to click on the ‘direct link’ part of the “Problems with the download? Please use this ‘direct link’ or try another mirror.” line.

Mac

This solution does not scale; the amount of needed space can grow beyond the image size.

Windows

Due to the frequency with which Windows computers are compromised, it is advised to encrypt your wallet or to keep your wallet on an encrypted disk image created by third-party software, such as TrueCrypt (open source) or Jetico BestCrypt (commercial). This also applies to the storage of passwords, private keys and other data that can be used to access any of your Bitcoin balances.

Assuming that you have installed the Windows Bitcoin client and run it at least once, the process is described below.

To mount the Bitcoin data directory on an encrypted drive

After doing this, any time you want to use Bitcoin, you must first mount the Bitcoin encrypted disk image using the same drive designation, and then run Bitcoin from the shortcut that you created, so that it can find its data and your wallet.

General Solutions

Your wallet.dat file is not encrypted by the Bitcoin program by default but the most current release of the Bitcoin client provides a method to encrypt with a passphrase the private keys stored in the wallet. Anyone who can access an unencrypted wallet can easily steal all of your coins. Use one of these encryption programs if there is any chance someone might gain access to your wallet.

There is also a list of open source encryption software.

Decrypting and encrypting the wallet.dat every time you start or quit the Bitcoin client can be tedious (and outright error-prone). If you want to keep your wallet encrypted (except while you’re actually running the Bitcoin client), it’s better to relegate the automation to a small shell script that handles the en/decryption and starting up Bitcoin client for you (Linux and OSX).

There is also a method to print out and encrypt your wallet.dat as a special, scannable code. See details here: WalletPaperbackup

Password Strength

Brute-force password cracking has come a long way. A password including capitals, numbers, and special characters with a length of 8 characters can be trivially solved now (using appropriate hardware). The recommended length is at least 12 characters long. You can also use a multi-word password and there are techniques to increase the strength of your passwords without sacrificing usability. The Usability of Passwords

However, simply using dictionary words is also insecure as it opens you up to a dictionary attack. If you use dictionary words, be sure to include random symbols and numbers in the mix as well.

If you use key files in addition to a password, it is unlikely that your encrypted file can ever be cracked using brute-force methods, even when even a 12 character password might be too short.

Assume that any encrypted files you store online (eg. Gmail, Dropbox) will be stored somewhere forever and can never be erased.

Choosing A Strong Password

Make sure you pick at least one character in each group:

Lowercase: abcdefghijklmnopqrstuvwxyz Uppercase: ABCDEFGHIJKLMNOPQRSTUVWXYZ Number: 1234567890 Symbol: `~!@#$%^&*()-_=+\|[{]};:'",<.>/? (space)<9 char = unsuitable for use 09 char = insecure 10 char = low security 11 char = medium security 12 char = good security (good enough for your wallet) 13 char = very good, enough for anything.

You might want to read What is your way to create good passwords that can actually be remembered? and XKCD #936: Short complex password, or long dictionary passphrase?

Backing up your wallet

Backing up your wallet is not necessary if you use a wallet with implemented BIP 0032 (hierarchical deterministic wallet). Today, only TREZOR, Electrum, and Carbon Wallet fully support BIP 0032.

For advise on the backup process see Backing up your wallet.

Erasing Plain-text Wallets

In most operating systems, including Windows, Linux, and Mac OS X, simply deleting a wallet.dat file will not generally destroy it. It is likely that advanced tools can still be used to recover the wallet.dat file, even after it has been deleted.

The Linux shred command can be used to overwrite the wallet file with random data prior to deleting; this particular copy of the file will then be practically impossible to recover. Using shred (and similar tools on Windows) however, does not guarantee that still other copies don’t exist somewhere hidden on your HD. That will depend on your system configuration and what packages you have installed. Some system restore and backup tools, for instance, create periodic snapshots of your filesystem, duplicating your wallet.dat.

In Mac OS, the equivalent of shred is srm (introduced in Leopard). Using the Finder to remove files, clicking “Secure Empty Trash” in the Finder menu will shred the contents of the trash can. As with any OS, this doesn’t guarantee that there are no other copies elsewhere on your system.

For Windows, the built-in command cipher /W will shred all previously-deleted files. CyberShredder can securely delete individual files.

Online and Mobile Wallets

Thus far, this article has been discussing the security of a wallet file for Bitcoin-Qt or bitcoind that is under your sole control.

Online wallets have a number of pros and cons to consider. For example, you can access your wallet on any computer in the world, but you are essentially storing your private keys or wallet with the provider of the online wallet. Depending on the level of security of such service, your bitcoins may be lost if the service is compromised.

The invention of hardware wallets makes it possible to use online wallets in a more secure manner. A hardware wallet keeps your private keys apart from the computer and the internet. An online wallet compatible with a hardware wallet (such as myTREZOR.com) then does not need to store any sensitive data (private keys, passwords or email addresses) and only serves as a tool for broadcasting transactions signed in the hardware wallet out to the blockchain.

Mobile wallet applications are available for Android devices that allow you to send bitcoins by QR code or NFC, but this opens up the possibility of loss if the mobile device is compromised. It may be possible to encrypt and backup the wallet or private keys on a mobile device but it is not advisable to store a large amount of bitcoins there without doing your own research and testing. Mobile wallets are useful for small spending and not for storing your bitcoin savings.

External links

References

This work is licensed under a Creative Commons Attribution-ShareAlike 3.0 Unported License.

Originally published at https://cryptonomad.info on August 31, 2019.

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