10 Steps to a Better Bitcoin Wallet
This article will cover the necessary steps that need to be considered when creating and maintaining a bitcoin wallet.
A very common question from new and current bitcoin owners alike is “What bitcoin wallet is best?” The answers to this are as varied as the needs and functionality desired of each user. One size does not fit all, and this article will cover the necessary steps that need to be considered when creating and maintaining a bitcoin wallet.
Basic security measures
Start with the basics. Do you want to use a popular online wallet like Blockchain.info, which controls your private keys? This increases the potential for you to fall prey to a mass hacker. More people use Blockchain.info than any other wallet, with millions of accounts already created, but they have not proven immune to hacking of these wallets.
Or do you want to use a downloadable wallet or app that may need periodic updating, but may provide more security in exchange for some convenience from an online ready wallet?
Check to see if the wallet offers its own internal data encryption measures and two-factor authorization, like requiring a password and a separate code for access that can be kept online or offline, or can be emailed to you upon entry.
Where are your private keys?
The holder of the keys is the owner of the bitcoins. Just ask those unfortunate souls who lost their shirts in the Mt. Gox collapse. Holding your own private key is always the best move, no matter how trustworthy someone else may seem. Owning a bitcoin wallet is a constant struggle between convenience and security. Don’t cut corners here. Hold onto your private keys!
One of the many great security innovations Bitcoin has wrought is multi-signature, or multi-sig, which didn’t exist before a couple of years ago. It is most practical for long-term, offline storage applications and requires more than one person or entity to authorize a transaction, so it is not terribly practical for a daily Bitcoin user.
If there are three keys, and you only have one, and two keys are needed to create a transaction, the chances for theft drop dramatically.
One can be kept with a friend or relative, and one in a safe deposit box or vault offline. Probably best if you save some bitcoins in one wallet long-term like a “cold wallet.” However, it’s best not to keep all of your bitcoins in one wallet anyway.
Open-Source Wallet Code
Wallet companies may ask you for information to be compliant and you should do the same. Is the wallet code open-source, like the wallet from Coinomi? This is becoming increasingly common, but it’s best to always check.
In other words, you want a fully transparent operation to work with and not some company operating as a frontman while subcontracting to another wallet that you don’t know anything about. You need to know how they do business, and who they are really protecting.
An HD wallet stands for Hierarchical Deterministic and this gives the ability to obtain a new public key address every time funds come in, dramatically enhancing security. Most wallets just provide one just address, making the user easy to track the more the wallet is used. This is a great option to have if you prefer not to leave to many footprints on the internet.
Identity Protection vs. Compliance
Some people are more compliant than others. Giving your information out online carries its own risks, and more and more wallet providers are asking for personal information of bitcoin wallet owners to be compliant with government regulators.
This covers the wallet providers, but makes the owner easier to track, tax, hack from a centralized database, etc. You must decide if you want to make life easier for a wallet provider and regulators or do you want more anonymity with your bitcoin transactions.
Location, Location, Location
Do you roll with the NSA or FSB in your country? Where you are in the world and how heavily regulated the area is important. Some places have never heard or recognized Bitcoin and will give your free reign over your bitcoin, while others are scheming on how to suppress it or tax it to pay national debts.
If the wallet provider is in the wrong country, your bitcoin could be subject to confiscation by domestic authorities or tracking of your transactions, hiding behind the guise of thwarting “terrorist activities.” You may want to think long-term about how you handle where you live versus where you do bitcoin transactions.
Ease of use
Security and ease of use have generally been mutually exclusive so far in the bitcoin wallet world. Generally, the easier a wallet is to use, the less security it has attached to it, but this is improving, slowly.
Do you need to download multiple gigabytes of the Blockchain? Do you just need it for your smartphone, because you can get one specifically made for iOS or Android. You can set up multiple passcodes for entry to the wallet and to perform any transaction.
Let's say you left your smartphone with 5 BTC at a bar, and your phone doesn’t have a passcode set on it when it falls into a sleep mode. Someone could pick up your phone and access your wallet if it doesn’t have a passcode. You should have another passcode to perform a transaction, not just when checking your balance.
You’ll Want a Backup
One great thing about digital currency and wallets are that they’re just digital computer files, like pictures. You can copy them and keep them in multiple places, but maybe your wallet gets a virus or some unknown glitch that destroys it.
Does your wallet provider offer a service to backup your wallet? Is it encrypted? MultiBit HD offers these features automatically for users. Can you set how often this takes place and how easy is this to use in an emergency?
What’s their reputation?
This is a double-edged sword because the longer a wallet has been around as a brand the more they are targeted by hackers as they acquire more wallets. It is best if you know someone who owns the wallet and can give you the low-down from the inside on how it works and whether it is very useful and secure. The industry is only six years old, so how much are you going to get as far as history?
If the wallet provider hasn’t been around a long time, see if it is endorsed by people you trust or have them on their board of directors, or as partners. Or have they set up a system well enough where their trust is not required? The idea of digital currency is a trustless, verifiable system of transactions, so removing a third party from your wallet transactions altogether is always optimal.
So what’s the best wallet?
Recently, the top leading wallets were ranked for security, effectiveness and convenience, including 38 separate privacy tests for each wallet. As of May 19, 2015, Dark Wallet and Armory took the top spots in the Open Bitcoin Privacy Project (OBPP).
More popular names like Blockchain and Coinbase took the bottom of survey results. Scoring 54 points out of 100 was enough to be ranked #1 overall, while Coinbase received just 11 points. This proves there is still a long way to go before the Bitcoin wallet has been perfected, but innovative wallet alternatives like Airbitz, Trezor and Case Wallet are moving in the right direction.
Chances are slim that you'll find every single security and convenience feature listed here in one wallet, but if you can get the majority of them, move forward. Wallets are adding new features all the time, and new options are hitting the market as we speak. If your provider doesn’t have something you want or need, let them know. They won’t add it if they don’t know you want it. If you don't trust your wallet and don't like using it, use this checklist to get what you need today.