How to set up a secure offline savings wallet
Why Set up an Offline Savings Wallet?
Modern operating systems are highly complexity, leading to a large attack surface. They also constantly leak information without the user’s knowledge or consent.
No matter how many precautions you take, it is very hard to ensure your wallets is reasonably secure on a computer that is connected to the internet.
Because Bitcoins can be stored directly on your computer and because they are real money, the motivation for sophisticated and targeted attacks against your system is very high. Previously, only large organizations had to worry about advanced attacks.
Overview of existing solutions
The bitcoin ecosystem is still relatively young and unfortunately not many user friendly and highly secure wallets have been developed yet.
Today these two ways are best to secure your bitcoins against theft:
1. Using a hardware wallet such as TREZOR. A hardware wallet has two functions - it stores your Bitcoins in a hardened device that is designed to be simple and highly resistant to the usual range of attacks (viruses, hackers, keyloggers).
2. Create a cold storage wallet, which means generating and storing private wallet keys on a clean air-gapped computer.
To spend funds from cold storage securely, an unsigned transaction is generated on an Internet connected computer. An unsigned transaction is akin to to an unsigned check. The unsigned transaction is then transfered to the air-gapped computer to be verified & signed with the wallet keys.
You can simplify the setup of a cold storage wallet with solutions such as BitKey or setup your own solution from scratch by hand.
Note that most people are not security experts, which means they do not fully understand the risks. This increases the risk of making a fatal mistake that will result in Bitcoin theft.
For example, paper wallets are typically generated by potentially compromised PCs connected to the Internet, then printed for offline storage. This is not enough as malware running on the computer may steal your private keys and then later steal any Bitcoin you send to that address.
Setting up an offline wallet by hand
The rest of this guide will instruct you on how to create an offline wallet by hand, a wallet that never even touches the internet in its plaintext form. This security measure is also referred to as being an air gap. For all practical purposes, this wallet is safe from all online threats, such as viruses and hackers. It is however still exposed to offline threats, such as hardware keyloggers, extortion, or people looking over your shoulder.
The below procedure may seem tedious, but remember that security almost always comes at the cost of convenience. When you deposit money at a bank, you let them worry about security. Bitcoins, however, are stored on your computer and that means you are fully responsible for securing them.
How to Deposit Funds
- Sign up for a few different cloud drive accounts such as Dropbox or Google drive.
- Create a strong and unique passphrase offline (manually). This passphrase should be TRUELY random. Diceware is a good way of generating the passphrase. It should be at least 12 words long.
- Never use this passphrase elsewhere, especially not on the web.
- Do not forget this passphrase. Recite it several times a day. It is easy to overestimate your ability to remember a passphrase several months in the future. To be on the safe side, write it down and store the piece of paper in a safe deposit box.
- Download Bitcoin-Core Linux binary and save it on a USB drive.
- Verify the software's release signatures from an alternative device and internet connection (eg. your smartphone). This makes sure you are not using a malicious program that poses as the bona fide bitcoin-core client.
- Shut down your computer, and boot Ubuntu (or Linux distribution of you choice) from a liveCD. This will not affect your current operating system.
- Disconnect machine from the internet. Unplug any network cables and disable wireless. Verify that wireless is disabled in the icon on the upper right corner (Ubuntu). Double check that machine is disconnected by opening the web browser.
- Run bitcoin while disconnected to the internet. The client will show 0 connections and 0 blocks, but it will still generate a wallet.dat file and a bitcoin address.
- Encrypt your wallet using the strong and unique password from step 2 above. (Bitcoin Client > Settings > Encrypt wallet)
- Copy wallet.dat (found in hidden folder .bitcoin in your home directory) to USB drive.
- Save bitcoin address to a text file and copy it to USB drive.
- Shut down system and turn off computer. Before switching your computer on again, remove all power sources for about 1 minute. Physically remove battery from laptop.
- Backup encrypted wallet.dat file in several places:
- Send it to your 5 best friends by email attachment and ask them to save it for you.
- Save it on your cloud drive accounts created in step 1.
- Save it on several USB drives and CDs and store them in different geographic locations.
- Send bitcoins to the address saved on the USB drive. Double check in the block explorer that they have been sent or you can add Watch Bitcoin Address in BlockChain Wallet.
How to Retrieve Funds
- Boot from Ubuntu liveCD, as in step 5 above.
- Insert USB drive.
- Run bitcoin client and close it again.
- Replace wallet.dat in ~/.bitcoin directory with wallet.dat from USB drive.
- Connect to the internet.
- Restart bitcoin client.
- Wait for blocks to download (optional).
- Send bitcoins.
How to Setup Watch Bitcoin Address
Watch Bitcoin address is a way for you to check your cold storage balance online without exposing your private key.
- Create an wallet account at https://blockchain.info/wallet/
- Go to import/export.
- At "Add Watch Only Bitcoin Address", add your bitcoin address.
- Wait for the balance to synch.
- You can also download the mobile version at Google Play, Apple Store
Notes
- This procedure is only secure if you perform steps 1-15 in this exact order.
- If you're a non-technical user that can't perform the steps above, use an in-browser paper wallet generator to create paper wallets (read below for more caveats and info).
- Perform one or two trial runs of the above procedure with a few bitcents, and make sure that you know how to successfully retrieve them, before making a bulk transfer.
- Every time you retrieve bitcoins from your savings wallet, create a fresh savings wallet by repeating the above procedure, and send all your remaining savings balance there.
- There is more than one way to do it. Similar procedures have been suggested on the forums here and here.
- Beware that even savings wallets have limited lifetimes. New, backwards incompatible versions of bitcoin might come out in future, AES might be broken, bit rot might destroy your wallets, etc. Pay attention to updates in the Bitcoin world and update to fresh savings wallets every couple of years, or as needed.
- See How to import private keys for an alternative way of retrieve your coins.
Alternatives
- Paper wallets can also be used to create offline bitcoin savings accounts, provided they are generated and stored securely.
Security warning: Generating paper wallets is not recommended from an online PC. Malware malware on the PC may be able to steal your paper wallet keys.
Even if you generate paper wallets securely, they are still vulnerable to loss and theft.
Unencrypted paper wallets must be kept safe like jewels or cash.
For additional security paper wallets can be split into shares, requiring X of Y shares (e.g., 3 out of 5) to reassemble the secret key.
Encrypting paper wallets is possible with BIP38, supported by bitaddress.org. This allows you to distribute more copies of the wallet while relying on the encryption, protecting your paper wallet against lost. However this means you'll need to the remember a secret passphrase and as a long as you're doing that you may want to consider just generating a secure BrainWallet instead. That way there is no paper to lose, only a passphrase you can forget.