How To Store & Spend Your Bitcoin Safely

Bitcoin has seen its share of controversy lately, with a lot of people losing a lot of money in various thefts, and most recently the widely-publicized collapse of Mt. Gox. This is unfortunate, because (with a little care) Bitcoins can be made so secure that theft is functionally impossible.

We’ve covered getting started with Bitcoin before, but the software and security available have improved a lot since then. In this article, we’ll show you how to set up a hot and cold wallet, and teach you to use both. It takes ten minutes, requires no special software, and provides quite a bit of security.

You can follow this tutorial on Windows, OS X, Linux, Android, and iOS. If you’ve been thinking about getting into Bitcoin, now is the time, and this is how.

What You’ll Need

Picking Secure Passwords

Pay careful attention to this step, because – while it isn’t hard – it is where most people get sloppy and make a mistake. To use this technique, you’ll need a cryptographically strong password. In order to generate this, we’ll use something called “pass phrases,” a technique for generating memorable but secure passwords (see this recent xkcd for a vivid example). As with cryptographic tools likeTrueCrypt, you must take your choice of password seriously: don’t use birthdays, poems, quotes, names, or short passwords. Be aware that there are bots that do nothing but attack random Bitcoin wallets all day, using sophisticated dictionary attacks. Weak passwords willbe cracked, often within seconds, and there is no way to recover stolen Bitcoins.

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Here’s how we’ll generate your password: get out your book, and flip to a random page, then put your finger down on the page with your eyes closed. Look at the word under your finger and write it down on a sheet of paper, then close the book. Repeat until you have seven words. In my case, this produced the string ‘am welding carpet attacked tranquilized laughs postage‘ (generated from a Kurt Vonnegut anthology). Obviously, you should never post your real password online, but I won’t actually be using this one for anything, so it’s okay!

Be sure to only write your password down on a single sheet of paper. Do not save it on your computer, don’t put it anywhere on the Internet, and don’t let anyone else see it. Spend some time memorizing it; it’ll save you trouble down the line.

These kinds of passwords are more secure than you might think. The entropy of a seven word randomly generated passphrase is about 80 bits, which means that, on average, it’ll take a dictionary attack about a septillion guesses to crack it, a task that would take a modern supercomputer many billions of years.

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Setting Up Your Hot Wallet with CoinBase

A “hot wallet” is the term for a Bitcoin address that you actively use for transactions, sending or receiving. The private key is stored on an Internet connected machine, and is at increased risk of theft. In contrast, a ‘cold wallet’ is a bitcoin address not connected to the Internet, used only to store Bitcoins in a safe way.

Think of it as the difference between storing money in your pocket and storing money in your bank account: your pocket is easy to access, but vulnerable to theft, so you don’t store much money in it. When you have more than you want to spend at once, you move most of it to your bank account. Likewise, you should never store more in your hot wallet than you’re prepared to lose. It may also be worth malware-proofing your computer to keep your hot wallet a little safer.

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