Not Your Keys, Not Your Bitcoin. Explained.
In Bitcoin, Great Power Comes With Great Responsibility
Access Is Not Ownership.
Hey everyone, welcome back to Bitcoin Basics your no-nonsense source for all beginner topics in the world of Bitcoin. In today’s article, we are going to be breaking down one of the most famous phrases in the world of Bitcoin: “Not Your Keys, Not Your Coins.”
In the most simple form, it means that if you buy Bitcoin and leave it on an exchange without transferring it to a hardware wallet, you don’t have control over your own private keys and therefore, you don’t own your bitcoin!
Leaving bitcoin on an exchange requires you to trust someone else to keep your bitcoin safe for you. And that’s a big risk. A bitcoin exchange, no matter how big or how popular it has become, is always vulnerable to being hacked, going bankrupt, freezing your account, or even running away with your money. It has all happened before.
Bitcoin has revolutionized the financial landscape, offering decentralization, security, and financial autonomy. However, with great power comes great responsibility. This is why you should always store your bitcoin in a secure hardware wallet that only you have access to. In this video, we are going to discuss bitcoin private keys, self custody, and why it’s the best way to protect your digital assets.
What is the difference between Public and Private Keys?
When you create a bitcoin wallet, your private key is generated through cryptography, which is a method of ultra-secure math. The wallet software creates a private key and an associated 12 or 24-word seed phrase using a random number generator. The private key is a long and random string of letters and numbers that should be kept secret. Anyone who has access to your private key also has access to your bitcoin.
From the private key, the software produces a public key using a series of mathematical operations that can be easily performed in one direction but are difficult to reverse. You can think of it as mixing paint colors together, which is simple to do but challenging to separate back into the original colors.
To receive Bitcoin, you simply share your public key with others. Your public key is like your home address. When you want someone to send you something in the mail, you send them your street address. Just because someone has your street address aka public key, does not mean that they have the private keys to enter your home.
Okay, And What About the Seed Phrase?
When you create a new bitcoin wallet, the wallet software generates a seed phrase in addition to the private key.
This seed phrase consists of a series of 12 to 24 words that can be easily read and remembered by humans. The seed phrase acts as a master key for your wallet. The main purpose of a seed phrase is to act as a backup for accessing your wallet. If lose or accidentally break your hardware wallet, you can use the seed phrase to restore your funds on a new device. Therefore, the seed phrase is equally as important as the private key itself and should be kept secure. If someone gains access to your 24-word seed phrase, they can access your Bitcoin.
So, How Do Hardware Wallets Keep Your Bitcoin Safe?
In response to the dangers of leaving your bitcoin on an exchange, bitcoin self custody has gained traction among Bitcoin holders seeking greater security and autonomy.
A hardware wallet like the Coldcard Mk4, empowers users to retain control of their private keys while facilitating all bitcoin transactions. Hardware wallets are physical devices that store your private keys offline, rendering them immune to online attacks.
Custodial solutions, including centralized exchanges and hosted wallets, pose huge risks to Bitcoin holders. History is full of examples of exchange hacks and wallet breaches that resulted in the loss of millions of dollars worth of Bitcoin.
The sudden collapse of FTX, the third-largest crypto exchange, in early November 2022 was a huge hit to the bitcoin market. Public mistrust ensued, leading to the downfall of the giant crypto exchange. The collapse stemmed from reports that its affiliate, Alameda Research, relied heavily on some speculative and risky crypto tokens.
As news spread, a wave of customer withdrawals, fueled by concerns over financial practices and close ties with Alameda, pushed both FTX and Alameda into bankruptcy. This event rocked the volatile bitcoin market, causing billions in losses and dropping its valuation well below $1 trillion.
In December 2022, the U.S. government filed civil and criminal charges against Sam Bankman-Fried and top executives for misappropriating over $8 billion in customer deposits and fabricating financial statements. SBF was convicted in November 2023 on criminal charges. He faces a second trial in March 2024 after extradition from the Bahamas.
Now, Let’s Go Over Some Best Practices to Maximize Bitcoin Security
If you’re like me, you value your financial independence and privacy, and you don’t want to trust third parties with your hard-earned bitcoin. That’s why self-custody is the way to go. But how do you do it safely and securely? Here are some tips:
· Use a hardware wallet. A hardware wallet is a device that stores your private keys offline, away from hackers and malware. It also allows you to sign transactions without exposing your keys to the internet. Hardware wallets are easy to use and offer a high level of security. I recommend buying a Coldcard hardware wallet.
· Backup your seed phrase. Your seed phrase is a set of 12 or 24 words that can restore your wallet in case you lose or damage your hardware device. You should write it down on a piece of paper or metal and store it in a safe place, preferably in multiple locations. Do not store it digitally or online, as that defeats the purpose of self-custody.
· Use a passphrase. A passphrase is an optional extra layer of security that you can add to your seed phrase. It is a word or a sentence that you have to enter every time you access your wallet. It acts as the 25th word in your seed phrase, making it harder for anyone to guess or brute force attack your wallet. You should choose a passphrase that is easy for you to remember but hard for others to guess. Do not write it down or share it with anyone.
· Use a multi-signature wallet. Multisig is a feature that requires multiple signatures to authorize a transaction. It can help you protect your bitcoins from theft, loss, or coercion. For example, you can set up a 2 of 3 multisig wallet, where you need two out of three keys to spend your coins. You can keep one key on your hardware wallet, one on your phone, and one with a trusted friend or family member. This way, even if you lose one key, you still have control over your funds.
· Stay updated and educated. Bitcoin is constantly evolving and improving, and so are the tools and techniques for self-custody. You should always keep your hardware wallet firmware and software updated, and follow the best practices recommended by the developers and the community.
These are some of the best practices for bitcoin self custody ownership that I follow and recommend. Of course, there is no one-size-fits-all solution, and you should always do your own research and decide what works best for you. Remember, with great power comes great responsibility. Self-custody is not for everyone, but if you value your freedom and sovereignty, it is worth the effort.
In bitcoin, “Not your keys, not your Bitcoin” is always a reminder of the importance of self-custody and keeping your ownership for yourself. By retaining control of your private keys and adopting the best security practices, you can safeguard your Bitcoin holdings against potential threats. As the custodial vs. non-custodial debate continues, giving you the knowledge and tools to protect your Bitcoin is our priority.
Well, that’s all for today’s article.
If you enjoyed the article consider clapping and following Bitcoin Basics. A lot of hard work goes into preparing and writing these articles and readers like yourselves are able to play an important role in helping the work continue. Consider supporting my writing by heading over to my buy me a coffee page, its free!
https://www.buymeacoffee.com/bitcoinbasics
Check out the link below to this article in video form on the Bitcoin Basics Youtube Channel: