Do you have your Bitcoin on a hardware wallet and not on an exchange?
-> Very good, because not your keys, not your coins!
But did you know that there are ways to further increase the security of storage beyond the hardware wallet? There are so-called multisig wallets and passphrases.
With Bitcoin, you take over the Verantwortung🛡️
Bitcoin gives you control over your own assets, but with that comes great responsibility. Unlike traditional banks, the security of your Bitcoin is solely in your hands (and that's a good thing!).
A tried and tested method of storage is hardware wallets, which store your private keys offline to protect them from hackers. But what if someone gets hold of your seed phrase or you hide it in a place that could theoretically be found by a burglar?
This is where multisig wallets and passphrases come into play. They offer additional levels of security by requiring either multiple signatures or an additional passphrase to authorize a transaction.
What are multisig wallets? 🔑🔑🔑
Multisig stands for "multiple signature". In contrast to a classic wallet, where a single signature is sufficient to carry out a transaction, a multisig wallet requires multiple signatures. This means that you need several keys to transfer Bitcoin.
Imagine you have a vault with three locks and three keys. To open the vault, you need at least two of these three keys. The advantage of this is that even if one of the keys is stolen or lost, your Bitcoin is still safe. You can store the keys in different places or even entrust them to different people, which makes the system extremely flexible. This is particularly useful if you want to secure your assets in the long term or involve several people in their management.
What is a passphrase? 🔐
A passphrase is an additional layer of security that you can add to your wallet. It works like an additional password that is required alongside the 24 recovery words (seed phrase) to access your Bitcoin.
Again, think of your wallet like a vault, and the recovery words are the key. When you add a passphrase, it's like adding another lock to the vault that requires a separate password. Without this password, no one can access the safe, even if they know the recovery words.
One of the advantages of a passphrase is that you can theoretically use a "fake" passphrase to create a "fake" wallet. This wallet could serve as a decoy (also called a "honey pot"), while the real wallet remains protected with the correct passphrase.
Example to make this clearer: You own 1 Bitcoin, have 1 hardware wallet and 1 seed. Now you could create two additional wallets, each with a different passphrase. You then move 0.9 Bitcoin to one wallet and 0.1 to the other. Should someone ever break into your home, threaten you and demand your Bitcoin, you could simply enter the password that takes you to the wallet with the 0.1 BTC. In the best case scenario, the burglar will be satisfied with the 0.1 BTC and you could save the majority of your assets.
The big disadvantage, however, is that if you forget your passphrase, you can no longer access your Bitcoin (theoretically, you can still brute force the passphrase, but that's going too far).
Difference between multisig and passphrase 🆚
Both offer additional security, but in different ways:
- Multisig walletsThese require multiple signatures from different devices or locations to complete a transaction. This means that no single key is sufficient to access your Bitcoin. This method is particularly useful if you want to spread your assets geographically or involve multiple people in the management.
- PassphraseA passphrase adds another layer of security that goes beyond a single device. Even if someone knows your recovery words, they can't access your Bitcoin without the passphrase. This is a good solution if you want a high level of security on a single device.
When to use what?
Multisig wallets are ideal if you manage a large amount of Bitcoin or if you have multiple stakeholders (e.g. in a company) who should have access to the wallet. If three people in a company each have one of the keys, one person can never abscond with the Bitcoin alone💨
Passphrases are easier to set up and are ideal for individuals who want an extra layer of security without using multiple devices. It's a flexible solution that can be customized for different scenarios.
I personally currently use the BitBox02 with a passphrase, but I could imagine switching to a multisig wallet in the future.
Conclusion / TL;DR 📊
Multisig wallets and passphrases each offer additional security measures in conjunction with one or more hardware wallets, which should be selected depending on your needs and application scenario. While multisig wallets are ideal for larger assets and collaborative environments, the passphrase offers a flexible and simpler way to secure your Bitcoin assets with an additional 25th word.
Consider which method is best for you and prepare well to keep your Bitcoin safe. Mistakes can be very expensive.
Here's another tip: Regardless of whether you set up a wallet with a passphrase or a multisig wallet, never send all your assets there immediately, but always make a small test transaction beforehand and check whether everything has worked.
I didn't want to get too technical in this article, I just wanted to explain the concepts as simply as possible. Accordingly, I hope that this was reasonably understandable.
If you are interested in a technical article on this or if you have any questions, please write them in the comments 👇
See you Baldrian,
Your Stefan
