Bitcoin Security and Privacy

A Practical Guide

By Lexie M

ExpressVPN

Lexie M

1st Edition

© 2018 ExpressVPN

This work is released under a Creative Commons License (CC BY-SA 4.0)

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The material in this book is for informational purposes only. It is not investment advice. You are using the tips and guides at your own risk. ExpressVPN or Lexie M do not guarantee the safety or privacy of your Bitcoin.

Introduction: Welcome to Bitcoin

Part 1: Securing Your Bitcoin

How to Safely Acquire Bitcoin

How to Securely Store Your Bitcoin

How to Secure Your Bitcoin Wallet Password

Part 2: Privacy and Bitcoin

Protecting Your Financial Privacy

Part 3: Systemic Risks

Can Bitcoin Disappear as a Whole?

Conclusion: Where to from here?

Appendix 1

How to Use Electrum to Create Your Brainwallet for Bitcoin

Appendix 2

How to make anonymous payments with Bitcoin

Appendix 3

Create Strong Passwords with Diceware

Introduction: Welcome to Bitcoin

Bitcoin has grabbed headlines over the past year for its massive spike in value and the ensuing rush to regulate it. However, the real story is the degree to which Bitcoin democratizes global financial systems.

While Bitcoin may often be referred to as anonymous money, its blockchain is also perfectly transparent and may be inspected by anybody at will. That apparent contradiction makes it a revolutionary way for people around the world to realize greater financial freedom: Bitcoin does to money what the internet did to information by providing indiscriminate access to a decentralized financial system.

What is Bitcoin?

Bitcoin is not just a cryptocurrency, but also a new financial system comprised of many components. It was invented in 2008 by the mysterious Satoshi Nakamoto and released shortly after to the public. Most importantly, Bitcoin is not controlled or owned by any individual, corporation, or government. It extensively uses cryptography and relies on a peer-to-peer network.

The Bitcoin protocol lays out the rules of this financial system, including how many Bitcoins can exist, and how they are created and transferred between participants. This protocol is incredibly difficult to change, as any change requires overwhelming consensus from its participants.

Bitcoin software refers to programs that use the Bitcoin protocol to verify its rules and individual transactions. These programs act as nodes in the distributed Bitcoin network. Nodes can also act as miners, meaning they will use cryptographic proofs of burned electricity to secure the network, for which they are rewarded with newly minted Bitcoin.

Bitcoin as a currency or commodity can be used to settle debt, remit money, or conduct online payments. While some participants will rarely hold on to Bitcoin for long in order to not be exposed to volatility in value, others exclusively use it to store value and speculate on its future uses.

Legally, Bitcoin holds a different status in countries around the world. While some governments regard it as a virtual currency, others have gone so far as banning its citizens from using it. As Bitcoin takes away a state’s power to arbitrarily print money, freeze accounts, and censor transactions, it is often seen as a significant threat to authoritarian regimes.

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What is blockchain?

Blockchain is Bitcoin’s accounting ledger. Unlike other systems, where data is amended and deleted continuously, the Bitcoin blockchain only allows participants to add data, and only once every ten minutes in average.

Each block is linked to the previous block through a cryptographic link called a hash. All blocks create a chain back to the first block, the Genesis Block which was minted by the creator of Bitcoin, Satoshi Nakamoto in January 2009. The cryptographic linkage ensures that nobody can add or remove any kind of data from previous blocks without this becoming apparent.

Each block contains several things:

1. Reference to the previous block. This makes it impossible to later reorder transactions.

2. Proof of work. Miners solve mathematical puzzles, which costs them electricity. To prove that they have worked enough, they include the solution to the puzzle into the block.

3. Coinbase. As a reward for their work, the miner is allowed to send themselves Bitcoin from “nowhere” in what is called the Coinbase transaction. Currently this reward is at 12.5 bitcoin, but gets halved every four years, until all Bitcoins are created.

4. Transactions. Each miner can include a number of transactions into the block. The amount is currently limited at 1 MB, which is roughly 2000 to 3000 transactions.

Note how the blockchain does not contain the balances of the accounts themselves. Software is required to calculate the balance of each address by summing up its incoming and outgoing transfers. This is usually done by your Bitcoin wallet.

It might feel like we don’t need Bitcoin, or we may be unsure about what we might need it for. Similar to the early days of the world wide web, Bitcoin seems to mainly attract dubious characters, facilitate drug trading, or conceal other financial crimes. However, Bitcoin has the potential to transform society and build a truly digital economy in which everyone on this planet will be able to participate, free from coercion, censorship and debasement.

Banks, payment processors, and financial services remain inaccessible to the majority of Earth’s population. These people may be able to look into the digital economy that the internet has enabled, but they are unable to  take part in it as entrepreneurs, producers and consumers.

With Bitcoin, they are suddenly given a tool to transmit monetary value with the same ease as sending a text message. They can support family members abroad, get paid for work online, and find cheaper alternatives to the products they consume.

Essentially, Bitcoin has the potential to challenge the status quo digital economy. That’s because it’s radically different from other forms of electronic payment:

1) Your Transactions cannot be censored

When sending Bitcoin to somebody, nobody is able to block your transaction. You alone decide who to transact with. This also means that nobody is able to take back money that has been sent to you if they change their mind about the payment.

However, this also means that there is no central authority to take care of your dispute, like if the merchant does not deliver the goods.

2) Your Bitcoin cannot be seized

Your savings are safe from arbitrary seizures by corporations or governments. Unlike with banks and saving accounts, nobody can order the Bitcoin network to shut down during a national emergency, an economic crisis, or a banking collapse. Your accounts cannot be frozen, and your funds cannot be taken away remotely. However, robbers or police might still try to hack your devices, steal your backup codes, or force you to transfer your Bitcoin over to them through the threat of violence.

3) Bitcoin cannot be debased

Currency debasement still plagues citizens in dozens of countries around the world. The possibility of your savings evaporating and wages diminishing can be an existential threat, and owning Bitcoin can be an important part of a hedging strategy. There will only ever be 21 million Bitcoin, and we do not need to trust the founder or the network participants with not raising this limit.

Another point to remember: finance requires privacy. We do not want all our neighbors or passersby to know how much money we carry with us, and our businesses would not function the same if competitors could easily see financial strength, income, and purchasing costs.

Using Bitcoin can be far more secure and private than using traditional banking systems. The Bitcoin system challenges our assumptions of how we think money and security work, and requires us to trust ourselves and put our own resources into securing our coins.

In exchange, we can enjoy greater freedom in how we store our wealth and make and receive payments than we ever could with bank accounts, credit cards, or Paypal.

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What is a Bitcoin wallet?

Who owns how many Bitcoin is recorded in a globally distributed ledger called the blockchain. Each account has a balance, and each account is associated with the hash of a public key, which functions as an account number.

The owner of the account identifies themselves with a private key, which is essentially a long random number.

This number must remain private at all times, as anyone in possession of it would be able to spend the Bitcoin. This private key may come in many forms—as a file on a computer, a long number written down, or in the form of words (a so-called seed phrase).

To create and store these keys, software is used. This software is known as a Bitcoin Wallet. It is also used to sign messages, make transactions, and handle incoming payments.

A Bitcoin wallet can be installed on a computer or mobile phone, or it may be on its own device, as in the form of a hardware wallet.

This book is broken up into three main sections. The first section deals with Bitcoin security. You’ll learn everything you need to know about acquiring and storing Bitcoin, as well as securing the passwords you use to protect your Bitcoin.

The second second deals with Bitcoin privacy. One of the great virtues of Bitcoin is that it can be used with anonymity (unlike, say, a credit card). Here you’ll learn all the steps necessary to safeguard your identity while making Bitcoin transactions.

Section 3 explores an extreme: What would it take to wipe Bitcoin off the face of the planet? We bring it up not as a strong possibility, but more to model the ultimate threats posed to Bitcoin.

Finally, the book ends with three appendix guides: How to use electrum to create a Bitcoin Brainwallet; how to make anonymous payments with Bitcoin; and how to create strong passwords with Diceware.

For readers totally unfamiliar with Bitcoin, they can learn plenty just by reading through the entire text. (Don’t worry, there are pictures, too.) However, more experienced Bitcoin users might find it useful to drop in and out of the sections that are most useful to them.

One more thing: This being a security and privacy guide, some of the steps we advise might seem a bit paranoid (you might even think we should be investing in tinfoil hats rather than VPNs). However, we want to educate people about worst case scenarios so that they understand what it takes to realize total financial privacy and security.

Otherwise, welcome to Bitcoin!

Part 1: Securing Your Bitcoin

How to Safely Acquire Bitcoin

There are lots of ways to acquire Bitcoin; each method comes with different risks and benefits. Regardless, security concerns should be taken into account even during the buying phase.

In this chapter, we’ll cover the following methods for getting Bitcoin:

In-person transactions

Dedicated Bitcoin ATMs

Online exchanges

Decentralized exchanges

Accepting Bitcoin as a form of payment

Warning: There generally is no consumer protection when dealing with cryptocurrencies, and police and courts have difficulty assessing different situations properly. That makes it easier for fraudsters to get away with your Bitcoin. This shouldn’t dissuade you from Bitcoin, but rather encourage you to take extra precautionary measures. Some of these measures may seem extreme, but our goal is to help you understand the diversity of threats that pop up in the Bitcoin world.

In person

When trading Bitcoin in person, large amounts of cash may be involved, so your physical safety is most important.

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It’s important to put some thought into where you physically meet to carry out the transaction. Meeting during the day at a busy but uncrowded, public location is ideal. This may be a coffee shop, a library, or a museum, but unless your local government takes a strong anti-Bitcoin stance, the reporting room of a police station may be the place least likely for a mugging. Yes, you can still be mugged with virtual currency.

As soon as somebody knows you have access to Bitcoin on your phone or laptop, they may threaten you with violence unless you transfer the coins to them. If the thieves know where you keep your backup seed phrase, they might also steal this seed and transfer the coins to their own wallet immediately.

Unusual meeting spots

In places where the government does not have a strong anti-Bitcoin stance, meeting in the report room of a police station might be a great idea.

You can assume that somebody who intends to harm or defraud you will be hesitant to meet at a police station, and you will be able to freely count your money and wait for confirmation of your Bitcoin transaction.

Furthermore, police officers are often concerned about your security and that of the community. They’ll probably even appreciate if a risky transaction is carried out under their eye.

Other unusual and safe places include the lobbies of post offices, banks, or government buildings. In general, you’re much less likely to become the victim of theft or robbery in a well lit building with security and a proper entrance and exit.

Before meeting, have your Bitcoin wallet set up (that’s how you’ll hold your Bitcoin). Avoid setting anything up on the spot.

When buying Bitcoin, always wait for at least one confirmation. For large amounts, you may even want to wait for more (two to six confirmations).

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What is a Bitcoin confirmation?

In the Bitcoin network, transactions can be broadcasted almost instantaneously. As a transaction is picked up by other computers in the network, these computers are able to verify immediately whether the transaction is valid or not.

These “unconfirmed” transactions are not 100% finalized, however. Similar to depositing a cheque at a bank, the money may appear immediately in your account, but it will take longer to be “cleared.”

In the Bitcoin blockchain, miners discovering new Bitcoin bundle transactions together into a block, which they release roughly every ten minutes. Once your transaction has been included in such a block, we say it has “one confirmation.” Once a transaction has a confirmation, it is incredibly difficult to reverse. For most daily transactions or trades, you will be able to assume this transaction as settled. The likelihood of this transaction being reversed is so small, it’s not worth worrying about.

In some cases, like when you are selling millions of dollars of gold to somebody you don’t trust, one confirmation is not enough, and you might want to wait for three to six confirmations to be absolutely sure not even somebody with a lot of money to spend is able to reverse your payment.

When selling Bitcoin, verifying the integrity of the fiat currency you’re receiving can be difficult. Be prepared to test their authenticity if counterfeit money is common in your country. When in doubt, meet at a bank and ask your counterparty to be present while you deposit the notes into your account.

Finally, take notice of your surroundings when leaving. Stay inconspicuous and avoid being followed—again, you don’t want to be mugged.

Dedicated Bitcoin ATMs

Bitcoin ATMs are a generally safe and convenient option for buying Bitcoin. Inform yourself about the rates beforehand.

As with any other sort of ATM, practice caution. Be careful of people observing you too closely!

Online exchanges

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Bitcoin Exchanges often offer the best rates (often at 0.3% fees) to buy and sell Bitcoin, but they also require the most personal information and take more time.

When signing up for an exchange, make sure it is reputable. Check out reviews from your community and friends. Even small bugs and inconsistencies in a website should send up a red flag, marking them as possibly untrustworthy or incompetent.

Never leave Bitcoin or fiat currency with a Bitcoin exchange. Always withdraw your cryptocurrency as quickly as possible to a wallet that you control (see counterparty risk).

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What is counterparty risk?

When you deposit money into a bank, you are essentially loaning the money to the bank, and it is no longer yours. The bank becomes your counterparty in a contract. The bank might default for a variety of reasons, and become unable to honor the contract. This risk is your counterparty risk.

Usually, you are compensated for this counterparty risk, for example, through interest. Many jurisdictions have legislation that guarantees some deposits with banks, but no such provisions exist for cryptocurrency.

When depositing Bitcoin to an exchange, you are taking on counterparty risk in various forms. The exchange could get hacked, or ordered to be shut down by the government. They could also turn out to be insolvent, or simply make your coins unavailable for a period of time.

Whenever you are using third-party services, like payment processors or exchanges, be aware of counterparty risk. You can try to minimize that counterparty risk, for example, by selling Bitcoin in small tranches, or by reducing the time you keep your Bitcoin on an exchange to the absolute minimum.

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Decentralized exchanges

There are different definitions of decentralized exchanges. In this case, a decentralized exchange is any exchange, website, or platform that does not have its own bank account, but rather maintains some kind of order book.

LocalBitcoins and CoinCola, for example, are websites operated by companies. People can post their offers and interact with each other through the site. Other platforms, like Bisq, are decentralized software systems that no company controls. Unlike a website, they cannot be taken down.

Decentralized exchanges usually offer some kind of escrow service in which the Bitcoin are held. It is important to always make use of this escrow service to avoid becoming victim of a scam.

The fiat currency payments are usually handled directly between the two trading parties. It is important that you familiarize yourself with each payment method that you accept or make in order to understand what your risk of being defrauded is.

For example, some wire transfers and online payment systems like Paypal are reversible, meaning that even after you think you have received a payment, it can be “taken back” by the buyer of the Bitcoin. Never release the funds from escrow until you are certain that you have received the funds.

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Accept Bitcoin as a form of payment

Often, the most secure and convenient way to acquire Bitcoin is to accept them for your goods or services.

What are network forks?

In the Bitcoin blockchain, transactions are packaged into blocks, which are chained on top of each other. Each block has to abide by the rules of the Bitcoin protocol to be accepted by the network.

The network is made up of individuals and organizations, each running the Bitcoin software. If a large number of Bitcoin users were to change the rules of the network, for example by allowing more Bitcoin to be created, the network would likely split, or fork.

When the first miner creates a block according to the new rules, the block will get accepted by some participants in the network, while being rejected by others. Some miners will chain their new blocks on top of fork A, while others will follow fork B.

In some circumstances, both forks will survive continuously. All balances held before the fork are present in both sides of the chain, while all coins moved or created after the fork will only exist in one chain. Blockchain history diverges.

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How to Securely Store Your Bitcoin

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Not only has Bitcoin’s value gone up over the past year, but the available options for Bitcoin storage have also increased. The choices can be especially intimidating for Bitcoin novices.

No matter what you choose, however, there is always a tradeoff between convenience and security. And while privacy is also a factor, in this section we assume you are not willing to go the extra step of anonymizing and completely eradicating your financial trail.

Security

Your coins are secure when nobody but you is able to access them. This can be hard to measure, as there are a large number of unknowns. A good way to think about security is to imagine how expensive it would be to compromise your Bitcoin.

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Security can be improved through physical forms of protection, such as safes and vaults. A laptop kept in a car in an abandoned parking lot surely offers different security than one kept in a well guarded building.

Similarly, the security of an encrypted file depends on how random the encryption key is. A password with 10 characters might already be cracked after one hour, while a password with 20 characters will take thousands of centuries to crack.

The security of your phone and computer depend on its hardware and frequency of updates. A modern smartphone with the latest software might take resources worth over a million U.S. Dollars to hack remotely, while an older phone could be taken over by anybody if you click on a problematic link.

Loss is a security concern that is most difficult to grasp. You may lose your phone or forget your password. Fire and natural disasters—while seeming old-fashioned—can still pose a threat to your virtual currency.

Convenience

It is far easier to measure convenience than security. How easy is it for you to spend your coins? How fast can you access your funds? An online wallet is probably the most convenient, as you only need any computer or phone nearby to access it.

A wallet installed on your mobile phone is still relatively convenient, as you will likely have it with you most of the time.

A multi-signature paperwallet distributed around the globe will be very hard to assemble for thieves, governments or hackers, but to reassemble the wallet you will have to get on a couple of planes.

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What is a paperwallet?

A paperwallet is a piece of paper that holds the backup seed of a wallet, or the private keys themselves. As paper cannot easily be hacked, it is regarded as some of the most secure wallet options.

As with any wallet, it is important that you create the private keys yourself, and that nobody else has access to them.

In almost all cases, you will need to make a paper wallet yourself.

When to choose security, when to choose convenience

When deciding between security and convenience, make a decision on when you will want to access your funds again. If you are holding Bitcoin for the long run, choose the most secure option, and take into account the risk of loss and your ability to remember passwords in the long run.

When keeping Bitcoin for shopping, don’t keep more than you intend to spend, and keep them with you on your phone so that you have them ready when you need them.

A structured approach for deciding how to store your Bitcoin

Bitcoin usage can be defined by two independent variables: transaction volume and transaction value. Whether these values are high or low changes which Bitcoin wallet is best for you.

Transaction volume is the rate of Bitcoin transactions you make. This might mean one transaction per day or only one per week. What counts as high or low in this case is arbitrary.

Transaction value is the Bitcoin value of a given transaction. What defines a large Bitcoin value is similarly ambiguous. A good rule of thumb to have is to consider a low transaction value as less than or equal to the amount of money you would be comfortable carrying around as cash in your pocket. Everything larger than that can be considered high value.

Consider using multiple Bitcoin wallets to mitigate risk

There is absolutely no need for you to restrict yourself to one solution. Maybe the way you use Bitcoin includes all the use cases listed below, such as regular small payments, regular large payments, and long-term investments.

Use multiple options in parallel to make the most out of keeping Bitcoin both accessible and secure.

Find the Bitcoin solution for you

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High frequency with low amounts

Mobile Wallet

If you are making a lot of transactions with low value (e.g., because you mostly use Bitcoin to buy socks, tea, or a VPN), then you should use a mobile wallet that you control the keys to.

With a mobile wallet, your Bitcoin are always accessible as long as your phone has power. If you use a modern smartphone with an up-to-date operating system, your Bitcoin are secure. Don’t forget to backup your seed phrase on a piece of paper and store that paper somewhere securely!

What makes a good mobile Bitcoin wallet?

There are plenty of Bitcoin wallets. Finding the right one for you may take a bit of time. Feel free to download more than one and try setting them up. Explore the user interface a bit before deciding where to keep your Bitcoin.

You also don’t have to make an immediate decision. You can send funds to two wallets at once, or move your funds to a different wallet.

Fees:

Bitcoin transactions cost money, but estimating the correct amount is a big engineering challenge. Some wallets allow you to set fees yourself, while others only let you choose between “expedited” and “economy” transactions, which can be grossly overestimated.

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Custody:

In a good mobile wallet, you yourself are in control of your funds, nobody else. Period.

SPV or not:

SPV, or Simplified Payment Verification, is a technology that lets your lightweight phone app connect directly to the Bitcoin network. This may be a bit slower and consume more data, but it also means your wallet will always be online. Another drawback of SPV wallets is that they might get confused during a network fork.

High frequency transactions of high value

Hardware Wallet

If a lot of money is at stake, like if you are conducting a business that frequently deals with Bitcoin, or if you are paying some of your staff in cryptocurrency, then you need a hardware wallet. Hardware wallets look like USB sticks and store your Bitcoin private keys on a specialized chip, similar to the secure enclave in an iPhone. Reputable hardware wallets include Trezor and Ledger Wallet.

Even if your phone or computer gets hacked, your hardware wallet would be unaffected. Since the wallet is password protected, someone who steals or finds your wallet would not be able to access it.

Low-frequency transactions of high value

Paper Wallet

If you have significant savings in Bitcoin that you do not need to spend or move frequently, a paper wallet is best for you. Don’t use an online service to create your paper wallet, but rather create one yourself.

The most secure option is to get yourself a copy of the operating system TAILS, which comes with the Bitcoin wallet Electrum installed. Crawl under a blanket or tent, boot it up, and create a Bitcoin wallet. You write down the seed on a piece of paper and shut down the computer.

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As TAILS by default keeps no data on your USB stick and wipes the internal RAM, there are no traces of your seed left on the computer. As long as you can secure the paper, your Bitcoin are secure. If you lose the the paper, you lose everything.

To send your Bitcoin, you will have to again boot into a TAILS instance and restore a wallet using the seed from your paper.

Low-frequency transactions of low value

Online Wallet

If you only keep a small amount of Bitcoin and rarely spend them, have a look at an online wallet service, like blockchain.info.

Unlike with your mobile wallet, you don’t have to worry what happens when you switch devices. You can log into your account using an email address and a password. When you sign up, carefully go through the security options to protect your account from hackers while keeping it accessible only to you. Using a strong password and a password manager is a good idea!

How to make a multi-signature paper wallet?

For the extra paranoid, you can not only keep your Bitcoin in a single paper wallet, but also combine multiple paper wallets to further protect yourself from loss and theft.

The steps below describe a simplified process to create a two-of-three multisignature wallet. It has three paperwallets, but two of the three wallets are needed to redeem the Bitcoin. If a single wallet is stolen, lost of seized, you will not lose your Bitcoin.

1. Pick three locations for your Bitcoin wallets. Some suggested locations include your home, your safe, a safety deposit box, your lawyer or trusted friend, family homes or work desk.

2. Go to location #1 and create a wallet using Electrum in TAILS. Write (not print) the seed on a piece of paper, and store the master public key on a USB stick. Repeat for location #2 and #3.

3. Start your regular computer and combine the three master public keys into a watch-only multi-signature wallet. You will see the Bitcoin addresses you created and can send funds to them.

4. To redeem the funds, create an outgoing transaction in your regular computer and save it as a raw, unsigned transaction on your USB stick.

5. Go to two of the three locations, create the wallet from your paper backup, and load the unsigned transaction into Electrum. Sign it.

6. As soon as the transaction has two signatures, you can transfer it back to your regular computer and broadcast it to the network.

How to Secure Your Bitcoin Wallet Password

Depending on how you have set up your Bitcoin wallet, you will likely need a password as part of its security. A good password is long and random. Some password need to be memorable, while other passwords can be conveniently stored in a password manager.

Password Managers

A password manager, or password vault, is a computer program that helps you create and store secure passwords. It may come as a browser extension, a separate program, or an app on your phone. Some password managers host your encrypted password in the cloud, while others store them only locally.

If you intend to use your password manager between multiple devices it is often better to go with a paid cloud solution. If you are only using them on a single computer, an open-source tool like KeePassX will do you well.

Password managers are not only more secure because they can create long and truly random passwords at the click of a button, but they are also more convenient—you don’t have to remember hundreds of passwords.

Instead, you only have to remember a single password to open the password manager. To create a random, long, yet memorable password for your password manager, have a look at the Diceware guide in the appendix. Four to six words will be long enough.

Paper wallets

When creating paper wallets, it is usually best not to encrypt them separately with a password. It is generally very difficult to remember a good password over a long period of time, and you will likely forget the password by the time you want to recover your funds.

Hardware wallets

If you use your hardware wallet often, you should definitely set an additional passphrase. That way, in case you lose your hardware wallet or have it stolen, you will not lose your funds (make sure to have a backup seed on paper somewhere).

Because hardware wallets often come with a switch that wipes the wallet after too many false attempts to guess the password, two words from the Diceware list are enough.

Mobile wallets

Your smartphone should have encrypted storage (make sure this option is enabled in your Android device; iOS devices come with encrypted storage enabled by default). It is important to also set a passcode or passlock, as fingerprint or face scanners can be insufficient for security.

Most mobile wallets allow you to set an additional password or passcode. Make use of that, though if you don’t use the passcode too often, you might want to add it to your password manager, too.

Online wallets

Your online wallet can be a good place to keep a small amount of Bitcoin without having to worry how to regain access to it after a long time. Make sure your online wallet is associated with your email address so that you don’t have to rely on keeping a wallet identifier ready. Familiarize yourself with the security options of your account and make use of them. Because online wallets are accessible through a web browser from anywhere, it is most vulnerable to hacking attempts.

Two-factor authentication for your online accounts

While using Bitcoin theoretically won’t require you to open up any accounts, you will likely open up plenty of accounts with third-party services. Is is important to keep those secure too, even if you don’t keep money in them. These accounts include exchanges, payment processors, and debit card providers.

Two-factor authentication means that in addition to your regular password, you need to submit a second code to log into your account. There are plenty of ways to obtain this second code. You can use a combination of any of the following, or just pick the one that best suits your needs.

Secondary passwords by SMS

A few services will ask you for a second code every single time you log in, especially if you have never logged in from that device before. Services such as Facebook, Twitter, Google, and Dropbox will send you a text message containing this code. This code must then be entered into the website in order for you to log in to your account.

However, for this to work, your phone needs to have reception, which is something that is not always possible. If you are traveling in a country where your phone does not work, or you simply run out battery, you could end up locked out of your account just because you don’t have a working phone on hand.

If you lose your phone, this system could potentially lock you out of your account for good. However, it’s not too difficult to get a new SIM card with the same number. The downside of this is that an attacker could trick your mobile phone provider into issuing them a duplicate SIM, or perhaps find a way to reroute your text messages directly to them.

Snooping governments could also be reading your text messages silently or preventing an SMS from even reaching you (or both!). This would allow them to effectively render your SMS codes useless. At the very least, your phone could give away your location while receiving the text message, something you might wish to avoid.

Generating 2FA codes via an app

Google Authenticator and Authy are two great examples of Apps that generate codes on your phone instead of sending them to you via text message. Generating the codes on your phone means they are never in transit, making them impossible to intercept.

This process does make you more dependant on your device, though. And if it is out of battery, broken, or missing, you might get locked out of your account. If you are unable to get the device running again, or you lose it, it can be a huge hassle to regain access to your Google Authenticator protected accounts.

Some authentication services will allow you to create emergency codes in such a case, which you have to store securely elsewhere (such as in an encrypted file on your computer). Other services might ask you for a secondary phone number where they can reach you in case your primary number is lost and your 2FA needs to be disabled.

Generate an authentication code with a USB stick

Instead of getting the secondary codes from your phone or a remote server, you could generate them on a dedicated USB device. These devices are small USB sticks (sometimes as small as a fingernail!) that plug into the USB slot of your computer. They have a clickable button on its side. Pressing this button will generate a random and secure key which can be used as a secondary password.

FIDO U2F is an open source standard that is very easy to set up and is supported by many popular services, such as Facebook and Google. The U2F authentication system will place an instruction to enter the key after entering the primary password.

How to keep your wallet seed words private

Hardware wallets, mobile wallets, and even online wallets often use a seed phrase to back up your Bitcoin. These are usually 12-24 single words that, in the correct sequence, can be used to restore your wallet if your device breaks or is lost. However, everyone who has access to your seed phrase will be able to also steal your Bitcoin. It is important to store the seed phrase securely. Plenty of options exist.

Write them on a piece of paper

If you are mostly worried about hackers, you can easily protect yourself by writing the seed on a piece of paper. Don’t print them out or keep a copy of them on any electronic device. You can keep the paper where you store your other valuables or sensitive documents, such as a secret compartment, a safe, or a safety deposit box at a bank. What’s not electronic cant be hacked, right?

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Put them in your password manager

If you’re worried more about burglars or the government, a password manager is probably a safer place than your home or a safety deposit box, which the police can easily, and legally, get access to. If you are familiar with PGP, it’s also a great option to safely backup any files.

Divide and distribute!

You might be worried about a mix of attackers who could get hold of your Bitcoin wallet seed and steal your money. This could include burglars, hackers, the government, or even loss by fire or flooding. To defend against everything, you can cleverly distribute your seed.

Divide your seed equally into three parts of four words each. (If your seed has 13 words, make sure that the third paper includes five words.)

Write each block of four words on two pieces of paper.

Place the six pieces of papers in three different locations in a way that if each location is lost, you are still able to recover the full seed.

If an attacker finds any of the three locations, they are not able to steal your Bitcoin.

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Multi-signature wallets and how to use them

One of the great features of blockchain-based systems is the use of smart contracts. Smart contracts are rules enforced by the network, in particular the network nodes, which anybody can run on their computer.

In a broader sense, Bitcoin transactions are a kind of smart contract. A Bitcoin can only be spent by its owner as identified through their public key hash, e.g. their Bitcoin address.

A more complicated form of smart contracts implemented on the Bitcoin blockchain are multi-signature addresses. These addresses, which start with 3 instead of 1, have “only” been around since 2012, three years after Bitcoin’s inception.

Basic functionality of a multi-signature wallet

When creating a multi-signature wallet (“multi-sig wallet”), you can define how many signatures there should be in total, and how many of them should be required to make a transaction.

The most commonly created wallet-type is a 2-3 wallet, meaning there are a total of three signatures, of which two are needed to sign a transaction.

The functionality is in practice similar to bank accounts that require multiple signatories. But because the blockchain is built not on trust, but on cryptography and consensus, it is impossible to cheat, and no central party can arbitrarily seize your funds.

What 2-of-3 multi-signature wallets can be used for

Better security

If you fear that your computer or smartphone might get hacked, you can use a 2-of-3 multi-signature wallet to increase your security.

Setup

Wallet 1: Mobile wallet on your phone (without backup)

Wallet 2: Wallet on your computer (without backup)

Wallet 3: Paperwallet in separate location

How to use it

Every time you want to make a transaction, you have to initiate the transaction with one device (for example by scanning a QR code on your phone), then review and confirm the transaction on your other device. No transaction can be made with only one device. This means that if your phone or computer get hacked, your Bitcoin are not lost. If your phone or computer breaks or is lost, you can recover your coins with the paperwallet and move them to a new wallet. If the paperwallet gets stolen, the thief does not get access to your coins.

Drawbacks

If both your computer and phone break at the same time, you lose your Bitcoin. You may prepare yourself for this by creating backups of your digital wallets, in which case you need to be careful with how to back them up. Only put two backup seeds together in the same place if you are certain they are safe!

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Escrow

Imagine Alice wants to buy cryptokitties from Bob over the internet. However, she has never met Bob before and is unsure if she can trust him. She doesn’t want to send the money first, and Bob doesn’t want to send the cryptokitties first. To resolve the issue, and allow Alice and Bob to trade, they can create a multi-signature wallet with a third-party escrow, Emma.

Setup

Wallet 1: Alice on her phone or computer (with backup)

Wallet 2: Bob on his phone or computer (with backup)

Wallet 3: Emma on her phone or computer (with backup)

How to use it

Emma is a person or company. Alice and Bob don’t need to trust Emma with their money or their goods, but they do need to trust her with not colluding with one of the participants. All three create a 2-of-3 multi-signature wallet, and Alice sends her funds into the created address.

Bob can now see that Alice has made the payment. She can no longer take the money back after the goods have been shipped, as she only has one of the needed three signatures.

After Bob has shipped the goods and they have arrived with Alice, Alice and Bob can release the funds from the multisignature account and forward the money to Bob. If everything goes well, Emma is not needed at all, making it very easy and cheap for her to provide that service (unlike in traditional, bank-based escrow solutions).

Only if something goes wrong, Emma needs to step in and make a judgement. She can choose to side with one of the parties, or split the funds in agreement with one of the participants. She can’t, however, take the money herself.

Drawbacks

Escrow services are very useful in situations where the participants cannot trust each other at all, like when all participants are anonymous. However, in those situations, it’s not easy to make sure that Alice and Emma aren’t colluding with each other, or even the same person. Alice or Bob could also still try to bribe Emma.

Company funds

A company running on Bitcoin may have a hard time securing their funds in a traditional single-signature wallet. Who should have the keys to the wallet? Who should prepare the payments? If keys are replicated too often between various authorized signers, there is a risk of having the keys hacked or stolen. If too few people have access to the funds, they might become inaccessible after an accident.

Setup

Wallet 1: The CEO (without backup)

Wallet 2: The accountant (without backup)

Wallet 3: Paperwallet in a safe held by the board

How to use it

In this setup, neither the CEO nor the accountant can run away with the company money. But the accountant can still prepare the payments, sign them, and pass them on to the CEO, who confirms them by adding her signature. If one of them disappears or lose their device, they can regain access to the company funds by explaining themselves to the board.

Drawbacks

The CEO and the accountant may still collude with each other and run away with the company funds. But even if they don’t, they better never get into the same car or plane ever again. If both their keys become accessible, the funds are gone.

Two-factor authentication

Two-factor authentication (2FA) is not common for Bitcoin wallets, but highly recommend for online accounts like your email or cloud storage. With a multi-signature wallet, two-factor authentication can also become possible for Bitcoin wallets.

Setup

Wallet 1: Your computer (without backup)

Wallet 2: The online 2FA service

Wallet 3: Paperwallet in your safe

How to use it

Every time you initiate a transaction on your computer or phone, the transaction has to be signed off by the online service. Before they sign off on your transaction, they will require you to enter a two-factor authentication code. This code could be generated on your phone, be sent to you by text message, or even come from a hardware device. They can also impose transaction limits on your account, or require different levels of authentication for different transfers.

Drawbacks

If the 2FA service goes offline or is being DDoS’d, your funds will be unavailable until you can find the paperwallet in your safe. If somebody has both your device and access to your paperwallet, they are able to bypass the 2FA service completely.

There are also significant privacy implications to using a third-party service for your Bitcoin wallet.

Part 2: Privacy and Bitcoin

Protecting Your Financial Privacy

One of the apparent contradictions of Bitcoin is the notion that your transactions can be private but have a public transaction record. In this section, you’ll learn how you can use Bitcoin to keep your finances private.

Why it is important to keep your funds private

As a financial system, Bitcoin functions completely differently from the established banking network. Bitcoin allows you to store funds yourself, without the need for a third party, and therefore places the burden of keeping said funds secure and accessible on you.

While opening an account with a traditional bank or other financial institution requires significant cost and effort, creating a Bitcoin account is quick and easy to do on your home computer. This speedy process makes it possible to create hundreds of separate accounts if you wish.

Two aspects in particular—privacy and identity—function very differently with Bitcoin than in the legacy financial system.

Pseudonyms protect your identity in Bitcoin

A bank account, PayPal account, or credit card is always tied to a real identity, making it difficult for many people to open them. Bitcoin allows you to use any persona or online identity you wish.

Being able to use the internet anonymously or pseudonymously is the only way for many people to truly be themselves. Hundreds of millions of people around the globe are not accepted in their societies for reasons they cannot control.

Pseudonyms are used by women speaking up for their rights, atheists living in religious societies, and people critical of their governments to spread their thoughts, empower their causes, and encourage those around them to do the same.

These courageous men and women put their own safety and well-being at risk to defend who they are and what they believe in. Technology empowers them to become leaders of social change in societies by providing this very pseudonymity. Technology also connects like-minded individuals so they can form the communities for which they strive.

Maintaining an identity with a large following might require paid services such as blogs, logo designs, stock photos, VPNs, or translations. Without the ability to pay for these services anonymously, you would be forced to reveal your true identity in order to maintain your pseudonym situation which clearly makes no sense, and one with potentially dangerous ramifications.

How Bitcoin empowers anonymity

Bitcoin is an important, empowering technology. Using a Bitcoin account with a pseudonym protects your right to remain anonymous on the internet. It allows anonymous or pseudonymous fundraising. Groups can collectively control Bitcoin accounts and choose to either hide or reveal financial information at will.

There are many positive reasons for a private and secure banking system like Bitcoin.

For example, a workers’ rights group could raise funds with Bitcoin. The money could be used for servers, flyers, remote helpers… and all without tying any transaction to the real identities of the volunteers.

Likewise, a domestic abuse victim might use Bitcoin to securely stack away funds to prepare for an independent life.

Privacy through pseudonymous accounts

Privacy in traditional banking is guaranteed by the institutions that make up the system, such as banks, credit card companies, and governments. They (try to) ensure that your bank balance stays a secret. This puts them in a powerful position, where only they have complete oversight as to what is going on.

In the Bitcoin ecosystem, everyone can see the history of every account balance, but they cannot see who controls an account. All addresses and transactions are recorded in Bitcoin’s publicly distributed database, the blockchain. The addresses do not have names or IP addresses attached to them, so it is not always possible to know which transaction belongs to which individual.

Transparency requires protection

Bitcoin is by default a transparent system, in which every piece of information is available to the public. As such, every Bitcoin user requires some level of protection. Anyone with substantial wealth in Bitcoin would not want to advertise their funds to every person they transact with, for obvious reasons. But every time you spend just a tiny portion of your Bitcoin wallet, you reveal your wealth to the other party. Doing that on the internet is like flashing large stacks of cash in a dark back alley, so obviously it’s not advisable! A criminal might see how much you have and decide to come after it. Distributing your wealth between several wallets and using a different address for each transaction is a common practice that prevents others from knowing how much Bitcoin you have.

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The traditional privacy model and the new privacy model as explained by Satoshi Nakamoto in the original Bitcoin Whitepaper.

How you can be de-anonymized using Bitcoin

Sadly, there are hundreds of ways a Bitcoin transaction can be linked to someone’s real identity. True pseudonymity against a resourceful adversary is very difficult to achieve. Any sincere approach to anonymity in Bitcoin requires a holistic use of encryption and communication tools.

Over the course of just a few months, you could come into contact with hundreds of Bitcoin addresses. It is often only necessary to associate just one of these addresses with your real identity to work out your real identity.

Bitcoin is traceable on the blockchain

Each Bitcoin transaction contains at least one input (where the Bitcoin are from) and at least one output (where the Bitcoin are being sent). This means that once a single address is known, there is a trail to follow the Bitcoin.

Another characteristic of Bitcoin transactions is that they always need to match the previous transaction. If you previously received 1 bitcoin, but you only want to spend 0.4 Bitcoin, you will first need to make a transaction where 1 bitcoin will leave your account. 0.4 bitcoin will go as payment, then 0.6 bitcoin will return to you as change. Your Bitcoin wallet will handle this process automatically, but it is important to understand the principle in order to use it anonymously.

The owner of the original Bitcoin doesn’t know what you did with the money, but they can see the amounts involved. They can see two transactions on your account: one for 0.4 bitcoin and one for 0.6 bitcoin. They cannot see which was the purchase and which is the “change,” but it’s a 50% guess. The next time you make a transaction, it’s a 25% guess, and so on.

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1 input consumed, 2 outputs created.

This is why making lots of transactions, even between yourself, increases your anonymity in the Bitcoin network (as long as your wallet software does not reuse addresses!).

Similarly, if you receive 0.5 bitcoin but want to spend 1 bitcoin, you need to own additional Bitcoin addresses with a combined value of at least 0.5 bitcoin in them. Again it’s a 50% guess, but now you have one extra publicly visible Bitcoin address. Having publicly visible Bitcoin addresses could make it easier to find out your identity.

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2 inputs consumed, 2 outputs created.

Your name might be linked to your Bitcoin address

Your real name might be connected to a Bitcoin transaction when you make transactions with Bitcoin, for example, if you buy goods online and have them shipped to your real address. Bitcoin exchanges and even some ATMs often require you to show identification before making a purchase. When you buy Bitcoin from someone in person, they might know who you are and keep a record of the transaction. This record could fall into the hands of your adversary, or maybe even be made public.

Your country’s anti-money laundering laws might require you to reveal your identity when buying or selling Bitcoin, making it necessary to obfuscate your trail on the blockchain to protect your anonymity.

Your IP address might be linked to your Bitcoin address

When you make a Bitcoin transaction, you are essentially creating a message on your phone or computer and sending it to the Bitcoin network. Someone operating a large number of nodes in the Bitcoin network might be able to match some of your transactions to your IP address, then deanonymize your entire stack of Bitcoin.

It is relatively easy to avoid this on a computer by relaying all transactions through the Tor network. Most Bitcoin clients and wallets support Tor’s SOCKS5 proxy.

Revealing your Bitcoin address before it goes into the blockchain could let others track you

As soon as a Bitcoin address is entered into the blockchain, it is publicly recorded in an immutable global database. Before that happens, it’s likely that only two parties—the recipient and sender—had knowledge of this address. If you are making a search for an address that has not yet appeared on the blockchain, either you are the owner of this address, or someone is requesting a payment from you.

To avoid being tracked in this way, it is important to make all payment requests and other mentions of addresses via encrypted channels:

Make sure the website you are visiting has HTTPS enabled when you search for Bitcoin addresses

Use VPNs and Tor when possible

Encrypt your communications with PGP (emails, files and text) and OTR (chats)

Possessing a wallet file might be enough proof that you control Bitcoin

A signed message is the only strong proof that you own a Bitcoin address without revealing the private key. Be careful when signing messages using your Bitcoin keys, though. Signed messages are a great feature (we’ll talk more about why later), but they allow anybody to know that you control the Bitcoin address you signed from.

If someone is trying to de-anonymize you, they might be satisfied with a weaker form of proof than a signed message: Knowing that you keep records of public addresses is enough evidence for someone to draw the conclusion that you are involved in Bitcoin transactions and the Bitcoin blockchain will point them exactly to which transactions. All they have to do is search for the address you recorded.

Most wallet software store public addresses without encryption, only encrypting the private keys. This is good for user experience, since you don’t have to type in a password every time you want to see your balance or check transactions.

You can safely store your wallet in an external USB drive, a cloud storage service, or even your email account if the private keys are sufficiently encrypted. But anybody with access to these mediums could estimate what addresses you control and the transactions you make.

To protect yourself, you should encrypt all backups with a second password or PGP.

How to be transparent

The concept of privacy is best defined as the extent of control you have over your information. This control not only includes the power to hide or conceal your personal information, but also the power to reveal it to the public. Transparency is useful if you need to gain legitimacy in the eyes of your audience or backers. Bitcoin allows you to be transparent to any degree you like. You can use it to prove single transactions or ownership of a Bitcoin address. Transparency also allows you to audit your organization down to the last Satoshi (the smallest unit of a Bitcoin), without revealing your real identity or location.

When compared to traditional financial systems, Bitcoin’s transparency is an important and empowering innovation because it allows you to prove beyond doubt that you made a transaction of funds. The blockchain does not lie, and it cannot be bribed.

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“The blockchain does not lie, and it cannot be bribed.”

Transparency via signatures

The simplest form of Bitcoin transparency is to link two identities by signing statements. How you do this depends on your specific wallet software, but the principle is always the same. You write up a statement and then sign it digitally with your private key. This will not necessarily prove that the statement is true; it only proves that the owner of the address made the statement.

For example, if the operator of a website claims they control a Bitcoin address in their statement, and the owner of the Bitcoin address claims they are the operator of the website in their statement, you can reliably conclude the two are the same entity. You can then send funds to the Bitcoin address, safe in the knowledge that it is going to the right website.

You can also use these signatures to make statements about some of your transactions. For example, you might need to prove to auditors that you made a transaction, or that you control a certain amount of funds.

This is very useful for unforgeable, digital receipts. With just a few clicks you can prove to an art dealer that you are in possession of enough funds to purchase a painting, or maybe show your investors that you are still in control of their money.

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Sign and verify your message to prove you control the funds.

Transparency via reused addresses

The official Edward Snowden Defense Fund uses a static Bitcoin address for its Bitcoin donations. This shows how many Bitcoin they have raised, and gives backers assurance that they are not being duped into donating to someone claiming to be collecting money on behalf of the defense of Snowden.

This level of transparency can be used anywhere, to prove that funds are not being embezzled and money is being spent responsibly.

How to protect yourself from being de-anonymized

Be conscious of what information you reveal about yourself

The first rule is to be conscious about what you are doing and what you are revealing about yourself. Question your actions. Are you on a VPN? What have you previously done on this IP address? Which tabs do you currently have open in your browser? Which Bitcoin wallet are you using? Where does the money in that wallet come from, and what have you previously bought with it? Who have you recently communicated about what you are about to do, and was that information encrypted?

All of these steps are important if you want to protect yourself. There are many little things which reveal a bit about you online. The following points will explain how you can best protect yourself. Always be vigilant, and remember to stay conscious of what data you submit to whom and to think about how it could be used to identify you.

Never reuse addresses

Choose Bitcoin wallets that respect your privacy by never reusing addresses. HD wallets (Hierarchical Deterministic) generate a practically infinite number of addresses from a single seed. HD Wallets make it easy to use a new address for each transaction and also provide a safe backup mechanism.

Be cautious of services where your withdrawal address is fixed. Change your Bitcoin address manually after each withdrawal to an unused address. Encourage others to change their addresses after each use too, as their practices will affect your privacy as you interact with them.

Use Tor

To maintain your anonymity, use the Tor Browser or the TAILS operating system, which comes pre-installed with the Electrum Bitcoin wallet. Route everything through Tor by default.

It is also good practice to route your chats through the Tor network. You can also configure many cloud storage providers in this way.

Secure your browsing

Always use HTTPS when viewing websites with any information related to your identity or Bitcoin transactions. This simple protocol is used to encrypt the traffic between the site you are viewing and your computer. A green lock icon in your browser’s address bar indicates that the website you are on is using HTTPS.

Another way to secure your browsing is with a VPN. When you use a VPN, the VPN hides your real IP from the sites you are interacting with. Be careful when choosing a VPN provider. Carefully read their privacy policies, specifically with regard to the information they log.

Use the Tor Browser to further hide your location from the sites you access. Services using a .onion address allow for the most secure end-to-end encrypted and anonymous connections on the internet.

Encrypt your chats

For maximum protection, create a separate Jabber account (also referred to as XMPP) for each of your online identities. There are plenty of free services available for you to choose from. Sign up through Tor and route all your chats through the Tor network, using the inbuilt SOCKS v5 proxy for extra security.

To ensure that your chats cannot be intercepted and read by anyone other than the intended recipient, use OTR as a reliable and robust encryption protocol. Note that you can only use OTR if the person you are communicating with is using it, too.

Make your emails private

Of all online services, email is most vulnerable to snooping and hacking. While a good email provider will make it very difficult for attackers to access their system, the provider could still voluntarily hand over your data to governments, when asked. Unfortunately for people seeking privacy, many email providers make it difficult, if not impossible, to access your email via Tor. Some even require you tie your email address to a phone number or real identity.

Use PGP to encrypt your emails, although you will only be able to do so with people who also use PGP. If you are super concerned about your privacy, avoid communicating via email altogether and instead prefer encrypted and well respected chat apps, such as Jabber (with OTR) or Signal.

Encrypt your backups

The easiest way to encrypt the random words from your HD wallet (or any other text) is with PGP, though this will require you to also think about how to backup the PGP key. If you encrypt your PGP key with a very good password (it needs to be long and memorable, a combination human minds are notoriously bad at), you only need to remember one master password to access all your files. Use the password to encrypt your PGP key, then back up all other files by encrypting them with the encrypted PGP key.

Use separate wallets for each identity

It is easy to maintain a different Bitcoin wallet for each of your online identities. You could have a wallet for every need. For example, you could have:

a wallet for incoming donations

a wallet for your real identity for when you buy and sell Bitcoin at regulated exchanges

a wallet for your advertisement revenue

a wallet for your savings…

Etc.

You don’t need to download separate software for each of your identities. All you have to do is keep separate wallet files (files that contain your public and private keys). Just make sure not to confuse the separate files and not to mix their funds.

Whenever you need to move funds between your identities, you will need to obfuscate the trail to make it difficult for anyone to link your identities together.

Obfuscate transfers between identities

When used in relation to the traditional financial system, the words “obfuscate”, “tumble”, or “mix” sound like they’re related to criminal activity. However, they are pretty innocent when it comes to the Bitcoin world.

Due to the transparent nature of Bitcoin, business transactions might require some form of obfuscation to protect trade secrets and business practices. A wire transfer from a person to a regular bank account should not be revealed to another party, nor should the customer or competitors find out how revenue is used. Without obfuscation, we inevitably reveal a lot more than we have to, so it’s a good practice to ensure your Bitcoin wallet is as private as you need it to be.

How to obfuscate transfers between identities

Individual exchange

There are many ways to obfuscate transfers. You could exchange Bitcoin with someone else at a 1:1 exchange rate, though this requires great trust in the other party. You could also use an external escrow service. This option is rarely used, however, as the escrow company could possibly record compromising information about the transaction.

Online wallets

You can also protect your privacy by using an online wallet that doesn’t assign unique addresses to each user. Online exchanges are one example. When depositing your Bitcoin into such a wallet, your coins might end up in the hands of someone else. Conversely, you might receive coins previously owned by someone else. These services are called Tumblers. It’s important to note that you won’t gain or lose any Bitcoin during this process.

Common Bitcoin exchanges usually abide by strict anti-money laundering regulation. They will keep records of all your transactions, possibly indefinitely, which they may hand over to a law enforcement agency. They might also ask for proof of your identity before they let you withdraw coins, a practice that might affect your privacy more than simply tracing your Bitcoin.

No online wallet that exists for the purpose of tumbling coins would be able to give you a guarantee that you will receive Bitcoin that were not already held by you. Doing so would require them to keep track of the entire process (rather than just deposits and withdrawals), which would defeat the point of the system. Another significant risk of a Bitcoin Exchange is that you trust your Bitcoin with a third party that likely operates anonymously themselves. You will have no recourse if the exchange or wallet provider disappears with your funds, as has happened several times.

Altcoins

Another way to disconnect yourself from your Bitcoin is just to sell them. You could exchange your Bitcoin for cash or gold, but a better option is to exchange them for altcoins. That way the transaction is cheaper, safer, and easier to execute anonymously online. You could even sell your Bitcoin in exchange for another cryptocurrency with high volume and market cap, then buy them back on a second exchange shortly after.

You will have to find multiple exchanges, with low KYC (Know Your Customer) requirements that can be trusted with your coins. This can prove to be quite a challenge.

How to pick a good altcoin:

The altcoin must be popular enough that your transaction won’t stick out.

The altcoin should provide additional privacy guarantees.

The first and second exchange should not be the same, or else someone could try to link your two transactions through technologies like browser fingerprinting.

Coinjoin

Coinjoin is the most promising way to maintain your financial privacy with Bitcoin. It works by combining many transactions into one so that it’s not clear which inputs and outputs are correlated.

This can be done with software that eliminates the risk of funds disappearing or being stolen. Each of the signatures are created on the participants’ computers, so anyone trying to connect the signatures is unable to alter the transaction or redirect the funds. The funds will always be in a Bitcoin address that you control.

It’s possible to do this in a decentralized way so that the service does not rely on external parties or centralized servers. It just needs the participants of the transaction.

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Services like Coinjoin scramble the Bitcoin inputs and outputs to maintain everyone’s anonymity.

The biggest problem with Coinjoin is that it might still be possible to correlate the inputs and outputs, as there are often mathematically too few possible combinations of inputs and outputs, which allows a computer to determine which inputs correspond to which output.

To mitigate the possibility of someone figuring out which inputs and outputs belong to each other, the protocol has to be standardized in some way. As the inputs cannot easily be standardized, the outputs may be predefined. For example, you might limit the outputs to exactly one Bitcoin. Limiting the outputs to exactly 1 bitcoin would make it impossible to match the account to the transaction, as every output will be for 1 bitcoin. However, your inputs will likely be more than 1 bitcoin each, so the difference will be returned to you untumbled. This is because the spare amount can be matched to a transaction.

Coinjoin can be applied multiple times, and as many transactions are grouped together, participants may save on transaction fees. Coinjoin is the preferred method of gaining privacy in the Bitcoin network. It is even possible that this functionality might one day be included directly on the protocol level as standard, as some altcoins already do.

Part 3: Systemic Risks

Can Bitcoin Disappear as a Whole?

Apart from the security and privacy of your coins there are also other concerns around Bitcoin’s stability and security that deserve our attention. These risks are endemic to Bitcoin’s design and its young ecosystem, and they are often outside of our control.

While there is little we as individuals are able to do about them, understanding these risks helps us understand Bitcoin as a whole, and allows us to make better decisions about how much we can trust the network.

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Its proponents advertise Bitcoin as a decentralized network that cannot be controlled by anybody. Indeed, the cryptocurrency experiment now valued at more than US$300 billion is close to impossible to shut down—even its users don’t know how to turn it off.

Some obvious things could stop Bitcoin, of course. But they often raise more complications and are themselves highly complicated.

What could an organization do to make Bitcoin worthless?

Shut down the internet

How does one turn off the internet? Apart from the high amount of cooperation this would require from private entities and governments, we don’t know how to shut down the internet. The network was in part designed to keep going even after a nuclear strike, and it does not have a kill switch by design. The internet itself is also highly resilient against attacks, and information would just route around each part that we turn off.

Even if significant parts of the internet were shut off or damaged, Bitcoin’s bandwidth requirements (currently 1 MB per ten minutes at a minimum) might be small enough to successfully broadcast over radio waves or the telephone system.

On top of that, would any organization really want to turn the internet off? The internet has many other uses, like sending cat photos. The economic damage from turning the internet off would be gigantic, and it would very likely even cost lives.

Destroy all the nodes and miners

The Bitcoin network is made up of individuals, groups, and organizations that run the Bitcoin software on their laptops, phones, and even Raspberry Pis. Some of these participants also run dedicated computer chips, called Bitcoin miners, to exchange electricity into Bitcoin. In a kind of digital lottery, where those who make the network more secure might get some Bitcoin.

While some of these Bitcoin miners and node operators are highly visible, they’re not going to be interested in shutting down their systems voluntarily. It might be possible to seize or destroy some miners or node operators, but this will only make mining more profitable for those who operate secretly.

As a response, Bitcoin mining will go underground, and nodes will hide behind VPNs and the Tor Network. As long as there is money to be made in Bitcoin mining, people will risk their freedom to take part. For example, Bitcoin mining remains attractive in Venezuela, where Bitcoin is illegal.

Make Bitcoin illegal

If a state were to make Bitcoin illegal, it would become much harder for people to buy Bitcoin miners, exchange Bitcoin into paper money, or accept it as payments in a store.

But as in the world of online drug markets (which are also, to some degree, driven by Bitcoin), people are very much willing to break the law for some profit, and the pseudonymous nature of Bitcoin will make it hard to track down its traders, owners, and users.

Mine empty Bitcoin blocks

The only guaranteed way to bring Bitcoin to a halt and make it worthless, is to participate in the network yourself and disrupt it from within.

It’s part of Bitcoin’s anarchist nature that anybody can take part in the system anonymously, as long as they conform to the rules laid out in the Bitcoin software. For example, no rule states that blocks have to be filled with transactions to be valid, so a miner could theoretically just mine empty blocks.

If all blocks were empty, nobody could transact on the Bitcoin blockchain, and without the ability to send money, it would become worthless.

With just 10% of the global Bitcoin computing power, an organization could significantly slow down the Bitcoin network. As the evil operation expands, it will eventually reach 50% of the total hashing power, allowing them to keep all the blocks empty.

Bitcoin nodes accept the longest valid blockchain as valid, so if a group has more than 50% of the total hashing power, they can eventually create a chain longer than the other, honest miners, who would prefer to fill up their blocks with transactions.

Bitcoin’s founder, the pseudonymous Satoshi Nakamoto, explains:

“The race between the honest chain and an attacker chain can be characterized as a Binomial Random Walk. The success event is the honest chain being extended by one block, increasing its lead by +1, and the failure event is the attacker’s chain being extended by one block, reducing the gap by -1.”

With all that in mind, here’s how to destroy Bitcoin:

Step 1: Buy lots of Bitcoin miners

Currently, the Bitcoin network has a total hashing power of about 5.7 Exahash per second. That’s 5.7 x 10¹⁸ Hashes every second. The latest model of a modern Bitcoin miner, like the Antminer S9, produces about 14 Terrahash per second, or 14 x 10¹².

That means that there is roughly the equivalent of 400,000 Antminer S9s currently in operation in the entire market, which at US$1099 each would cost about US$447 million.

To gain 50% of the total computing power, you would need to add the total of the world’s computing power to the network. As more miners join the network, it becomes more difficult for everyone to mine. If the price of Bitcoin does not rise, it will become unprofitable for others to mine, and you wouldn’t have to try as hard to take over 50% of the total network. You might also be able to build miners for cheaper than what they sell for online, but margins aren’t huge.

An organization should expect to invest around US$350-400 million to get the attack started.

Step 2: Run all the miners

An Antminer S9 consumes 1372 W, so 400,000 Antminers will consume 548,800 kW per hour (4,800 GWh per year). For perspective, the largest nuclear power station in the world, the Bruce Nuclear Power Station in Ontario, Canada, generates about 47,000 GWh in a single year.

Bitcoin’s power consumption of 550 MW is about 1/10th of that of a city like San Francisco, so Bitcoin is still small enough that a group could source electricity for the Bitcoin attack on the open market.

Assuming the attacker chose the cheapest power supply available, it would cost around US$0.04-0.06 per kWh, which means ~US$22,000-33,000 per hour for electricity, or roughly US$192 million per year—just to keep Bitcoin blocks empty.

When will the ongoing power costs stop?

As the other miners slowly disappear, the daily electricity consumption can decrease bit by bit. It’s unclear how long others would be willing to hold out—maybe a month is enough, but it could take a year or longer. In a further increase to expenditures, the attacker might even have to buy more miners and spend more on electricity to keep an attack going.

An attacker would hope other miners would quickly slide into insolvency. It would be difficult to recoup money on the miners, though, as they can only mine Bitcoin (and Bitcoin is now dead), and will, therefore, have no resale value.

Who could finance a Bitcoin attack?

Bitcoin is a US$70 billion asset, with close to US$1 billion of trades worldwide in a single day. An organization could try to recoup some of the investments by shorting Bitcoin at the right moment, as it will inevitably lose much of its value in the first weeks of an attack.

Big banks have a market cap of around US$340 billion (JPMorgan Chase), US$95 billion (Mitsubishi UFJ) or US$145 billion (HSBC). Between them, they might be able to raise enough money to finance a Bitcoin attack, although half a billion would be hard for them to swallow (and justify to their shareholders).

However, if a government or party of governments wish to take down Bitcoin, it would likely be relatively easy for them to claim the funds from the taxpayer. And the total amount needed would probably be comparable to just a thousandth of the annual U.S. defense budget.

How could a Bitcoin attack be stopped?

There are a few things the Bitcoin community could do to stop an attack and rescue Bitcoin. At first, they could require miners to include transactions in every block, to which an attacker could respond by adding meaningless transactions between their Bitcoin.

Eventually, Bitcoin developers would change the proof-of-work algorithm of Bitcoin and make attackers’ (and everyone else’s) Bitcoin miners worthless. Other miners would quickly take their place, and more investment would be needed to keep the attack going.

Conclusion: Where to from here?

Admittedly, Bitcoin security and privacy is not yet as intuitive and easy as it should be.

Our devices and wallets shouldn’t leave us wondering about whether they are secure, and we should not have to be fully aware of all our addresses to be able to transact privately online.

Nonetheless, a lot of this advice would not have been possible just two years ago. The tools needed to safely store and transact Bitcoin have become a lot more sophisticated recently, and more information is available on the topic than ever before.

As Bitcoin becomes more used and tested, as more people rely on it for their commerce, more and better software gets published to fulfill our financial needs.

As it becomes easier to buy and sell Bitcoin, it also becomes easier to acquire them anonymously, and the more Bitcoin gets used the less we have to exchange it into paper money at all.

To use the analogy of the internet again, we won’t have to worry about dial-up modems and slow speeds for very long. Rather, in the future devices and software comes prepackaged for instantaneous Bitcoin transactions, safe storage and effective privacy features.

Appendix 1

How to Use Electrum to Create Your Brainwallet for Bitcoin

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What is a Brainwallet?

In Bitcoin, there exists a way to literally put your money in your brain. It is the equivalent of digitally burying your savings in the woods, only to come back years later to retrieve it. While we don’t necessarily advise you to do this, it can be a powerful demonstration for what is possible in Bitcoin, as well as a practical guide on how to securely create a Bitcoin seed.

You can download Electrum from their official website (https://electrum.org/). There are versions for Windows, Mac, Android, and Linux. You can also find Electrum pre-installed in the operating system Tails, which we recommend, and have used in our example.

A Live-USB (an operating system run from a USB stick) is recommended when setting up your brainwallet, as your computer could already be infected with malware without your knowledge. Even if you consider this risk to be relatively small, a Live-USB eliminates it almost entirely.

Create a new Bitcoin wallet

Create a wallet by clicking on File > New/Restore. Confirm the file name wallet_1.

Select Create New Wallet then Standard Wallet.

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Thirteen English words will appear in the next window.

Write these words down on a piece of paper, then click Next.

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You will be asked to enter the previously generated words in the next window. This will confirm that you have written down the correct words, in the correct order, and without typos.

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Next, you will be asked to set a password. If you are relying solely on your paper backup, this password is not important. If you intend to use this wallet regularly, generate a password with your password manager.

Hit Confirm, and your addresses will be generated by Electrum – You can see them all under Addresses.

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Next we will export our Master Public Keys for our watch-only wallet. You can view this key under Wallet > Master Public Keys.

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Save this key in a text file called xpub.txt on your USB stick or hard drive.

The public key beginning with xpub is not security relevant, so you do not need to worry about it being stolen. Anybody who has this key will be able to find which Bitcoin addresses belong to you, but they will not be able to steal your bitcoins.

Remember your seed words then delete your wallet

If you remember your seed words (or have them written down on a piece of paper) and your public key is saved in xpub.txt, you can delete your wallet.

You can find the file wallet_1 as listed below. Make sure to also delete it from your Trash Bin:

On Windows:

Show hidden files

Go to Users/YourUserName/AppDataRoaming/Local/Electrum/wallets

On Mac:

Open Finder

Go to folder (shift+cmd+G) and type ~/.electrum/wallets

On Linux:

Home Folder

Go -> Location and type ~/.electrum/wallets

Congratulations! Your Bitcoin wallet now exists solely in your head.

Keep your seed words safe

You must remember your seed words! If you chose to back them up on a piece of paper, you must keep it safe. If you lose this paper and forget your seed words, you will lose all your Bitcoins. Anyone who knows your seed words can steal your Bitcoins.

Do not put any paper copy of your seed words into a scanner or photocopier and keep it out of the reach of cameras or spying eyes. A safe, or somewhere you are comfortable keeping large amounts of cash or other valuable documents, would be a great place to store a paper backup.

Create a watch-only wallet to see your Bitcoins

A watch-only wallet will only allow you to monitor your balance and receive money. As a result, you do not have to worry about keeping this wallet secure–you only need to worry about remembering your seed words.

Open Electrum and click on File > New/Restore again. Enter a wallet name and select Restore a Wallet or Import Keys, then Standard Wallet.

Paste your xpub key into the field in the next window, or click on the folder icon and select the xpub.txt that you saved.

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A notification will inform you that this is a watch-only wallet.

You can see your addresses under Addresses. You can also see the balance of these addresses, or send money to them.

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Restore your wallet to spend your money

If you want to spend the Bitcoins you have gathered in your mind, you’ll first need to restore the wallet you deleted.

Open Electrum and select File > New/Restore.

Enter a wallet name and select Restore a Wallet or Import Keys, then Standard Wallet.

Enter a password–we recommend you generate one with your password manager.

Confirm this step by clicking OK.

Electrum will generate your addresses and you will be able to see your balance and make payments. For each payment, you will need to enter your password.

A threesome with triple protection

You can use Diceware to generate strong, memorable passwords for your computer and password manager. Then use your password manager to generate and store all your other account passwords. Add extra security to your most private accounts with two-factor authentication.

No password strategy is more secure than this.

Appendix 2

How to make anonymous payments with Bitcoin

This guide will show you how to set up a safe environment in which you can anonymously communicate, browse the web, and send and receive bitcoins. You will start by setting up a separate operating system equipped with privacy software that is easy to set up. You will then set up encryption keys and a Bitcoin wallet to communicate and transact in private.

Set Yourself Up

Step 1: Get Tails

Tails is a Linux operating system that you run from a DVD or USB stick. You do not need to install it on your computer. It comes with all important software pre-installed and routes all your traffic through the Tor network.

The easiest way to get Tails is to ask somebody who already has it to write a copy onto your USB stick using the Tails Installer program found inside the operating system.

Another option is to download Tails from their official website (https://tails.boum.org/), verify it, and install it manually using their step-by-step instructions. While the instructions on the Tails website may seem confusing at first, they’re well written and not difficult if you follow them carefully.

Step 2: Start Tails

Find a computer, plug your USB stick into it or put the DVD into the drive, and start up the computer. Some computers will automatically detect the drive and start running Tails, but in most cases you will have to enter the BIOS setup. If you run into any trouble, try searching online to find out how to enter the BIOS for your particular computer.

Everything you do around a particular identity should be done within Tails, whether you’re browsing, chatting, making Bitcoin transactions, or typing documents. Keep your browsing focused, and do not log into your private Facebook or the blog associated with another one of your identities at the same time.

Step 3: Enable persistence

Without having persistence enabled, you won’t be able to save any data in Tails.

Under Applications > Tails, select Configure persistent volume. To use this option, your USB stick must have been created using the Tails Installer program. If you created your USB stick manually (as described above), you need to copy Tails over using another USB stick. The Tails installer is under Applications > Tails > Tails installer.

You will be asked to create a passphrase. Check out our guide on how to create secure passwords with Diceware in this book. Length is more important than complexity. You will be asked for this passphrase every time you start Tails.

You will also have to select which information you want Tails to remember. The less Tails remembers, the more secure you are, but you’ll have to remember more things yourself and set them up again each time you start Tails.

To seamlessly run all the features you will need in this guide we recommend selecting Personal Data, GnuPG, Pidgin, Network Connections, Browser Bookmarks, Bitcoin client, and Icedove.

Restart Tails with persistence and enter your passphrase. Remember that only the files in the folder named “Persistence” will be saved when you shut down your computer.

Step 4: Set up KeePassX

KeePassX is a password manager that requires you to remember only a few passwords and still have secure unique passwords. Access KeePassX under Applications > Accessories > KeePassX. Create a new password database by selecting  File > Create New Database.

Use Diceware to set a long but memorable password to access KeePassX. This will be the second of maximally two or three passwords you need to remember. All other passwords can be created and accessed with KeePassX.

Save your database in the “Persistent” folder in your home folder.

To create a new password, click on the button with the yellow key called Add New Entry.

Give it a title and fill in the other information as well if you like. The most important button is labelled Gen. You find it right of the field “Repeat.”

Click the button Gen to the right of the field “Repeat.” This will generate a random password. You can define its length and whether it should contain numbers or special characters. For maximum security, don’t even look at it. There is no need for you to see it. And, in the unlikely event that something or someone is capturing your screen, all they will see are stars instead of the password. Just generate it and copy and paste it over to the site you need it for.

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A screenshot of KeePassX. Your password shows up as dots.

Step 5: Get a PGP key

Once you are inside Tails you can create a new PGP key under Applications > Utilities > Passwords and Keys.

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Create a PGP key.

Click on the blue “+” symbol under GnuPG keys and enter a name and email address. You can make this information up, but if you plan to use this key later to send and receive encrypted emails, you should enter an email address that you control.

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Enter a name and email address.

Enter a password for your PGP key. You can create a password using Diceware or KeePassX. You will need this password every time you send an email or decrypt a file.

After a few seconds, your PGP key will appear in the GnuPG keys list. Congratulations! You can now use it to backup your own data or securely send yourself files that only you can access. More on this in Step 8: Back Everything Up With PGP.

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This is what your PGP signature might look like.

Step 6: Set Up Electrum

The Bitcoin wallet is under Applications > Internet > Bitcoin Wallet.

Electrum is a lightweight Bitcoin wallet. That means it does not rely on its own copy of the blockchain (the immutable record of all Bitcoin transactions that ever took place), but instead relies on several other nodes.

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A screenshot of the lightweight Bitcoin wallet Electrum.

To find out your balance, enter your Bitcoin address into a Blockexplorer.

For example, this is the Bitcoin address of the Edward Snowden Defense Fund:

1snowqQP5VmZgU47i5AWwz9fsgHQg94Fa

You can enter it into a Blockexplorer like Blockcypher (many more exist) to see its balance and all transactions associated with it.

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The Edward Snowden Defense Fund in Blockcypher.

Create a new wallet by opening Electrum. A “standard wallet” will do fine. You will see 13 English words, which represent your wallet seed. This seed is more than just a password to your wallet. Anybody who has this seed can take your Bitcoins, so be careful about where you store these words.

To store your wallet seed words safely, you can create a new entry in your KeePassX database and paste them into the comment field, or you can write them on a piece of paper and lock it away. Either way, do not save it in a text file anywhere on an unencrypted drive.

Press proceed and enter your wallet seed into the next window, then choose a password, ideally by creating one with KeePassX. You will need this password every time you make a transaction.

Great! You can now receive and make Bitcoin payments. You can find your Bitcoin addresses and their balances under “Addresses.”

You can set up multiple wallets for your identity. You can create a new wallet for a single transaction if you so wish. Having separate wallets makes it easier to keep funds separate for accounting or privacy purposes.

Step 7: Communicate via XMPP and OTR

Pidgin is a chat program. As anonymous email accounts are hard to come by, it might be easier to chat with your contacts using this tool. The only downside is that you cannot receive messages when you’re offline.

Pidgin is under Applications > Internet > Pidgin.

Launch Pidgin. Add an account and choose XMPP as your protocol.

Pick a username, enter dukgo.com as the domain and pick a password, then tick the box Create this new account on the server. Close the window and connect to enable the new chat account in Pidgin. You may be prompted again to enter your username and password. Use KeePassX to create a secure and unique password.

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Add a new pidgin chat account is as simple as a round of duck duck goose.

Your username@dukgo.com address can now be given out to your contacts. You will need to approve each individual contact before you can initiate a conversation with them.You have now set up XMPP chat (also called Jabber). Note: Even though username@dukgo.com looks like an email address, it is not an email address and cannot be used to receive messages while offline.

To chat securely, you need to use OTR encryption. Click on OTR > Start private conversation.

You can verify the integrity of the conversation by clicking on OTR > Authenticate Buddy.

The easiest way to reliably verify each other is to exchange each other’s fingerprints outside the chat. which you can see under Manual authentication. To share your fingerprint with other individuals, you can paste it into the signature on a message board, or publish it on your website.

Step 8: Back Everything Up With PGP

The trickiest part of a secure and yet private backup process is to back up the PGP Key. The more effort you undertake to lock your key away, the less accessible the key becomes to you in case you need it.

We recommend the following: Choose a very strong password with Diceware when you create your PGP Key. Load the key onto a USB stick and leave the stick with your family, friends, or a lawyer.

You can also make more than one copy of the backup if you fear your first copy could get damaged or lost.

If your password is long enough (more than 25 characters), it should not be possible for anybody to read your communications or access your backups even in case they get a hold of the key, because the key is still encrypted with your password.

We highly recommend making regular backups of the documents that you cannot afford to lose, as well as your KeePassX password database and Bitcoin wallets.

Select all the files and folders that you want to back up. You can, for example, select the entire “Persistence” folder. Right-click the selection and select Encrypt. A window will ask you which keys you want to encrypt your selection with. Select only your own PGP key. Do not tick the sign option unless you want it to be verifiable that this backup was made by you. If you don’t sign it and somebody finds the backup, they will only know that this backup was made for you, not by you.

If you selected multiple files, you will be asked how you want them packaged. We recommend encrypting them packed together because this leaves the least metadata and creates one single file that will be easy to keep track of, instead of multiple small files. The process might take a while. After they’ve been packaged, you will have two files: one ending in .tar.gz (the unencrypted package)and the other in .tar.gz.gpg (the encrypted backup). The .gpg file is the file you are interested in. Load it onto a CD or USB and store it away.

When it comes time to decrypt the file, just double-click on the .gpg file, enter the password to your PGP key, and let the computer do its work. It is wise to test this process out before you rely on it for restoring your backups.

Step 9: Repeat the Above Steps for Each Identity You Have

Repeat steps 1 to 8 for each of the identities that you have. You should have a separate USB stick with Tails for each pseudonym, company, activity that you control and want to keep separate. Each of these sticks should have its own passwords, PGP keys, and KeePassX databases.

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Keep all your identities separate!

Don’t label all of this too obviously, and consider keeping everything in separate locations.

How to Acquire Bitcoins 2.0

No matter how you acquire Bitcoins, it will likely not be anonymous. This section highlights a few options for acquiring Bitcoins that are relatively private, or at least not overwhelmingly invasive. To increase your privacy, do not carry devices with you that have SIM cards in them, and never log your location with GPS.

Buy Bitcoins in person

You can buy bitcoins in person at Bitcoin meetups, through the “marketplace” option of the Mycelium wallet (the marketplace exists on the Android version only), or by finding traders on the LocalBitcoins platform.

The best place to meet traders in person is in a busy but not crowded place that offers free Wi-Fi. Public libraries or cafes are great venues for these appointments.

Both parties should allow enough time to wait for at least one confirmation of the Bitcoin transaction. To make sure your Bitcoin transaction gets confirmed by the network, you don’t need to bring a Bitcoin wallet with you; just knowing your address is enough. Enter the address into the search field on Blockcypher or any other blockchain explorer and watch as the transaction comes in and confirms.

Get Bitcoin From an ATM

Bitcoin ATMs are common in some countries but rare in others. Check Coin ATM Radar (https://coinatmradar.com/) to see if there’s one near you! Make sure to check the “other services” box in the bottom-left corner, or you might be missing out on some places where bitcoins are sold as vouchers.

Each machine differs in how it handles your personal information. Some might not ask for anything other than your Bitcoin address and cash, while others might want your phone number, fingerprint or passport. Just try the machine out with a small amount. Asking the machine’s operator can be tricky, because there’s a risk they might file a suspicious activity report.

If there is video surveillance at the Bitcoin ATM, you might not be able to hide from it. Even still, showing up at a Bitcoin ATM with a ski mask would make you look too suspicious, no matter how much you value your privacy.

Accept Bitcoins as a Payment or Donation

If you’re regularly spending bitcoins, it makes perfect sense to accept them as payment too as you will no longer need to worry about how to acquire them. The bitcoins you accept will not be anonymous either since there might be a record somewhere that they were paid to you, but they are likely already more difficult to link to you for a passive observer than the bitcoins you buy at an exchange, where records are kept in detail and made available to several parties.

Mine Bitcoins

Mining Bitcoin is not a profitable endeavor for hobbyists, but if you need a steady flow of Bitcoin and you have access to cheap electricity and free cold air, along with excess capital lying around, it can be an interesting alternative for acquiring bitcoins.

To mine Bitcoin, get yourself a Bitcoin mining machine, paid with cash or credit card, plug it in, point it to a mining pool, and watch the earnings come in daily.

Be aware, though: you are making an immense bet on the Bitcoin network, and there are many ways you might lose your investment. Make sure to read a lot about this topic before you start!

Also, there are many dubious services offering you mining contracts. They promise you gains from a Bitcoin mining operation without the hassle of acquiring machines or electricity. Most such mining contracts are accidental or deliberate ponzi and pyramid schemes, and you will lose all your money.

Obfuscate Transfers Between Identities

Every time you move funds between your identities you will need to obfuscate them. To do that, you can “obfuscate”, “tumble” or “mix” your bitcoins.In this section we recommend services that use the concept of Coinjoin, in which the transactions of many users are combined into one transaction to obfuscate which user controls which funds.

Helix

Helix uses a long chain of Coinjoin transactions to tumble your bitcoins.

Grams, the makers of Helix, is trying to be the Google of the dark web by indexing dark websites, building reviews, and allowing users to mix and tumble their coins.

Using Helix requires a membership, but you can use Helix Light without a membership. Just navigate to http://grams7enufi7jmdl.onion/helix/light with the Tor Browser and enter the recipient address (or the address of your identity that you want to send bitcoins to). You can add a random delay (which might be a few hours) and ask for more layers of transactions to make your payment more anonymous.

You can record your helix status ID or the URL if you want to come back later to check your transaction status. The fee per transaction is 2.5% and a 0.02 bitcoin minimum transaction amount.

As a member, Grams allows you to use the regular Helix service, which supposedly differs from Helix Light by handing you coins that have never been used on a dark market before. Of course this is difficult to verify, as Grams has no way knowing where the funds come from either. A membership will cost you  0.01 BTC as an entry fee, although this fee will be applied to your balance.

Joinmarket

Joinmarket (https://github.com/JoinMarket-Org/joinmarket) is a decentralized network that allows you to use Coinjoin with other users without the need for a centralized party and without requiring you to put trust in the other users. Unlike using a centralized service, when you use Joinmarket, your bitcoins never leave an address that you control, and you don’t run into the risk of the service shutting down during your transaction, or the service maliciously stealing your bitcoins.

Installing and using Joinmarket requires a considerable amount of technical knowledge. Despite this, we encourage you to read their guides and try it out because the lower risks and fees are worth climbing the learning curve!

Darkwallet

Darkwallet (https://www.darkwallet.is/) was developed by Peter Todd, Amir Taaki, and other distinguished privacy advocates. Unfortunately, it’s still in alpha version and has been for a while, which means it is untested software that likely contains a few bugs. It is not recommended to use it on a day-to-day basis, as unexpected behavior might even lead you to lose your Bitcoin.

Appendix 3

Create Strong Passwords with Diceware

Diceware is a great way to generate memorable, random, and long passwords. It’s a great strategy for your most precious passwords, especially those for which two-factor authentication or a password manager is unfeasible (e.g. the password to your computer, your backups, or your encryption key).

You can even use Diceware to create secure brainwallets, which are Bitcoin wallets that exist only in your head.

To generate a password using Diceware, you just need a good die and some pen and paper.

You can find the diceware list at the ExpressVPN website.

Make sure you are alone and there are no cameras nearby. For maximum protection, disconnect your computer from the internet (after you save the Diceware list!) and cover your webcam.

To start, roll the die five times. Record the number from each roll on the pen and paper. You will end up with a five-digit number. We got 52611.

Now search on the Diceware list for the five digit number you just created. Write down the word the number corresponds to, in our case it is ‘salvo’. This word by itself is not a good password, it would only take about a thousandth of a second to crack. Repeat the dice rolling process at least, four times.

After five sets of five rolls, we ended up with 52611 51631 63432 43123 21641.

This corresponds to the password “salvo rhoda walton mudd croft."

It would take a single computer about six nonillion (which is 6 x 10³⁰) years to crack this. It is an unimaginably large number and for comparison, the universe is only 14 x 10 to the power of 9 years old.

If you had a billion computers, each one a billion times stronger than the computers available today, you would still not be able to crack this password.

Memorize this password and then shred the piece of paper on which you recorded your dice results. Ideally, you should burn it.

To remember your new Diceware password, you will need to use it regularly, especially while it is still fresh in your memory. Frequently log into the service you created this password for, or set yourself a routine to practice it. Remember to destroy any physical copies you make!

Eventually, the password will become muscle memory and typing it will be as natural as drinking or eating.

Use diceware to create brainwallets and store Bitcoins in your head

The words generated with Diceware are random and secure, so you could even use them for your Bitcoin brainwallet.

In such a brainwallet (also called a hierarchical deterministic wallet, or HD wallet), your private and public Bitcoin keys are generated from a list of words instead of a number generator—just like the list we got from rolling the die. This list of words is called a seed.

The seed technique makes it possible for humans to remember large and complex Bitcoin addresses. Instead of using a large string of numerical digits as your Bitcoin key, you can use your randomly generated word seed instead, meaning you can quite literally put money in your head.

Your mind beats all forms of electronic storage. USB sticks, CDs, and SD cards can all corrupt, and who knows how easily a computer might access them in the future? But your brain will most likely remain unhackable for the foreseeable future.

A few great wallets allow you to use seed words for your bitcoin keys, such as Breadwallet (iOS), Mycelium (Android), and Electrum (Windows, Mac, Linux). These services do not allow you to enter your own words as a seed. Instead, they insist on generating the words themselves with an electronic Diceware algorithm. This is done to protect uninformed users from creating wallets with non-random words, such as song lyrics, then losing their Bitcoins to someone else who has used the same lyrics as their own seed words.

To demonstrate how word seeds work, we used Electrum to create a brainwallet and a separate watch-only Bitcoin wallet. This watch-only wallet can be filled up with actual Bitcoins and used to monitor your Bitcoin accounts, but since it doesn’t have a private key, nothing can be stolen.