Mastering Bitcoin, 3rd Edition

Chapter 13. Bitcoin Security

Securing your bitcoins is challenging because bitcoins are are not like a balance in a bank account. Your bitcoins are very much like digital cash or gold. You’ve probably heard the expression, “Possession is nine-tenths of the law.” Well, in Bitcoin, possession is ten-tenths of the law. Possession of the keys to spend certain bitcoins is equivalent to possession of cash or a chunk of precious metal. You can lose it, misplace it, have it stolen, or accidentally give the wrong amount to someone. In every one of these cases, users have no recourse within the protocol, just as if they dropped cash on a public sidewalk.

However, the Bitcoin system has capabilities that cash, gold, and bank accounts do not. A Bitcoin wallet, containing your keys, can be backed up like any file. It can be stored in multiple copies, even printed on paper for hard-copy backup. You can’t “back up” cash, gold, or bank accounts. Bitcoin is different enough from anything that has come before that we need to think about securing our bitcoins in a novel way too.

Security Principles

The core principle in Bitcoin is decentralization and it has important implications for security. A centralized model, such as a traditional bank or payment network, depends on access control and vetting to keep bad actors out of the system. By comparison, a decentralized system like Bitcoin pushes the responsibility and control to the users. Because the security of the network is based on independent ...