A Security Focused Outline on Bitcoin Wallets

Focus Project


The famous electronic peer-to-peer cash system called Bitcoin is an open-source protocol allowing individuals to store and transact units of the same named currency. Private and public key cryptography plays a central role in this value transfer system, which implies the importance of professionally managing the information about such keys.

This work elaborates on the essential prerequisites to understand this relatively new technology that combines elements from the fields of computer science, cryptography, mathematics, and game theory. In doing so, crucial general and Bitcoin-specific terms are defined and contextually explained.

The central part of this work addresses the outline of different Bitcoin interaction means, commonly known as wallets. The structure of the presented wallet types orients itself alongside a potential user’s experience. Besides defining explanations and examples of use cases, this work outlines advantages and disadvantages concerning security and privacy.

The start concerns two wallets that target beginners in the field of Bitcoin. The concept of online accounts is elaborated and attention is drawn to the inherent need to trust when using them. Also, the relatively primitive type of paper wallets is surveyed.

For a more intermediate interaction with this peer-to-peer cash system, the concept of software wallets, in general, is explained and examples are provided. The bridge from single-address paper wallets will be drawn to the more sophisticated multi-address wallets enabled through rooted key derivation techniques. Designated computer devices that solely serve the purpose of managing keying material, known as hardware wallets, represent another intermediate wallet type discussed in this work.

Last, advanced topics are discussed that further leverage the security and privacy of someone’s interaction with Bitcoin. One concerns the setup of a self-managed Bitcoin full node. This undertaking not only harmonies with the concept of verification over trust but also allows for the complete exclusion of any third party between wallet communication. Equally advanced is the concept of multi-signature wallets, which is discussed at the end of this work.

Keywords: Bitcoin · Software Wallets · Hardware Wallets · Private Key Management


In October 2008 a user with the pseudonym Satoshi Nakomoto introduced in an email to The Cryptography Mailing List the idea of a peer-to-peer electronic cash system that no longer requires trusted parties and simply works based on software and mathematical rules . The roots of such a digital cash system reach back to the year 1983 . Nakamoto referenced a PDF in this email that explains this idea in detail alongside proof of its robustness. This document later became famous and is nowadays also referenced as the so-called Bitcoin White Paper .

At the beginning of 2009, Nakamoto published a post in the P2P foundation forum to invite the public to explore and download the first software version of Bitcoin . Shortly after this announcement, the idea was discussed and further developed by the back at this time a small group of people that followed the mailing list or the activities in this forum. Also, the meanwhile famous Bitcoin logo was created, as shown in Figure 1.1.

Figure 1.1 Bitcoin Logo: The logo was created collaboratively by a few Bitcoin forum users starting in February 2010 . Usually, the upper case spelling «Bitcoin» denotes the protocol and the related technology as well as community while the lower case spelling «bitcoin» denominates the currency unit that is also abbreviated using BTC. For the sake of consistency, only the upper case variation and its abbreviation is used in this work.

Looking back at this early stage in the course of Bitcoin’s evolution, these posts represent contemporary historySee the browsable collections of it.. More than ten years later, Bitcoin still exists and continues to be collaboratively improved by thousands of people. In the meantime, it also served as a source of inspiration for new business models, technological devices, and how people transact with each other.

Nakamoto’s peer-to-peer electronic coin that can be used to transfer units from one place to another without relying on a necessarily trusted party in between succeeded. Numerous individuals and even institutions benefit from it by using it as a store of value, medium of exchange, or even unit of account. These purposes are commonly known as the three purposes of money.

An idea, textual explanation, software source code, mathematical laws, and intrinsic interest of individuals form the basis of this success. One concludes that everything that defines Bitcoin is simply information. Apparently, Nakamoto intended to free this information to the world and therewith pass the point of no return. Everyone and everything that can process this information will be able to interact with Bitcoin. No permission has to be obtained, nobody and nothing needs to be trusted, nor could by any authority.

It must have been Nakamoto’s desire to enable such a complete self-determined interaction for absolutely everyone without any prevailing party involved. This may be why the pseudonymized authorship has not been revealed until today and possibly never will. A potential association of Bitcoin with any form of existing individual or collective would automatically increase their influential power, regardless of whether indented. Additionally, this would also represent a target for powerful institutions and governments that may repudiate the idea of an uncontrollable, transparent, and censorship-free value transfer system. Ultimately, it is of no meaning who published this idea. What is essential, however, is that millions of people absorbed it and continue to use it because they intrinsically want to use it.

This work should lower the admittedly high barrier to entry to Bitcoin, again increasing its accessibility. This is done by covering different ways to interact with this peer-to-peer system with different security and privacy levels. While aiming for practicality, a generic storyline will be narrated where the readership identifies itself. The story told reflects the questions and challenges a new Bitcoin user will sooner or later be faced with. This undertaking structures in three stages, namely beginner, intermediate, and advanced. Eventually, the readership has gained the necessary information to confidentially start interacting with Bitcoin using the approaches that best fit the user’s needs.

The present work does not address money’s historical, social, and economic aspects and its relation with Bitcoin. Interested readers in these topics can refer to Von Mises and Ammous for a start. In this work, the focus merely lies on the proper management of the private information required to interact with Bitcoin and the prerequisites necessary to understand the risks and benefits of the presented approaches.