Bitcoin Ownership: Are your coins really yours?

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Coinmonks

7 min readApr 19, 2022

Bitcoin like every other cryptocurrency is a digital currency. This means that there are no physical coins/notes that owners possess.
In a centralised finance system such as traditional banks, one can prove that they own an amount of money by either possessing it as cash, or the balance that reflects on their bank account (not considering assets).

How then, does one prove ownership of bitcoin?
Bitcoin ownership is determined by two keys — a private key and a public key.
The public key is hashed to create an address to which bitcoin is sent to. It is analogous to Account number of traditional banks.

The private key is the digital signature used to redeem the bitcoin that is locked to the public key. It can be analogous to the account signature in traditional banks. The public-private key usage serves as a unique identifier for users and also a form of authentication.
Typically, if person A (Tina) wants to send 0.5 bitcoin to person B (Amaka), Tina would obtain Amaka’s bitcoin address either through a QR code, an invoice or a personal message. She then creates a transaction which spends one of her UTXOs to send the 0.5 bitcoin to Amaka’s address. After this transaction is broadcasted to the Bitcoin network, Amaka can use her private key to redeem ( and spend) this 0.5BTC.

UTXOs can be likened to physical coins, in that they must be spent discretely. If you want to spend 5 cents, you cannot spend half of a dime. Instead, you must spend the entire dime and receive a nickel as change. Unlike physical coins however, UTXOs do not come in standardised denominations. A UTXO can hold any amount of bitcoin.
An Unspent Transaction output (UTXO) is an output of a Bitcoin transaction. An output exists as a UTXO until it is used as an input in a subsequent transaction, at which point it is no longer unspent. The set of all existing UTXOs at a given point in time is called the UTXO set. Bitcoin nodes keep track of the UTXO set in order to determine exactly which coins exist and who can spend them.
— River Financial

How can bitcoin be acquired?

Bitcoin makes use of a public ledger to record all bitcoin transactions. This ledger is the blockchain which is a pile of blocks linked together containing a record of all transactions conducted in the Bitcoin network. This ledger is publicly accessible and transactions are verified by peer-to-peer nodes in the Bitcoin Network.
Bitcoin can be acquired in two major ways:

Through the coinbase transaction: Miners are nodes that validate bitcoin transactions and mine them onto a block. Mining requires some expensive machinery and thus, a miner is rewarded with bitcoin as an incentive to keep the network running and to compensate them for incurred cost. This bitcoin reward is known as the coinbase transaction and is the ONLY way new bitcoins are created.
Through bitcoin transactions: Bitcoin also serves as a means of exchange, thus individuals or organisations transact bitcoin. This is also a way to acquire bitcoin.

Bitcoin Storage

As established earlier, bitcoin is just a bunch of keys that prove ownership of coins. To store bitcoin, the keys are stored in a wallet - a digital wallet. A bitcoin wallet stores the cryptographic information used to access bitcoin addresses and send transactions. The public key is used to receive payments while the private key is used to sign and send transactions.

Each Bitcoin wallet contains a set of secret numbers, or private keys, corresponding to the user’s blockchain address book. These keys are used to sign Bitcoin transactions, effectively giving the user control over the bitcoins in that address. If an attacker can steal a wallet’s private keys, they can move the Bitcoins in that address to their own wallet. — Investopedia

NB: Some modern wallets are HD wallets and thus, they save the mnemonic seed since this can be used to generate all the user’s private and public keys.

Bitcoin Wallets

Hot wallet: This type of wallet has access to and can connect to the internet. It can be custodial or non-custodial. A hot custodial wallet is one where a third party manages the keys for the user. A hot custodial wallet is easy to use but takes control away from the user.
A non-custodial hot wallet is connected to the internet but here, the user has full control of their keys.
Desktop, web and mobile wallets are all types of hot wallet.

i. Desktop wallet: Desktop wallets are installed on a desktop or a laptop and is non-custodial. However this is not so secure as a result of possible computer malware which can compromise your coins. Examples are Armory, Hive OS X, and Electrum.

ii. Mobile wallet: Mobile wallets are installed on an android, iOS or other mobile device. They can either be custodial or non-custodial and is susceptible to malicious attacks, phishing to steal user’s coins. Examples are Hive, Mycellium, Binance, Bitnob etc.

iii. Web wallet: A web wallet is an online service that can send and store cryptocurrency on your behalf. If the web wallet is a custodial wallet, you are trusting the custodian to keep your private key secure. If the private key is password protected(since it is not stored on your device), that means the private key should have been encrypted behind the password. However, it is still sitting on a server you don’t control. This means you need to trust the server owner to:

not lie about hashing the private key
hash the private key properly so attackers cant get it.
Both of these are big problems, since it would be very easy for a web wallet to lie about not keeping a copy of the private key and take your coins. Examples are Coinbase, Blockchain etc.

2. Cold wallet: This type of wallet generates and stores user’s keys offline. This wallet is commonly referred to as cold storage. Because this wallet type is offline, it is the most secure since it is not prone to malicious attacks on the internet and one can only steal coin through physical access to the cold storage.
Cold wallets are primarily non-custodial such that users have direct access to the cold storage and thus, the keys. However, certain custodians keep their users’ bitcoin in a cold storage facility that is physically stored in military grade vaults.
The most commonly used cold storage is a hardware wallet. A hardware wallet is a small, portable device that stores a user’s keys. This device remain disconnected from the internet at all times. To transact, a computer and the manufacturer’s application are required in order to keep the private keys offline. Examples of hardware wallets are Ledger and Trezor.
Paper wallet is also another method of cold storage. It is an offline mechanism for storing bitcoins that involves printing the private keys and bitcoin addresses onto paper.

An image of Trezor and Ledger hardware wallets

Secure your coins

Not your keys, not your coins — A popular Bitcoin saying

It is a popular saying that if you do not control the keys to your wallet, then they are not your coins — the custodian is just promising to give you the coins that you “own”.
Here are a few suggestions on how to secure your coins:

If you can, use a non-custodial hot wallet. This way, you are in control of your keys and and your coins are easily accessible for daily transactions.
Backup your wallet. This is important in cases where you forget your details, so that you don’t completely loose your coins. If you are making use of a HD wallet, perfect! you only need to backup your mnemonic and you can restore ALL your coins.
For saving large amounts of bitcoin, it is advisable to use a hardware wallet. This is very secure and reduces chances of theft.
Encrypt your wallet. Encrypting your wallet means locking your coins from being spent by using a passphrase. This is an added layer of security so that if an attacker were to gain access to your coin, they wouldn’t be able to spend it — unless they also have access to this passphrase.
Update your wallet software. New updates and bug fixes are usually shipped to help make your wallet software more secure. Ensure that you keep your software up to date.
Protect your identity: Try not to link your personal data to your wallets. This would give malicious persons less information to work with and enhance anonymity.
Try not to use web wallets. They are very prone to malware, phishing and coin theft since your keys are stored on the server and not on your device.
Use Multisig: Bitcoin includes a multi-signature feature that allows a transaction to require multiple independent approvals to be spent. This can prevent theft as an attacker cannot spend the coin with just one stolen signature.
Also, the multisig feature can be used to transfer ownership to your family/kin in case of death. Your bitcoins can be lost forever if you don’t have a backup plan for your peers and family, and having your kin as one of the signatures ensure they can spend the bitcoin when you are no longer.

Conclusion
There are tradeoffs to be made when it comes to securing coins. If you are saving a large amount, use hardware wallets BUT ensure to backup your seed/keys as your security is entirely up to you.
For everyday transactions with relatively small coins, you can use a mobile wallet (best to use a non-custodial wallet)— be sure to encrypt it and backup also to prevent loss.

Remember, NOT YOUR KEYS, NOT YOUR COINS!

So tell me, what type of bitcoin wallet are you using?
Which of the security measures are you taking already? If none, which would you try out?

You can share your thoughts with me here or reach out to me on twitter

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Bitcoin Ownership: Are your coins really yours?

Bitcoin Wallets

Secure your coins

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Written by Jennifer Ezeobi