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How to create a secure cold storage Bitcoin wallet using Bitkey
In July 2017, one of the largestBitcoin(BTC) exchanges, Bithumb, was targeted by hackers who stole millions of Won. The infamous BTC Exchange MtGox was alsohacked in 2014. Thieves made away with nearly $500 million (around 370 million) worth of Bitcoin, forcing the exchange to shut down.
So there are certainly security concerns regarding the virtual currency. However, one very easy way to ensure that your Bitcoin wallet cant be targeted by hackers is to use Bitkey. Bitkey is a live bootable version of the Debian Linux operating system.
In this guide youll learn how to boot Bitkey to create a cold storage offline Bitcoin wallet, which is never directly connected to the internet. This protects it both from online hackers and malware designed to exploit Microsofts Windows operating system.
Youll also learn how to set up an online watching wallet which you can use to view your balance and previous transactions. Your watching wallet can also be used to send Bitcoins by generating a special transaction file, which you can then sign using the cold offline wallet.
In order to get started, all you need are three empty USB sticks of at least 4GB capacity. Youll also need a way to clearly tell these apart: for example, you could purchase USB sticks which are different colors.
Open your web browser and navigate to Click the Download button then click on Bitkey ISO to download the CD image.
If youre running Windows 10 and your machine has a DVD burner, you can write this to a blank disc by inserting it, right clicking the file and choosing Burn Disc Image.
If you have no DVD drive, you can create a bootable USB stick using the file you just downloaded. The easiest way to do this in Windows is to use the programRufus. Follow the instructions on the website to do this.
Once youve created your boot medium, save any important files. Windows users can then restart to the Advanced Startup Optionsscreenand choose the DVD or USB stick from there. If youre using a Mac hold down the Alt key on startup to show the boot menu, then double click on the external disk.
Once the Bitkey boot menu shows, choose the first option: cold-offline (green). True to its name, once the desktop loads youll see the background is green. This signifies that the cold-offline version of Bitkey is not connected to the internet so cant be hacked remotely.
If youre using a USB stick to boot Bitkey, remove this now and put it in a safe place. Next, insert a separate, blank and formatted USB stick into your machine. Ideally use a brand new USB drive for this.
Juggling USB sticks can be confusing. As we mentioned at the outset, Bitkey recommends color-coding your USB sticks. The one you just removed will be called Red (feel free to mark it with some red tape or a pen accordingly). The new, blank stick youre inserting is will be known as Black. You should only ever insert the Black USB stick when booted into the cold-offline desktop.
Click the blue Electrum icon at the very bottom left of the screen. Youll first be asked to set a passphrase to protect the wallet files youre about to create. Enter a suitably long passphrase and click OK.
The Electrum install wizard will now launch. Leave the default options checked and click Next. Electrum will now display a dozen random words. This is whats known as your wallet generation seed. Make sure to write this down and put it in a safe place. Click Next and retype your seed to make sure you have it written down correctly. Click Next, set a password specific to this wallet, then choose Next again. Electrum will now launch.
As soon as your Electrum wallet opens, click on the Receive tab. Make a note of your Receiving Address. Youll need to provide this address to anyone whos sending you BTC. If you already have an existing Bitcoin wallet, scan the QR code to send your funds here. As the wallet is offline, dont worry if your balance doesnt display right away.
Next click the Wallet menu and choose Master Public Keys. Youll need this to create an online watching wallet in the next step so you can view your balance.
Either write down the master key carefully or scan it using a QR code app on your phone.
Close down Electrum and use the icon at the bottom-right to shut down the machine. Ignore the warning about your session being non-persistent as youve saved your wallet data to the USB stick. Be sure to remove the Black USB drive and put it somewhere safe.
Reboot the machine and choose the second boot option: cold-online (blue). Now you need to insert another new USB drive, which well name Blue. This will be used to store your watching wallet settings.
Once the desktop loads click the Electrum icon at the very bottom left of the screen once again. On the install wizard this time choose Restore a wallet or import keys and click Next. On the following screen enter the master public key you generated earlier. Click Next and then Next again to choose servers automatically.
When you launch Electrum, youll see a warning message reminding you that this is a watching wallet. In other words, while you can see your balance and any transactions that have been made, it cant send money by itself.
If you do want to make a payment, click the Send tab and enter the recipients payment address in the Pay To field. Next fill in the Amount field for the number of BTC you want to spend and click Send.
Electrum will generate the transaction data for you. Click Save to store the transaction (TXN) file to the Blue USB drive.
Electrum will confirm the transaction has been saved.
Shut down your machine. Make sure both the Black and Blue USB drives are connected, and then restart. Choose the first option: cold-offline (green) from Bitkeys boot menu.
Once the desktop loads, click the Electrum icon once again and enter the passphrase you chose earlier.
On the Tools menu choose Load Transaction From File. Navigate to the TXN file you saved earlier to the Blue USB stick. Youll most likely find this in either /media/usb0 or /media/usb1.
Choose Open, then at the new window click Sign. Re-enter your wallet password. Next click Save. Save the newly signed transaction file (e.g. signed_123*.txn) to the Blue USB stick. Electrum will confirm that the transactions been saved.
Shut down your machine and remove the Black USB stick. Restart and choose the second option: cold-online (blue). Once the desktop loads, open Electrum once again and click the Tools menu. Choose Load Transaction From File and navigate to the signed transaction file on the Blue USB stick, then click Open.
Electrum will now display the transaction. Click Broadcast to send the authorized transaction to the Bitcoin network. Finally click Close. Your transaction will appear as Unconfirmed. Depending on the transaction fee you paid it may take several hours to be fully validated.
Bitkey uses an older version of the Electrum client which doesnt have all of its newest features. You can get around this issue by going to the Tools menu and choosing Plugins.
The most useful option you can choose is Exchange Rates. Mark the checkbox then click Settings to choose both an exchange rate API such as CoinDesk and your chosen fiat currency such as Euros.
By default Electrum expresses your Bitcoin balance in mBtc (millibitcoins). One MilliBit is equal to 0.001 Bitcoins. This makes working with smaller sums of money easier. If you want to change this setting, go to the Tools menu. Click on Preferences then the Appearance Tab. You can then select a different Base Unit from the drop-down menu.
If anything happens to your Black USB stick which contains your cold wallet, boot Bitkey once again and choose the first option: cold-offline (green). Once the desktop loads insert a new USB stick to replace the old Black one, then launch Electrum.
BitKey will ask you to set a password to protect the new wallet files. Once the Electrum install wizard starts choose Restore a wallet or import keys and choose Next.
From here you can type the private seed for your original cold wallet which you wrote down earlier. Click Next and set a new wallet password. Electrum will warn you that as the wallet has been restored offline, not all your payment addresses are listed here. However, you can check them at any time using your watching wallet.
Top Image Credit: Ian Mackenzie (Wikimedia Commons)
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