Want to invest in bitcoin but don’t want to trust the security of your coins to a third party? You need to set up your own personal bitcoin vault! Follow the steps in this guide to get started. If you need one-on-one assistance with the process, I am available for private consulting.
Step 1. Buy a hardware wallet
Hardware wallets are devices that keep your bitcoin private keys permanently offline. Private keys are the files that are needed to sign bitcoin transactions and authorize transfers to other bitcoin addresses. If your private keys are stored on a computer that is “online” – that is, connected to the internet – then there is a risk that the private keys could be compromised by a remote hacker via malware that you unintentionally installed on your computer.
By storing private keys permanently offline, hardware wallets limit your risk to physical security threats. This means that a thief would have to have physical access to the hardware wallet in order to even have a chance at stealing your bitcoin. As we will see later in this guide, even physical access will not be enough for a thief to steal your bitcoin if it is properly stored in a hardware wallet.
Hardware wallet options that I can recommend based on first- or second-hand experience:
- Ledger Nano S
Step 2. Set up your hardware wallet
After you have received your hardware wallet, you will need to set it up. Steps vary depending on which hardware wallet you have purchased; step-by-step instructions are included with each device. Generally, these steps will include downloading the local app that is used to manage your hardware wallet, writing down your hardware wallet’s backup phrase, and adding a PIN to protect against thieves who gain physical access to your hardware wallet.
Step 3. Protect your backup phrase
The backup phrase that is generated when you first setup the wallet is essential to protect in case anything happens to the hardware wallet itself, such as loss, theft, or breakage. This backup phrase will consist of 12 or 24 words that you’ll need to recover your wallet if anything happens to it.
The easiest way to protect this backup phrase is to write it down. But then you have to think about how to protect this written copy – if anyone gains access to it, they’ll be able to recover your wallet just as easily as you could and move your bitcoin to their own address. So you need to treat your backup phrase just as sensitively as you would physical cash, jewelry, precious metals, social security cards, and other valuables.
Let’s say, for example, that your hardware wallet backup phrase is 24 words. You could protect this backup phrase a few different ways, depending on your risk tolerance:
- You could write down all 24 words in one place and put them in a safe with other valuables.
- You could write 12 of the words down on one piece of paper and keep it in your safe, and write the other 12 words down on another piece of paper and store that piece of paper in a separate location, such as a safety deposit box. Then, you (and any prospective thieves) will need access to both pieces of paper in both separate locations in order to recover the wallet.
- In addition to storing 12 of the words in one location and the other 12 words in another location, you could also send one copy of one of the sets of 12 words to one trusted associate and one copy of the other set of 12 words to another trusted associate. These trusted associates could be, for example, a family member and a lawyer. Then, if anything happens to either or both of your own copies of either set of 12 words, you can ask your trusted associates to send you the copies you shared with them. Additionally, if anything happens to you, and your own copies become irrecoverable, you can leave instructions with your lawyer for both of the trusted associates to combine their copies of the words to recover your wallet and execute your will.
- If you are storing a lot of value in your hardware wallet, you may consider using a tool like Cryptosteel to ensure that each copy of your backup phrase is protected against fires, floods, and electrical storms.
Step 4. Purchase bitcoin and transfer it to an address generated by your hardware wallet
Choose a service to purchase bitcoin and complete any steps that may be required to initiate your purchase (such as ID verification and adding two-step authentication – you want to make sure you add two-step authentication to all services that offer this). Use the local app that is required to manage your hardware wallet to create a new bitcoin address.
When you are ready to transfer your bitcoin to your hardware wallet, copy+paste the address you generated with your wallet’s local app into the withdrawal window of the service you bought bitcoin from. Double-check that the address you pasted matches the address generated by your hardware wallet, then withdraw the funds. Within a few seconds to a few minutes, you should see the bitcoin appear in your local app.
Options to purchase bitcoin that I can recommend based on first- or second-hand experience:
- Abra – the Abra mobile app supports buying bitcoin with cash everywhere in the world where there are Abra Tellers in their marketplace, with an additional option to buy bitcoin with a bank account in the US and the Philippines. Abra has a $500 daily limit for purchases via bank account. Full disclosure: I work for this company.
- Gemini – allows you to purchase bitcoin with a bank account in the US. Suitable for advanced traders who understand financial markets.
- Kraken – allows you to purchase bitcoin with a bank account in many countries. Suitable for advanced traders who understand financial markets.
- Genesis Trading – allows you to purchase bitcoin with a bank account in the US. This service is most useful if you want to buy large blocks of bitcoin ($25,000+) OTC. If you do business with them, tell them John Light sent you.
- LocalBitcoins – allows you to purchase bitcoin with a variety of payment methods, including cash or bank transfer, from traders in their marketplace. The quality of each transaction varies depending on the trader you choose to buy from.
- Mycelium LocalTrader – allows you to purchase bitcoin with cash from local traders in their marketplace.