Monthly Archives: April 2014

Keeping an eye on your Bitcoin keys

In the government, banking and certificate authority worlds important keys are generated and used within specialized cryptographic devices called Hardware Security Modules (HSMs) or their less powerful cousins smart cards.

In the Bitcoin world keys are most commonly generated and stored in software running on the same machines people use for surfing the web. This means those keys are exposed to all of the same risks as the rest of your computing experience.

This is why there are now multiple variants (1, 2, 3) of wallet stealing malware and many cases of Bitcoins being stolen through key compromise (1).

The reality is we have not even touch the tip of the ice-burg on the sorts of attacks that expose these software keys and as Bitcoin becomes more mainstream the techniques used by attackers will improve so that they can overcome the mitigations more advance software is surely to use.

For example a lot of effort was spent mitigating in memory key access threats in Windows by moving keys out of process and working to minimize the amount of time the key was left in its unencrypted form. In-fact the inadequate in-memory protection of keys in OpenSSL was a contributor to the recent #Heartbleed vulnerability.

It is not possible to totally mitigate the risk of in-memory keys but you can reduce the exposure. Even when you do there will still be moments when they or the components that were used to make them may be exposed; For example they may simply get dumped into your page file

So what can you do to protect yourself? The most important mitigation available to you is to do what governments; banks and certificate authorities have been doing for decades – generate and use your keys within specialized devices. The bad news is that even though there are many projects that aspire to help you do just that for Bitcoin your choices are still quite limited – especially if you want ease-of-use and accessibility.

Absent reasonable hardware solutions for key management people often resort to storing their Bitcoins on paper using keys generated on hardened dedicated operating system installs not connected to any network and while this is an useful technique in your arsenal even paper keys can be compromised through carelessness.

In military and aerospace systems things are often designed for triple redundancy and if your storing a large amount of bitcoin you should also keep this principal in mind when designing your key management strategy.

Not doing so sets you up for failure, just look at Mt. Gox. If we believe Mr Karpele’s story he did not know how much Bitcoin he had at any one point and according to reports he also set himself up as a single point of failure.

Though the advent of multi-signature wallets in Bitcoin along with third-party services like BitRated will help people manage this sort of risk in the future it does not mitigate the need for solid accounting and monitoring of your balances.

As such it also makes sense use wallet watcher services such as’s “Watch Only Addresses” or so that you can know what transactions are happening with your keys at any point and time.

If you have a large amount of Bitcoin it also makes sense to use a Honey Pot where you have wallet(s) placed in locations where they are easily accessible and monitored via services like the above so that you know you need to respond accordingly.

In short when thinking about your key management strategy it’s a good idea to keep in mind what Benjamin Franklin said: By failing to prepare, you are preparing to fail.

Insurance and Bitcoin

There are lots of ways we risk loosing our money one of the biggest is when the institutions we trust to keep those funds safe fail to do so.

This happened in the United States during the Great Depression when widespread bank failures destroyed lifetimes of savings overnight.

To address concerns of this happening again the FDIC and NCUA were created in the 1930s to provide assurances that if such an event were to happen again their savings would still be safe and even this has its limits.

This along with regulations that were put into place around minimum liquidity and other practices are what helped people begin to regain trust in the US financial system.

The fall of Mt. Gox and other smaller exchanges has once again introduced similar concerns but thankfully the influx of venture capital to the Bitcoin ecosystem has brought in a new class of organizations who have both the skill and capital to run more professional institutions.

As a result we now are seeing vault services starting to offer similar insurance via self-insurance programs coordinated with underwriters such as Lloyds of London and Meridian.

This is a huge step forward but there is a long way to go before these offerings are viable because as they stand today its far from cost-effective. As an example lets look at Elliptic if we were to store $250,000 USD of Bitcoin (510.58 BTC at todays price) you would be paying $5,064 USD every year for that peace of mind.

That’s not to suggest everyone needs $250,000 of insurance or that this is not a “reasonable” fee for this service but the reality is the price for this assurance has been established and its FREE.

Vaulting services such as Elliptic and Xapo are also a little different than traditional banks because they do not (for the most part) offer other services. Additionally building and operating services that provide the necessary assurances to qualify for such insurance comes at a cost above and beyond the cost of the insurance itself so a premium of some sort must be charged. The costs here are sure to go down as they get amortized across more customers but regardless the current cost structure these services are based on are out of reach of mainstream users.

Making this insurance more accessible will be necessary for us to see this broader adoption of Bitcoin along with many other changes that will include regulations (either self enforced like the NCUA or government mandated). This will include things like reporting requirements, minimum liquidity levels, operational practices, key management requirements and insurance.

When it comes to insurance I think we will also see it become a “freebee” just like in the classical financial institutions where its costs are built into the profit model of the institution. Today classical financial institutions cover these costs via account maintenance fees, transaction fees, the profit they make on the money they hold for others (via fractional reserve banking) and the overall revenue diversity in their business models.

In the meantime the insurance these vaulting services offer fill a market need for those with large amounts of Bitcoin and but not the time or skill to protect the keys themselves.

The irony is of course it’s the little guy who likely needs the insurance more.