Bitcoin & Crypto Wallet Security Best Practices: Can Your Setup Withstand These Scenarios?

Self-custody of your digital assets is the only way to get the full value of your assets. But secure self-custody is hard. 

Here’s a series of challenges to test the security of your Bitcoin and other digital assets custody setup. These tests were proposed by @brucefenton and distilled and named by @bensig in some recent X posts. 

The scenarios prompt you to consider not only how your system might go wrong but also how to improve your setup so you can sleep at night.

Before considering these tests, remember that they are ideals. No setup is completely bullet-proof. Achieving great security is challenging and may take time, thought, and effort. 

But start somewhere—even modest improvements in your Bitcoin and crypto security can dramatically reduce risks. Don’t let the goal of perfection discourage you from implementing steps that offer meaningful protection.

1. Next of Kin Test 💀

Could your family or loved ones access your digital assets if something happened to you today? 

If you haven’t prepared them with instructions, assume that no new information will be added—they must use only what they currently know or have access to. Are your instructions clear and accessible in a time of need?

2. Device Loss Test 📱

Imagine your phone, computer, and any belongings with backup notes or devices are suddenly destroyed. 

Fire, flood, and wind can be sudden and devastating. Without these tools or any items stored at home (or wherever you keep your devices), could you still recover your digital assets?

3. Home Invasion Test 🏠

If armed attackers forced entry into your home, how secure would your Bitcoin and other crypto assets be? 

Assume that they could find a safe or a hidden location for documents or hardware wallets. What is your planned response to threats of violence to give up your keys?

4. Government Seizure Test 👮

You fall afoul of the government, and authorities execute a search warrant on your home, office, cloud accounts, or safe deposit box. They’re specifically looking for any material related to your Bitcoin and crypto holdings. 

Is your setup resilient enough that they couldn’t simply find a seed phrase or private key you’ve stored and seize your digital assets?

5. Memory Loss Test 🧠

If illness, trauma, or age-related memory loss affected your recall, would you or trusted loved ones still be able to access your Bitcoin and crypto assets? 

6. Exile Test ✈️

Political unrest breaks out and you need to leave your country within 24 hours, unable to bring physical items or return. 

Would you be able to access your Bitcoin and crypto assets from another location, without relying on local institutions like banks or safe deposit boxes?

7. Imprisonment Test 🚔

If you were detained or arrested, would anyone else (such as the state or other unauthorized parties) be able to access your Bitcoin and crypto assets? Would someone you trust be able to access your Bitcoin and crypto assets?

Want to prepare your setup to better withstand these scenarios? Here are some actionable strategies to build resilience and accessibility into your Bitcoin and crypto assets custody.

1. Multi-signature Wallets

• Why: Distribute control across multiple keys so that no single point of failure can compromise the wallet. For example, a 2-of-3 multi-signature wallet requires only two signatures. If you lose one key, you can still access funds. If one key is stolen, your funds are still safe.
• How: Set up a Bitcoin multi-sig with trusted individuals using a well-established multi-sig wallet like Sparrow, Electrum, or Nunchuk, or use services like Casa or Unchained Capital.

2. Timelock Recovery Path

• Why: A relative timelock can be used on a separate recovery path to allow access to your funds after a specified period of inactivity. This can be a failsafe if all other options fail. Because of the timelock, this path is not enabled until it is needed (after the coins lie dormant for a period).
• How: Use a wallet such as Liana that implements timelock recovery options or a more general tool like Electrum or even Bitcoin Core that allows the use of Bitcoin Script to implement timelocks (the latter two require technical expertise). Other blockchains typically don’t have this capability built in, but it can be implemented through smart contracts through a system such as Sarcophagus.

3. Offsite Secure Backups

• Why: To protect against device loss or natural disaster, store physical backups of your seed or keys in trusted, geographically separate locations.
• How: Create encrypted backups on durable storage media and store them in secure vaults, ideally across multiple regions. Consider tamper-evident bags to detect unauthorized access.

4. Passphrase-Enhanced Seed

• Why: An additional passphrase acts as a second factor, protecting your seed phrase from direct access.
• How: Many wallets allow a “25th word” or passphrase to enhance security. Store this passphrase separately or memorize it, so it becomes a required factor alongside the seed.

5. Documented Recovery Instructions

• Why: In the event of your passing, your family will need clear guidance.
• How: Write a simplified recovery guide stored securely offsite (without revealing private keys). Share this with a trusted family member, executor, or attorney.

6. Memorization of Key Information

• Why: If you need access without any devices, having a critical piece memorized can be invaluable.
• How: Memorize a passphrase or part of the seed phrase (with a backup somewhere secure) to ensure you can access your Bitcoin and crypto assets even under limited conditions.

7. Privacy Practices

• Why: Reducing the visibility of your Bitcoin and crypto assets holdings minimizes personal risk.
• How: Use privacy-preserving tools like CoinJoin, avoid discussing your Bitcoin and crypto assets storage publicly, and keep records discrete.

By taking these practical steps, you’ll be more prepared for a range of challenges, from device loss to physical threats. These tests offer an evaluation grid for building true resilience into your Bitcoin and crypto assets self-custody. 

Even if you don’t meet every criterion, starting with any one of these improvements is a major step toward protecting your Bitcoin and other valuable crypto assets in real-world scenarios.