If you are someone that invests in Bitcoin or other cryptocurrencies, security is probably important to you. That may be why you are choosing to use crypto in the first place. Here’s something important to know:
Your Bitcoin and other cryptocurrency is only as safe as the wallet you hold it in. There are many types of crypto wallets. There are hot wallets and cold wallets, hosted wallets and paper wallets. The type of crypto wallet that we are going to talk about today is a multi-signature wallet. Some people think it is the most secure way to protect your Bitcoin.
Here’s an overview of how to create a multi-signature cryptocurrency wallet.
What is a Multi-Signature Wallet?
First lets take a look specifically at what this type of crypto wallet is.
The traditional Bitcoin wallet is one that uses a single signature, or key. Only one person is needed to verify and sign the transaction. Control the private key, and you control the wallet. For many Bitcoin users this works very well, but there is a certain amount of risk involved.
In a regular Bitcoin wallet access depends on your control of the private key. Lose that key and you will have lost access to the wallet and the Bitcoin that it contains. Your crypto is gone.
Multi-signature wallets are exactly what they sound like. They are crypto wallets that require more than one signature to verify a transaction. In fact, some multi-signature wallets can use up to five signatures. Before a transaction can proceed, three of the five signatures have to be used to validate a transaction.
The Purpose and Advantages of Multi-Sig Crypto Wallets
Can you see the purpose here and advantage of using a multi-sig Bitcoin wallet? Let’s try to clarify things with an example.
Let’s say that you and a group of friends are embarking upon a new project. You are going to crowdfund the project with Bitcoin. Before you begin to accept Bitcoin donations, you create a multi-signature wallet that establishes signatures for five members of your team. You also establish a rule that three of the five signatures must be used when transactions are sent from this multi-sig wallet.
You have now taken the power of the Bitcoin wallet out of one person’s hands and placed it in five. You do not have to worry about someone taking off with the Bitcoin funds that you have received. You don’t have to worry about one person being responsible for the private key. Multiple signatures are now required for every Bitcoin transaction made from this wallet.
Multi-Signature Bitcoin Wallets are Not New
The concept of a multi-signature Bitcoin wallet is not new. These wallets have been around since 2012. That’s only a few short years after Bitcoin was launched. They have become more popular in recent years thanks to the growing acceptance of Bitcoin. There is perhaps a greater need for Bitcoin multi-sig wallets today than there was a few years ago.
In the beginning Bitcoin was used on a solitary basis. Individuals were generally managing their own projects and wallets. Bitcoin was built for group use, though, and for creative funding of endeavors. To do that there had to be a way for more people to participate with a single wallet that had multiple keys, or signatures, on top.
So, the multi-sig Bitcoin wallet was created. All of these wallets have at least three private addresses, whereas a standard Bitcoin wallet has one.
Setting up a Multi-Signature Wallet for Bitcoin
When setting up a multi-signature Bitcoin wallet there is a need to make a few decisions. The first of these is to decide how many of the total signatures will be required to authorize a transaction. The most common number is 3 of 5. You can choose any type of set up that you want.
A word here. Having a multi-sig wallet can indeed improve Bitcoin security. Don’t go overboard. There is no reason to try and create a wallet with ten signatures. If you need that many, there is a trust issue among the members of your team.
There are options for setting up multi-signature wallets with most wallet services. You can even create one with some hardware wallets. You will be guided through the process. Don’t forget to capture all the necessary information needed to reclaim the wallet in the event that there is a problem with the private keys.
Reasons to Consider
This article is not meant to be a precise step-by-step setup guide for a multi-signature wallet. Rather, we are trying to give you an overview and address why you might want to consider these types of cryptocurrency wallets.
A multi-signature Bitcoin wallet can be used as a type of two-factor authentication. The way this works is to begin by creating three wallets. The first will be a wallet on your computer. You will then establish a wallet with the 2FA service. Finally, a paper wallet is created that is kept in your possession. Be sure to keep it secure, such as in a safe.
When transactions are initiated in this way, you will be required to key in a two-factor authorization code in a method that you have selected. When you verify the code the service then completes its signature. The transaction can then be validated and process.
A situation like the one we just described is useful if someone is attempting to steal your Bitcoin by forcing your cooperation.
Multi-signature wallets can also be used for escrow services. They can be used for the improved control of company funds. The reason that you choose to accept and use a multi-signature cryptocurrency wallet is up to you.
The Challenges and Disadvantages of a Multi-Signature Wallet
It would not be fair to present an overview of multi-signature Bitcoin wallets without touching on the disadvantages that one might encounter. Let’s start with the overall complexity of using a multi-sig crypto wallet.
When you are the only one with a signature it is much easier to spend and authorize Bitcoin transactions. You don’t need approval from anyone else, nor will your spending be questioned. If you are not actively involved in a collaboration with someone, a regular wallet might be right for you.
But, let’s say, what if you had a problem with online gambling? You could, in theory, create a multi-signature wallet as a self-check for yourself.
That leads us to the biggest challenge of using a multi-sig crypto wallet. You have to have trust from everyone involved. Yes, the purpose of multiple signatures is to reduce the chance of one person going rogue. But what if enough signatures were assembled by a group trying to take over a project? Trust is still a major component when you are talking about a group of people sharing access to funds.
A Few Popular Multi-Signature Bitcoin Wallets You Can Use
We will stop short of recommending any specific multi-sig wallet. What we can do is point you in the direction of a few that are regarded as effective.
Electrum is a mobile and desktop multi-sig wallet that can actually be integrated with hardware wallets like the Ledger. It allows you to set up wallets that require up to 15 signatures. Again, if you need this many you may want to rethink the integrity of your team.
Copay supports two of three signatures for Bitcoin transactions. It is a wallet that is designed to be used on a mobile device or a desktop.
BitGo is one of the oldest multi-signature wallets. It was introduced in 2013. This wallet is effective but very basic. It uses a three of three multi-sig configuration.
Before you choose a multi-signature wallet from the list above or make another choice, you need to ask yourself a few questions:
- What type of crypto wallet access will work best in your situation? Do you need a desktop, mobile, or hardware wallet?
- How many people will be included in the management of your multi-signature crypto wallet?
- Have you explained the concept of a multi-signature crypto wallet to your team?
This guide should be enough to get you started with multi-signature Bitcoin wallets. You may find them to be the right solution, but only use them if they are a good fit. Anytime that you introduce more people into the equation of managing a crypto wallet, a certain risk factor enters the picture.