Cryptocurrency Backup: Everything to Know

By  Beluga Research August 30, 2023

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Summary

  • Cryptocurrency backup is the process of securely saving a copy of digital assets to protect against loss, theft or technical failures.
  • Cryptocurrencies are digital assets that are decentralized and do not rely on a central authority - therefore, backups are essential
  • Different types of backup methods, such as paper wallets, hardware wallets and software wallets, can secure cryptocurrencies.
  • Implementing a comprehensive backup strategy, including redundancy, encryption, regular updates and secure storage, is crucial for safeguarding cryptocurrency holdings.

Overview

Cryptocurrency backup is the process of securely saving a copy of digital assets to protect against loss, theft or technical failures. Cryptocurrencies are digital assets that are decentralized and do not rely on a central authority. Because of this backups are essential as there is no third party that can restore lost funds.

A Brief History

The idea of cryptocurrency dates back to the late 20th century, but it gained significant attention with the introduction of Bitcoin in 2009 by Satoshi Nakamoto, an anonymous person or group. Bitcoin introduced the concept of a decentralized digital currency operating on a peer-to-peer network called blockchain. Since then, numerous cryptocurrencies have emerged, each with unique features and use cases.

What is Backup?

Backing up cryptocurrency holdings is essential because it protects from potential loss or theft. Unlike traditional banking systems, cryptocurrencies are not insured by governments, and once funds are lost or stolen, they are generally irretrievable. Implementing a backup strategy ensures that even if the primary access to funds is compromised, there is still a way to regain control and access these assets.

Different types of backup methods that can secure cryptocurrencies:

  • Paper Wallets: A paper wallet is a physical printout or handwritten copy of the user's cryptocurrency's public and private keys. It provides offline storage as the keys are not stored on a digital device. Paper wallets are highly secure if generated and stored correctly, but they require careful handling and protection from physical damage or loss.
  • Hardware Wallets: Hardware wallets are physical devices designed for securely storing cryptocurrencies. They store private keys offline and provide a convenient and secure way to manage digital assets. Hardware wallets are resistant to malware attacks and can be used even on compromised computers, making them popular for long-term storage.
  • Software Wallets: Software wallets are applications or programs that run on a computer, smartphone or tablet. They can be hot wallets (connected to the internet) or cold wallets (offline storage). While software wallets offer convenience, they are susceptible to malware and hacking attacks, so it's crucial to use reputable software to keep devices secure.

To ensure the safety of cryptocurrency holdings, implementing a comprehensive backup strategy is a must. Consider the following:

  • Redundancy: Create multiple backups of cryptocurrency wallets to guard against data loss. Generate multiple copies of paper wallets or create backups of hardware wallet seeds. Having redundant backups stored in different secure locations increases the chances of recovering funds if one backup becomes inaccessible.
  • Encryption: Encrypt wallet data when creating backups to protect it from unauthorized access. Encryption adds an extra layer of security, ensuring that even if someone gains access to the backup files, they can't decipher the private keys without the encryption passphrase.
  • Regular Updates: Update the backups with transaction activity and when new cryptocurrencies are acquired. Generate new paper wallets or backup hardware wallet seeds after significant changes to holdings occur. This keeps all backups up to date and accurately reflects the current cryptocurrency portfolio.
  • Secure Storage: Store backups in secure physical locations such as safety deposit boxes or fireproof safes for paper wallets. For digital backups, use encrypted external hard drives or reputable cloud storage services with strong security measures. Be cautious about storing backups solely online, as they may be vulnerable to hacking attempts.

Getting Started

Before diving into cryptocurrency backup, it's important to understand the basic principles of digital asset security. Unlike traditional financial systems, cryptocurrencies operate on a decentralized technology called blockchain. This technology ensures transparency, immutability and security by storing transactional data across a network of computers. However, this decentralization means there's no central authority to recover lost or stolen funds. Therefore, cryptocurrency holders must safeguard their assets.

To start, a secure digital wallet to store the cryptocurrencies is needed. Wallets come in different forms: software wallets are installed on a user's computer or mobile device, hardware wallets are physical devices that store private keys offline and paper wallets involve printing private keys on paper for safekeeping.

Once a suitable wallet is established, the next step is to generate a backup, often called a "wallet backup" or "wallet recovery phrase." This backup consists of a series of words representing the private keys. These words are the only way to regain access to the funds if the wallet is lost, damaged or stolen. Creating and securely storing this backup is of utmost importance.

Unique Aspects

Cryptocurrency backup has several unique aspects compared to traditional backup methods. Firstly, the backup is entirely digital, consisting of a sequence of words or characters. Unlike physical assets like cash or gold, cryptocurrencies exist only in digital form, making the backup process fundamentally different and involves a different way to address security.

Secondly, the backup isn't tied to any centralized entity or authority. In traditional banking, a customer can contact the bank to recover access to funds if a password is forgotten or account information is lost. In the world of cryptocurrencies, there's no customer support to rely on. Solid backup is the only lifeline, and losing it could result in permanent loss of cryptocurrency assets.

Furthermore, the backup is often called a "seed phrase" or "mnemonic phrase" and usually consists of 12, 18 or 24 words. These words are generated using cryptographic algorithms and adhere to standards like BIP39 (Bitcoin Improvement Proposal 39). Standardized backup phrases ensure compatibility across different wallets and enhance interoperability within the cryptocurrency ecosystem.

Another unique aspect of cryptocurrency backup is hierarchical deterministic (HD) wallets. HD wallets derive multiple private and public key pairs from a single backup phrase, allowing the generation of an unlimited number of addresses. This hierarchical structure simplifies the backup process since securing the initial backup phrase grants access to all addresses associated with the wallet.

Advantages

  • Protection against data loss: Cryptocurrency backups safeguard against the loss of digital assets in case of hardware failure, accidental deletion or theft. Backups allow full restoration of the cryptocurrencies involved.
  • Recovery from security breaches: By regularly creating backups, the impact of security breaches on funds can be reduced. If the account is compromised, funds can be restored using the securely stored backup.
  • Peace of mind: Having a backup record of cryptocurrencies eliminates the fear of losing access to funds due to unforeseen circumstances. It provides peace of mind in case of hardware or software issues.
  • Accessibility and portability: Cryptocurrency backups are stored in digital formats, making them portable and accessible from different devices. Regardless of location or device, imports from the backup are always available to restore the funds in the account.
  • Protection against human error: Regularly backing up cryptocurrency information protects from accidental deletion or misplacement of private keys or wallet files. Even if there is a mistake, assets can be recovered using the backup.

Disadvantages

  • Vulnerability to physical damage: Digital backups can still be physically damaged or destroyed. Storing backups on physical devices like hard drives or USB sticks poses risk from accidents, natural disasters or wear and tear. Regularly updating and storing backups in multiple secure locations helps mitigate this risk.
  • Risk of theft: Cryptocurrency backups contain sensitive information like private keys or mnemonic phrases, which are keys to digital assets. Storing backups in secure and encrypted environments minimizes the risk of unauthorized access and theft.
  • Complexity of backup management: Creating and managing cryptocurrency backups can be complex, especially for non-technical individuals. It involves understanding backup methods, secure storage and the need for regular updates. Neglecting best practices can lead to fund loss or compromised security.
  • Potential for outdated backups: Cryptocurrency networks and wallets undergo updates and changes over time. Older backups may not be compatible with newer wallet versions or lack support for the latest security features. Relying on outdated backups can result in difficulties or complete loss of access to funds.
  • Single point of failure: While backups are crucial, they introduce a single point of failure. If the backup is compromised or inaccessible, recovering funds becomes difficult. Diversifying backup strategies and implementing additional security measures reduce the risk of a single point of failure.