When we talk about backups, we mean saving the information needed to restore access to a wallet outside of the application that created the private keys. Often, this will just be the recovery phrase of 12 or 24 words, but can also include other information like a passphrase and derivation path.
The main risks that backups need to protect against are:
Loss of wallet - you lost the device and application holding the private key
Remote theft - your backup got discovered online by a bad actor
Physical damage - your backup got destroyed
Theft on discovery - your backup got discovered in person by a bad actor
Catastrophic events - your backup location got destroyed
Inheritance loss - next-of-kin were unable to access your wallet
Lightning wallets also need to back up the full channel state history to be restored properly. See Backing up a wallet in the Onboarding chapter to learn more. The guide on this page is only suitable for base layer wallets.
By storing the recovery-phrase in an encrypted online location (not in plain text) and hard to access by anyone other than yourself, you are protected against loss of wallet. This is the absolute minimum you should do and only takes a few minutes.
Use an encrypted password manager like 1Password, LastPass, iCloud Keychain
The previous offline backups have one flaw in common - if discovered by a bad actor, your funds can be stolen.
To protect against this theft on discovery risk, a passphrase can be added to the recovery-phrase. This passphrase is sometimes called an extra word, or the 13th/25th word.
While this level provides more protection, it also adds complexity to your backup setup. For most beginners storing small amounts it might not be worth the effort from the start and can be a later consideration should the funds grow.
Technically, all recovery-phrases have a passphrase. If it’s not set by the user, an empty string (“”) will be used by default. This means that using the recovery-phrase with or without the user-defined passphrase will recover two DIFFERENT wallets.
If a bad actor discovers only the recovery-phrase, they will find an empty wallet. Alternatively, one can deliberately leave a small amount of bitcoin in this wallet as a honey-pot, and monitor it for any withdrawals to know if it has been discovered.
To provide protection against theft on discovery, the passphrase should be stored separate from the recovery-phrase.
Since adding a passphrase will generate a different wallet, it is best to add it when first creating the wallet, and before storing any bitcoin in its addresses.
It’s worth noting that most hardware wallets support passphrases, while most software wallet applications do not.
Use a secure passphrase, it is case sensitive and can include numbers and special characters
Have redundant and secure backups of both the recovery-phrase and the passphrase. They are equally important for successful wallet recovery
Understand you now have two distinct wallets (one each from the recovery-phrase with or without the passphrase). This can be useful to fool a bad actor, or a risk if next-of-kin is unaware of the passphrase
Store the recovery-phrase and passphrase together
Forget to document your setup for next-of-kin
Situations where the backup can be discovered by bad actors
Set up a hardware wallet from the recovery and passphrase that uses a PIN to protect usage. The PIN now becomes the protection against theft on discovery and should be saved somewhere safe, just like the passphrase.
Another alternative is to split the recovery phrase into several parts and store them separately, often called Shamir’s Secret Sharing or sharding. However, this is not recommended as it introduces more fragility by multiplying the potential failure points.
One remaining flaw with the single offline backup levels is that severe damage to the one location where they are stored could lead to the backup not being usable. This could be a fire, flood, earthquake or similar, all more or less likely depending on where you live.
To protect against such a catastrophic event we can create multiple backups and distribute them to other locations. This could be a second home, trusted family and friends or a safe deposit box.
As the risk of discovery increases with the multiplying backups, it’s best to maintain the protection against theft on discovery with a passphrase or hardware wallets with a PIN.
Make sure you have redundant copies of all parts of the backup in several locations
Document your setup well for next-of-kin now that complexity has increased
Forget to safely store the passphrases or PINs
In locations where catastrophic events are common or likely to cause severe damage
For any backup setup, sufficient information and understandable instructions for recovering the wallet should be available to next-of-kin.
Even though it might feel uncomfortable (or unnecessary if you are young and single), it is never too early to document your wallets. If you don’t, there is a very high chance that next-of-kin will not be able to inherit your funds.
At a minimum, document each wallet with a given name (Bob’s bitcoin wallet 1), how to recover it, when it was created and what application was used to create the wallet. Ideally, this document has all the instructions required to recover the wallet, but not the information itself (recovery-phrase, passphrase etc.), as that might expose you to theft on discovery risks.
Make next-of-kin aware of the existence of any wallets
Explain clearly how to recover the setup, and how to access the required information
Forget to ensure that required information is also stored in locations your next-of-kin can access even if you are not around anymore