When do you need to replace your Bitcoin keys?
Let’s consider the most common situations where your key security can be compromised.
Each hardware wallet setup has two components: the hardware wallet device and the seed phrase backup. Seed phrases are the more sensitive of the two components because they are a direct human-readable representation of your key’s seed, which is what generates all the private keys to spend your funds. Hardware wallets, on the other hand, store the seed and let you use it to sign bitcoin transactions, and they’re usually protected by a PIN for an added layer of physical security.
Let’s consider the most common situations where your key security can be compromised.
Compromised seed phrase
If your seed phrase has been compromised, it means that there is a possibility that it has been viewed by someone who is not supposed to have access to it. This can occur if your seed phrase is stored digitally, transmitted online, photographed, or physically seen by someone other than yourself.
Digital Exposure Risk
It’s a common recommendation that you physically store your seed phrase backup when you set them up, but some users may ignore this advice and store the seed phrase digitally instead.
Hardware wallets are designed to generate seeds in a secure environment that is separate from devices that are connected to the internet. Storing your seed phrase immediately on another device that is not specifically designed to secure seeds exposes your wallet to the risk of malware such as keyloggers and the potential failure of digital storage media. In fact, you might not even realize that your seed phrase has been compromised until you have already transferred a significant amount of funds to your wallet.
If you have backed up your seed phrase digitally, you should consider the key compromised and must replace it.
Lost Seed Phrase
If you have lost your seed phrase backup, it means that you are unable to find it or that it is otherwise not accessible to you. This could be because you have looked for it in your safe and it is not there, or because you misplaced it while traveling.
In either of these cases, you should consider the key compromised and think about replacing it in your wallet and moving your funds to a safe wallet.
Destroyed Seed Phrase
In the unfortunate event that you are affected by a flood or house fire and your seed phrase backup is destroyed, you will need to replace this key unless you have the chance to obtain the seed phrase from your hardware wallet and create a new backup.
To minimize this risk, you can upgrade your paper seed phrase backup to a metal one.
Stolen Seed Phrase
Is important to consider a stolen seed phrase as both lost and compromised. You will need to move your funds to a safe wallet as soon as possible.
In order to minimize all these risks, I advise following these recommendations:
Compromised hardware wallet
If your hardware wallet is lost or stolen, you should replace the associated key in your wallet as soon as possible. This is similar to what you would do if your seed phrase was compromised. Even if you have a PIN set up on your hardware wallet, it is important to assume that the key may have been compromised, as there have been instances where attackers have been able to bypass PINs on certain devices to access funds stored on the wallet.
Lost Hardware Wallet
If you cannot locate your device, it is not possible to determine if your seed phrase has been compromised or may be compromised in the future. In this case, it is advisable to assume that the seed phrase has been compromised. You will need to move your funds to a safe place and replace the key in your wallet as a precautionary measure.
Stolen Wallet
If your hardware wallet is not in its usual secure location when you check on it (which we recommend doing every three months) or if it goes missing from your personal belongings while traveling, it is possible that it has been stolen. In this case, you should assume that the seed phrase has been compromised. You will need to move your funds to a safe place and replace the key in your wallet as a precautionary measure.
When you don’t need to replace a key?
Your seed phrase is the most sensitive item to secure for a given key. If you believe that it has been lost or compromised, you should replace the key. However, there are some situations where replacing the key is not necessary and can even increase the risk to your bitcoin.
Some of the risks and costs of unnecessarily replacing a key include:
- transaction fees
- the risk of making mistakes when moving large amounts of bitcoin
- the need to update your multi-sig wallet configuration file
- any whitelisted addresses you have with exchanges or other services
It is important to understand when replacing a key is not necessary in order to avoid these risks.
Hardware or Software Failure
If your hardware wallet is physically damaged (e.g. in a fire or flood) or stops working due to an unknown hardware or software issue (e.g. faulty firmware update, broken USB port, or non-functional display), you can restore your seed onto a new device as long as your seed phrase is secure. If your device breaks and your seed phrase is secure and uncompromised, it is safe to assume that the seed phrase on the damaged device is not compromised and you do not need to replace the key in your wallet setup.
Lost or Forgotten PIN
If you forget the PIN for your hardware wallet, you can either reset the device to its factory settings and restore your seed onto it, or restore your seed onto a new device. As long as your seed phrase is physically secure and uncompromised and you are confident that the physical device has not been compromised, you can assume that the seed phrase on the device is not compromised and you do not need to replace the key in your wallet setup.
Compromised PIN
If someone has discovered your PIN but has not physically accessed your device, you do not need to consider the device as if it were lost or stolen. You can assume that the private key on the device has not been compromised and there is no need to replace it.
Upgrading your Device
There is no need to replace the key in your wallet configuration when you obtain a new device. Seed phrases that follow BIP39 standards can be used with all reputable bitcoin hardware wallets, allowing you to easily restore the seed phrase for a specific key on the new device. To confirm that the key has been restored correctly, it is recommended to use the new device to verify your address or make a small transaction. As long as your seed phrases are kept secure and have not been compromised, there is no need to replace the key in your wallet setup.
How do I replace my key on a single-sig scheme?
If your private key in a self-custody single-sig scheme needs to be replaced, you need to follow these general steps:
- Generate a new private key on a new hardware wallet
- Properly back up the new seed phrase
- Perform a test deposit and withdrawal of a small amount of bitcoin to confirm the new wallet was built correctly
- Send the funds from the old wallet to the new one.
How do I replace my key on a multi-sig scheme?
If one of your keys in a fully self-custody multi-sig scheme needs to be replaced, you need to follow these general steps, assuming you use a 2-of-3 multi-sig:
- Generate a new private key on a new hardware wallet
- Properly back up the new seed phrase
- Properly back up the new wallet configuration information
- Construct a new multi-sig wallet making use of the new key, along with the two original, uncompromised keys
- Perform a test deposit and withdrawal of a small amount of bitcoin to confirm the multi-sig wallet was built correctly
- Using the two of the original keys, send the funds from the old wallet to the new multi-sig
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