How to avoid losing Bitcoin (BTC)s when using Bitcoin (BTC) Core

How to avoid losing Bitcoin (BTC)s when using Bitcoin (BTC) Core

Bitcoin Core is by far the best Bitcoin wallet and a necessity for anyone planning on using significant amounts of Bitcoin. Most Bitcoin wallets store your private keys on their server, so anyone with access to the server could take your Bitcoin (BTC)s at any time.

This is akin to giving cash to a random anonymous person rather than putting it in a bank. There are hybrid wallets like Multibit and Electrum, which don’t need to store your private keys on their server to work, but they still have access to your keys, and it only takes one bad employee or a hacker to steal your funds.

Only Bitcoin Core gives you complete control of your private keys, with no one else able to touch them as long as your password is secure. Bitcoin Core is completely self-sufficient since it stores the data from every transaction in Bitcoin’s history; it only requires an internet connection so it can broadcast your deals and receive the latest Bitcoin transaction data.

Additionally, running Bitcoin Core strengthens and secures the Bitcoin network by increasing data transfer speed and verifying all-new Bitcoin transactions against Bitcoin’s rules, preventing invalid transactions.

To ensure full access to your Bitcoin (BTC)s if your computer breaks or its memory is corrupted, you must store the private keys in an external storage device, which is quickly done by clicking on file → Backup wallet and downloading the wallet.dat file. After you fix or replace your computer, you can import this wallet into Bitcoin Core to recover your Bitcoin (BTC)s.

Most Bitcoin users rarely backup their wallet due to a common misconception that you can restore your wallet with a wallet.dat file from any point in time.

This can result in losing all of your Bitcoin (BTC)s when you restore your wallet due to the way Bitcoin Core handles ‘change’ transactions. When sending Bitcoin to someone else, protocol requires that any inputs used in the transaction must be completely spent.

For example, if you receive 2 Bitcoin (BTC)s and then send 0.5 Bitcoin (BTC)s to someone else, then 1.5 Bitcoin (BTC)s are sent as change. This is a similar concept to using a $20 bill to buy $5 of goods; you cannot rip off a piece of the $20 bill to pay. Instead, you send the full amount to the cashier, and then they send back $15 of change.

Bitcoin Core sends the change to a new address, which it creates and stores the private keys in your wallet.dat file, so you control the new address. The available balance in your Bitcoin Core wallet is the sum of all the addresses you control, rather than the amount of Bitcoin (BTC)s sitting in your main wallet address.

It would be difficult for an outside observer to determine that you own the newly generated change addresses, significantly increasing the anonymity of transactions. It is possible to simply send all change to your regular wallet address to avoid creating new wallets, but Bitcoin Core creates new addresses for change by default, and few people ever modify it.

If you restore Bitcoin Core with a wallet.dat file created prior to your most recent transactions, it is probable that the wallet.dat won’t contain the private keys for newly generated change addresses, so you will see zero Bitcoin (BTC)s in your wallet even if you had Bitcoin (BTC)s prior to your computer crashing.

This has confused and enraged many Bitcoin Core users. To restore your Bitcoin (BTC)s, you must obtain the wallet.dat file from right before your computer broke and import it into Bitcoin Core, which is a relatively easy task as long as your hard drive isn’t broken.

Your Bitcoin (BTC)s will sit idle in the change addresses, so even if you get the wallet.dat off your old computer weeks or months later, you will recover the previously lost Bitcoin (BTC)s. It is important to have zero Bitcoin (BTC)s in your wallet before you attempt to restore an older wallet.dat since you will lose access to any change addresses created after your computer crashed.

To summarize, the only way to ultimately ensure access to your funds in Bitcoin Core when using default settings is to download the wallet.dat file after each Bitcoin transaction you participate in.

This would be quite a hassle for active Bitcoin users. It is much easier to direct all change to a specific address that you control, which is quickly done in newer versions of Bitcoin Core, as seen below. As long as your wallet.dat backup contains the private key for the fixed change address, you won’t need to update it ever again, at least in theory. The downside is your transactions will be less anonymous.

Published at Sun, 15 Dec 2019 13:37:54 +0000

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