Plausible Deniability

Plausible deniability is the capacity for anyone (usually someone in charge of a situation) to completely deny the knowledge of facts or actions because of a lack of evidence that they do have such knowledge (even if they do).

Plausible deniability and bitcoins

With Bitcoin being a distributed ledger, you are in complete control of your own bitcoins. There is no bank standing behind you confirming your actions and dictating what you can and cannot do.  Whist this has many advantages, it also has drawbacks:

1. If you mess up and loose your bitcoins, that’s your problem and nobody else’s
2. If somebody attempts to steal your bitcoins, it is you that needs to stop them.

Obviously, you can do your best to track where you keep your coins and to protect them from hackers.  But what happens if you are mugged in the real world. Someone attacks you, maybe in your home, and demands that you transfer your bitcoins to their wallet under threat of violence. Once those bitcoins have left your wallet, they will be irretrievable.  In such a situation, how do you plausibly deny that you have any bitcoins?

How to avoid being mugged for your bitcoins

Bitcoins are not yet owned by everyone. So, if you are mugged for your bitcoins it is likely the attacker knows you own some. Maybe you’ve talked about it too loudly in a restaurant, or maybe you’ve been spotted in a bitcoin-trading forum on social media.

The trick to plausible deniability with bitcoin ownership is to be able to show your attacker that you own very few or no bitcoins. For this, you will need a wallet that allows the creation of hidden accounts (sometimes referred to as hidden wallets). You then keep a small quantity of bitcoins, maybe thousandth or hundredth of a bitcoin in the main wallet account.  But the bulk of your bitcoins will be kept in a hidden account that doesn’t even show up as existing unless you enter a specific code.

Plausible Deniability and Bitcoin Wallets

With some wallets, such as the Ledger Nano S, "Plausible deniability" is a security feature incorporated specifically to combat the risk of being threatened and forced to give your PIN code. With this option, you will actually manage two PIN codes or phrases: 

1. First PIN code gives access to your main wallet, like a basic current account with low bitcoin amounts for daily usage.
2. Second PIN code, linked to a specific passphrase, which opens a hidden account, similar to a savings account, which will be used once in a while – this is where you keep the bulk of your bitcoins.

With this option, even if you are forced to recover a wallet from your 24-word backup, only the main wallet will be displayed, and the second account will remain hidden, as long as you don't reveal the attached passphrase. No one can know you have 2 PIN codes attached to your wallet, so you can reveal the first PIN code giving access to your daily wallet, to avoid having your savings stolen from your second wallet.

As each PIN is using its own independent counter and PIN comparison is constantly performed, it is highly unlikely for an unsuspecting, sophisticated attacker to guess that a second PIN is enabled.  Providing that you give the first PIN to the attacker the most they can steal is the amount you keep in the main wallet because it is not possible to brute force one PIN knowing another one.