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If someone was to steal my external hard drive would they need to input my password to be able to read the TimeMachine backup data on there?

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Not by default.

By default Time Machine Backups are not encrypted. They are stored in a sparse bundle disk image with the name of the computer which the backup is from. You can open this image and browse it without a password.

You can easily enable encryption for Time Machine backups if they are connected via USB/Firewire. It's more complicated if you access your backup disk using ethernet/Wi-Fi. How can I enable encryption for my Time Machine backup?

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  • I'd just like to point out that for local external disks, TM doesn't seem to use a sparse bundle, just a folder.
    – SilverWolf
    Commented Dec 8, 2018 at 18:00

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