Just like traditional currency, Bitcoins and other cryptocurrencies need to be stored somewhere safe and secure. Whether you’re mining, investing or exchanging, you need to know that your coins are locked away and safe from theft.
Storing digital currency can be tricky. There isn’t a government-led initiative that covers your holdings, so if your coins are stolen, it is very unlikely you’ll ever see them again. It is therefore essential that you take all the necessary steps to protect your Bitcoins.
Cryptocurrency wallets are used to store Bitcoins and other cryptocurrencies. These virtual bank accounts don’t technically store your coins, however. Instead, they store the public and private keys needed to unlock your holding. They can also perform transactions — both offline and online.
The Goals of Bitcoin Storage
The primary goal of Bitcoin storage is to protect funds from theft or accidental loss. Think of your storage solution as a safety deposit box — only you know where it is and how to open it. But what if you were to write down your details in order to remember them? They’d then be susceptible to theft, and exactly the same issue exists with cryptocurrency wallets.
Bitcoin storage is all about keeping your public and private keys safe — but maintaining access to them when you wish to perform transactions with your cryptocurrency holdings. Your cryptocurrency storage solution also needs to verify that new Bitcoins are real, and that potential thieves and fraudsters aren’t spying on you.
How Should I Store My Bitcoins
How you store your Bitcoins depends on a number of factors, including how many you own, how often you trade, and whether or not you use a public computer. While there are several types of digital wallets to choose from, the choices boil down to just four: a hardware wallet, a multisignature wallet, a hot wallet, and a cold storage wallet.
Hardware wallets are external devices that work independently from computers and mining software. Typically, a hardware wallet holds private keys offline — making it safe from malware. All transactions are signed internally within the wallet before being transmitted to a computer.
While hardware wallets allow people to keep their holdings away from computers infected with malware, they aren’t without their problems. For example, hardware wallets can’t easily be connected to a full node on a cryptocurrency network. As a result, the rules of Bitcoin aren’t verified, and the third-party servers involved aren’t properly queried. Hardware options are also more expensive than other types of wallets.
A multisignature wallet requires multiple private keys to transact with Bitcoins. These keys are typically spread across several servers, giving them added protection from hackers and malware. Lost keys can be recovered with a paper backup or a special phrase.
Multisignature wallets are far cheaper than hardware alternatives. They are basically software packages that can often be downloaded for free. They are accessed online with an easy-to-use interface, which makes the process easy and quick.
Hot wallets are single signature options with private keys that are stored online. If you downloaded free wallet software or went with the option provided by an exchange, the chances are you got a hot wallet.
If you’re new to cryptocurrency investing or mining, this is a good option to get started with. However, as your portfolio grows, it’s best to diversify your holdings and split them across several wallets. Hot wallets are particularly susceptible to hackers and malware, so you should follow security protocols such as changing passwords regularly and only using trusted and private computers to access your funds.
Cold Storage Wallets
Cold storage wallets stores private keys in an “air-gapped” computer. They also generate new keys without the need to connect to the Internet. While payments are received online via a watch-only wallet, all other transactions and operations take place offline. All transactions are transferred offline for signing before being sent to the Bitcoin network.
Cold storage wallets work in a similar way to hardware wallets. However, you can use your existing computer to hold one, whereas hardware options involve a dedicated device. Cold storage gives you protection against online threats, but you have to be with your computer in order to access your funds.
There are several other types of wallets, including web wallets, paper wallets, and custodial wallets — where a third party protects your crypto holdings. Some people even use Cloud-based services such as Dropbox to store their coins, but this isn’t advisable. It is also possible to use standard storage devices such as USB sticks for the storage of Bitcoins.
If you’re just getting started with your cryptocurrency investments, it’s probably best to use a wallet provided by an exchange. The set-up process is seamless, and you’re usually taken through it step by step. As your holdings grow, however, so does the risk of fraud and theft. It’s therefore a good idea to spread your investment portfolio across several different wallets.