Although the blockchain technology that underpins Bitcoin is very secure, one of the biggest weak points with Bitcoin is storage. Because Bitcoins have risen significantly in value over the years you will not be surprised to know that the number of cyber criminal’s intent on stealing Bitcoins has risen too. And these people are getting smarter and smarter.
They are creating bots that will scan online Bitcoin wallets and try and remove the Bitcoins in them. There have been several reports about cyber criminals emptying cryptocurrency exchange wallets over the years and the wallet holders never seeing their Bitcoins again. We want you to be shocked and concerned by this.
If you are going to be a successful Bitcoin investor then you need to hang on to your Bitcoins! It is essential that you keep your Bitcoins safe and fortunately there is a lot you can do to ensure this.
The type of Bitcoin wallet that you choose is crucial to the security of your Bitcoins. It is all about keeping your private key safe. Inside of your wallet your Bitcoins have an associated address which consists of your private key and public key. The public key is the actual address of the Bitcoin and your private key is the password that unlocks those Bitcoins.
It is essential that you keep your private key safe. If a cyber criminal gets their hands on your private key then they can transfer all of your Bitcoins to other accounts. And you know that once a Bitcoin transaction is verified and confirmed then there is no turning back.
People that are unlucky enough to have Bitcoins stolen from their wallets just have to accept it and get on with their lives.
You just cannot do anything to get your Bitcoins back. So let’s take a look at the different types of wallets and how you can provide the maximum protection for your private key.
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Online Bitcoin Wallets
There is no easier way to get started with Bitcoin investing than to setup an online wallet. You can setup a free Bitcoin online wallet even if you have no Bitcoins right now. Cryptocurrency exchanges like Coinbase will provide you with an online wallet and you can get one at Blockchain.com as well.
When you are just starting out then an online wallet is a good thing to use. But you would not want to keep a sizeable Bitcoin inventory in an online wallet. Yes it is great that you can access your online wallet from anywhere in the world but so can thieves and cyber criminals! An online wallet is a “hot” wallet because all you need to access it is an Internet connection.
The problem is that most online wallets end up storing your private keys on their servers and if these get hacked you can say goodbye to your Bitcoins. The other issue is that servers can and do have technical problems and if they suffer a catastrophic issue then your private keys could disappear forever. Some online wallet platforms will limit or suspend accounts for terms of service infractions and you may even have your account shut down permanently and you lose your private keys.
We strongly recommend that if you have a significant amount of Bitcoins that you move them to a cold wallet which is offline. Don’t take the chance of not being in control of your Bitcoins. Online wallets are not all bad. Yes there are security and other risks but if you intend to make frequent Bitcoin transactions then they are useful.
You can hold a small amount of Bitcoins in your online wallet for those regular transactions and then move the rest to a more secure wallet.
Mobile Bitcoin Wallets
A mobile wallet is another form of hot online wallet. With a mobile wallet you can access it using your mobile device when you connect to the Internet. If you have a smartphone or tablet that you take around with you wherever you go then this is a very convenient type of Bitcoin wallet.
With a mobile wallet you can make Bitcoin payments to a vendor either online or offline.
If you have a Blockchain.com or Coinbase online wallet then there is a mobile counterpart synchronized to your main wallet. Despite being very convenient there are issues with mobile wallets.
Cyber criminals and hackers can still get hold of your private keys if they are saved on your mobile device or remote servers. A lot of people lose their mobile phones or have them stolen. Also a lot of mobile phones suffer damage.
If you don’t make copies of your private keys then you could potentially lose all of your Bitcoins in these scenarios. To get the best use out of a mobile wallet we recommend that you transfer just what you need to it from a more secure wallet.
Then if you lose your phone or it becomes unusable you will still have your private keys safely stored in the secure wallet.
Desktop Computer Bitcoin Wallet
Another choice for you is the desktop wallet. It is a much safer choice than an online or mobile wallet as you download an app for your computer or laptop and you store your private keys in it.
One of the most popular desktop wallets is Bitcoin Core. In our opinion this is not the most practical choice. The reason is that Bitcoin Core will actually download the complete blockchain so you will need at least 150 GB of spare disk space to make this work. The good news is that there are alternative desktop wallets that you can use which do not require you to download the blockchain for Bitcoin.
Instead they use simple payment verification (SPV) technology.
Some good examples are:
- Electrum
- Armory
- Bither
Desktop wallets are simple to use and so much safer than online or mobile wallets. With a desktop wallet you can disconnect your computer from the Internet to prevent hackers from accessing your private keys.
While it is true that a desktop wallet does not have the convenience of an online wallet you will have control over your private keys. You can also make a backup in case your laptop or computer is stolen or becomes inoperable.
Paper Bitcoin Wallet
This may seem a strange thing to try and store your Bitcoins on paper as they do not seem to be a very good match. But paper wallets are another cold storage option as it is impossible for even the most competent cyber criminals to hack a piece of paper!
Of course if you do not take care of a paper wallet in the real world then people can steal it.
So if you choose this option then don’t leave it lying around. You also need to protect paper wallets from damage as well so use a water resistant container to store them. A paper wallet definitely does not have the convenience of an online wallet but they are a lot safer.
All you need to do is to print off your private and public keys and store the paper somewhere secure such as a safety deposit box. Paper wallets are a good long term option. You can store large amount of Bitcoins in your paper wallet and then have a few available in an online wallet for regular transactions. It is definitely one to consider.
Hardware Bitcoin Wallet
Most Bitcoin experts will tell you that the most secure types of Bitcoin wallets are hardware wallets. We agree and if you are serious about Bitcoin investing then we strongly recommend that you invest in a hardware wallet. They are not cheap but they are worth it.
The majority of hardware wallets will enable you to store other cryptocurrencies as well as Bitcoin.
A hardware wallet is usually in the form of a USB stick which you just insert into your computer when you want to make a Bitcoin transaction. Once you are done just remove the hardware wallet and then store it safely. A really good security feature with hardware wallets is the ability to create private keys offline.
You can carry your hardware wallet around with you wherever you go without the worry of having your private keys stolen. It is really easy to setup and use a hardware wallet. With most hardware wallets you can set a password and PIN code and even add recovery seed words to authenticate access and to recover any stored Bitcoins if you lose your hardware wallet or it stops working.
We recommend that you write down all of your security details for your hardware wallet just in case you forget them. Hide these details in a place that only you know about.
If these details fall into the wrong hands then you can lose all of your Bitcoins.
There is no chance of a hardware wallet being hacked so the only thing you have to do is to keep a backup of your security details in a safe place. At the end of the day you will probably want to use a combination of different wallets as you become a more serious Bitcoin investor. Hardware and paper wallets are the best choice for long term storage.
You can use a desktop wallet for medium term storage and an online wallet for those frequent short term Bitcoin transactions.
