How to Store Your Bitcoins
Bitcoin wallets store the private keys that you need to access a bitcoin address and spend your funds. They come in different forms, designed for different types of device. You can even use paper storage to avoid having them on a computer at all. Of course, it is very important to secure and back up your bitcoin wallet.
Bitcoins are a modern equivalent of cash and, every day, another merchant starts accepting them as payment. We know how they are generated and how a bitcoin transaction works, but how are they stored? We store fiat cash in a physical wallet, and bitcoin works in a similar way, except it's normally digital.
Well, to be absolutely accurate, you don't technically store bitcoins anywhere. What you store are the secure digital keys used to access your public bitcoin addresses and sign transactions. This information is stored in a bitcoin wallet.
Bitcoin wallets come in a variety of forms. There are five main types of wallet: desktop, mobile, web, paper and hardware. Here’s how they work.
What is Paper wallets
One of the most popular and cheapest options for keeping your bitcoins safe is something called a paper wallet. There are several sites offering paper bitcoin wallet services. They will generate a bitcoin address for you and create an image containing two QR codes: one is the public address that you can use to receive bitcoins; the other is the private key, which you can use to spend bitcoins stored at that address.
The benefit of a paper wallet that is made correctly is that the private keys are not stored digitally anywhere, and are therefore not subject to standard cyber-attacks or hardware failures.
To find out more about creating a paper wallet, read our tutorial.
Are bitcoin wallets safe?
It depends how you manage them. The private keys stored in your wallet are the only way to access the transaction data stored in a bitcoin address. If you lose them, you lose your bitcoins. So, they are only safe in so far as no one else can access them, and they don’t get lost.
Are bitcoin wallets anonymous?
On the one hand, bitcoin is entirely anonymous. On the other, it is completely transparent and trackable. Due to this fact, bitcoin is often cited as being pseudonymous.
This fact resulted in some companies emerging with the goal of controversially tracking suspect transactions to 'police' the blockchain. To counter this, ideas were developed in the bitcoin community to take anonymity further, such as merge avoidance, stealth addresses, and coin mixing.
The alpha version of Dark Wallet – a crowdfunded bitcoin wallet – went live in May 2014. Created by Amir Taaki and Cody Wilson, Dark Wallet was designed to provide new tools for financial privacy, including in-built coin mixing and stealth wallet addresses. At the time of writing, the developers are urging users to use the testnet with 'play money' to iron out bugs before risking significant amounts of bitcoin.
Wallets and services like Dark Wallet ultimately mean that using bitcoin can be as anonymous as you want it to be.
How can I secure my wallet?
There are several ways to make your bitcoin wallet more secure:
Encrypt it
One way to protect your wallet from prying eyes is to encrypt it with a strong password. This makes it difficult to access your wallet, but not impossible. If your computer is compromised by malware, thieves could log your keystrokes to find your password.
Back it up
If you have your private keys stored in one wallet, but you mislay that wallet or it gets corrupted, you will lose your keys. Backing up your wallet makes a copy of your private keys, but it's important to back up your whole wallet. Some addresses are used to store change from transactions, and may not be shown to you by default. Back up the whole wallet in several different places, and keep them safe from prying eyes.
Use multisig
The number of services which support multi-signature transactions is increasing. Multi-signature addresses allow multiple parties to partially seed an address with a public key. When someone wants to spend some of the bitcoins, they need some of these people to sign their transaction in addition to themselves. The required number of signatures is agreed at the start when people create the address.
Since multiple signatures are needed before funds can be spent, the additional signatures could come from, say, a business partner, your significant other, or even from a second device which you own, to add a second factor to spending your coins.
Take it offline
If you are too nervous to store your bitcoin keys digitally, for fear that they may be stolen by hackers, there is another option: ‘cold storage’. Cold storage wallets store private bitcoin keys offline, so that they can’t be stolen by someone else on the Internet.
It’s a good idea to use cold storage for the bulk of your bitcoin fortune, and transfer just a little to separate bitcoin addresses in a ‘hot’ wallet with an Internet connection, making it easy to spend. That way, even if your mobile phone is lost, or the hot wallet on your notebook PC is erased during a hard drive crash, only a small amount of bitcoin cash is at risk.
Many software bitcoin wallets feature a cold storage option. Or, you could go completely analogue, and simply use paper wallets for offline storage.
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