Safest Ways to Store Bitcoin
Bitcoin is in many ways different from traditional financial systems. One of the main differences is the level of control offered by it: you are ultimately responsible for the safety of your bitcoin. This is certainly a liberating concept, but with freedom comes responsibility: once you lose your coins, they are literally gone for good. In this light, you need to know how to store bitcoin if you don’t want to see an empty balance one day.
However, trying to figure out the safest way to store bitcoin is confusing, with different companies promising ultimate protection through sophisticated encryption while others advise to lock it in a safe. The first step in deciding where to buy btc otc and store bitcoin is to understand the different types of wallets and the advantages they offer for long-term storage.
Bitcoin Wallets Basics
All coins that have ever been mined exist on the blockchain. Within the blockchain, the funds are moved between addresses, which are represented by long random strings of alphanumeric characters known as bitcoin addresses. People usually think about these addresses as bank accounts because they look and feel almost the same.
While this perception is not entirely correct, there is one important similarity: any person who owns private keys to a certain address has complete control over all bitcoins tied to it. In this sense, the question “How to store bitcoin?” boils down to making sure that only you have access to your keys.
Now, the keys can be written down, memorized, or converted to the human-readable format like seed phrases, but to actually use your crypto you will need software that can interact with the blockchain.
This software (and, in some cases, hardware) is called a wallet. There is a ton of options in this field ranging from simple printouts of keypairs to sophisticated solutions with multiple levels of protection.
So when people look for the safest way to store bitcoin, they may mean completely different aspects of safety. To some, it may mean “I want to be sure I never lose my coins by accident.” History remembers many chilling stories about people losing fortunes after accidentally throwing away hard drives with their private keys, so this is a real concern.
To others, the safekeeping of their bitcoin wallets is all about protection from theft, either physically or over the Internet. Fortunately, developers of wallets recognize this risk and equip their products with clever anti-temper mechanisms.
Finally, the users who move their coins often may want to have safe and easy access to their funds. This is a problem in its own right, with different types of wallets offering varying levels of convenience.
Understanding of Cold Storage For Bitcoin
Probably the safest way to store bitcoin offline is the so-called cold storage method. In the most basic terms, cold storage means that the keys used to control the bitcoins remain offline. In practice, this means that the keys are generated on a machine that is not connected to the internet.
The advantage of such a method is that it is impenetrable to any sort of cyber threat, such as phishing or a man-in-the-middle attack. The downside is that the keys are still necessary to make a transaction, so there should be a way to move them to an online bitcoin storage.
Because of this, the ease of use varies wildly among cold wallets, with no one-size-fits-all solution.
The simplest example of a cold wallet is a pair of keys – a private and a public one – created on an offline machine. There exist a plethora of wallet generators that can create keypairs and optimize them for print or digital storage.
Many of them are open-source, which makes it possible to actually look into the code and make sure there is no foul play involved.
Many software wallet developers also add offline functionality to their products, which is a step up above the bare-bones wallet generator experience.
Finally, hardware wallet manufacturers like Trezor and Ledger use sophisticated protection measures to ensure that private keys are never exposed to the device your wallet is connected to, which technically makes them a type of cold storage.
Once you have set up a cold bitcoin storage you can be sure that your funds are safe for keeping, as long as you are certain the storage medium is not compromised. If the physical medium is the best way to store bitcoin for you, you can write it down or print out on paper and put it in a safe or a vault.
This storage method, known as a paper wallet, is the simplest cold storage option for those who do not expect to move their funds often.
Access to funds is another important aspect of cold storage. In the case of hardware wallets, all the technical stuff is taken care of by the device itself. In the rest of the cases, you need to decide how to transfer keys to the online bitcoin storage. The most intuitive way is to enter them manually.
The important thing to remember here is that a key is a string of random characters, which makes transcribing quite a challenge.
A much more convenient way is to use seed phrases – strings of words that contain your encrypted private keys. Seed phrases are easier to memorize and transcribe. Alternatively, you can always transfer keys by copying them on a flash drive or scanning a QR code. Obviously, you have to trust the device and software used in the process – after all, there is always a chance you are introducing spyware through that USB drive.
What is a Hot Wallet?
Now that we know how to store bitcoin offline, we can see it is not exactly a smooth user experience. For daily transactions and storage of small amounts, it is far more convenient to have a wallet connected to the Internet at all times. This type of storage, called a hot wallet, is similar to carrying cash on a person – you have it within reach but so do people who want your money.
Occasionally, an exchange or a bitcoin store may allow storing your bitcoin for you. This is also a type of hot wallet, in which funds are stored on the company servers. While using a hot wallet, the person is open to all sorts of hacks that may take control of the device and steal their keys.
In addition, no matter how hardened your software of choice is, there is always space for undiscovered vulnerabilities. Simply put, as long as the device is on the Internet, it is wise to treat it as potentially compromised.
Cold vs Hot Wallets
At the core, cold and hot wallets serve different purposes, which means each has its own strengths and weaknesses.
- Accidental Loss: with cold storage, there is very little chance a paper wallet will vanish from your safe (or wherever you store to hide it). On the other hand, your phone with hot storage on it can be lost or just broken, which means all those bitcoins are gone for good.
- Protection from Theft: Currently, there are literally dozens of ways to intercept the data from a device connected to the Internet that apply to hot wallets. In the case of cold wallets, the only way they can be stolen is by having physical access to the place they are stored.
- Ease of Use: Cold wallets have built-in features that simplify the process a bit, which are sufficient for long-term storage with occasional use. Hot wallets, on the other hand, are designed with daily use in mind at the expense of safety and security.
As can be seen, cold wallets are the safest place to store bitcoins in bulk and for long periods of time. Since the keys never show up on internet-connected devices, there is no real way for somebody other than the owner to get them.
Of course, this also means that you will have to go through the trouble of actually transferring them every time you need to move your coins, but should not be a problem unless you plan to do it every day.
Another thing to remember is that a wallet is only as secure as the system it is installed on. Simply put, there is no use in knowing how to store bitcoin offline if you carry malware on your USB drive.