Wallets hold the keys.
Bitcoin is stored and accessed using special bitcoin wallets.
Technically, all bitcoin is stored on the same public blockchain. Wallets only store and manage the secret keys used to access and authorize transactions on the blockchain. But since the keys on these wallets are what unlock access to your bitcoin, it helps to conceptualize them as the place where your bitcoin is stored. The consequences of losing a bitcoin wallet are the same as losing a wallet full of cash. If you loose your keys, you loose your bitcoin.
Each wallet has a public key, which acts like an address for receiving bitcoin, and a private key, which is used to unlock and authorize the sending of bitcoin out of the wallet. Anyone with access to the private key, has access to the bitcoin stored on that wallet, so it’s important to keep it secure.
In the early days of bitcoin, people would just write their public and private keys down on a piece of paper. But that had a lot of drawbacks – especially when it comes to the convenience of sending bitcoin. But now that bitcoin has been around for a while, members of the community have developed a number of different wallet solutions to meet different needs. Some are designed more for security and long-term storage at the expense of convenience, while others are designed to be convenient for transacting at the expense of security. Depending on your goals, you might chose one wallet for all of your bitcoin, or you could have a different wallet to suit each of your needs.
Read on to learn more about the various options.
Wallet services.
For those who don’t want to worry about keeping their own keys secure, there are services out there that can do it for you.
These services typically offer wallets that are accessed through a web browser or a mobile app that make buying and transacting with bitcoin easy. There is typically no charge for storing bitcoin with a wallet service (they only charge for buying and selling) and you’ll be able to access your bitcoin from any device with an internet connection by logging into your account. The service provider stores the private key and doesn’t share it with the user. This can be great if you don’t trust yourself to keep your own keys safe, but it comes with its own risks and drawbacks.
It requires that you place trust in a middleman. And history has shown that not all middlemen are trustworthy, as was the case when $460 worth of bitcoin disappeared from the first bitcoin exchange, Mt. Gox. But as the bitcoin industry matures, other services have established themselves and have begun to develop a reputation of trust. Today, Coinbase is one of the most popular and trusted exchange and wallet services on the market.
Software wallets.
For those who want to retain full control of their private keys, while still maintaining the convenient transacting experience of a wallet service, software wallets are a good option.
Some software wallets, like Bitcoin Core, require downloading a full copy of the blockchain onto your computer. These are called full nodes, and require more technical expertise and and a lot of storage space. It also takes a lot of time to download the full blockchain before you can start making any transactions.
“Light wallets,” like Jaxx, are much more friendly to beginners and don’t require downloading the blockchain. These can be easily run on a mobile device like an iPhone and used for day-to-day transacting on the go – as long as you have the device with you, you can access your bitcoin.
Software wallets store your keys on the device that’s running the software. Since these devices require an internet connection to function, there is always a potential for hackers to gain access to your keys by infecting your device with malware or viruses. There are measures you can take to help secure your wallet from malware, but it’s always a good idea to limit the amount of bitcoin you store on a software wallet to smaller amounts. You probably don’t want to keep your life savings here.
Cold storage.
If you want to store large sums of bitcoin for the long term, it’s worth investing in something like a hardware wallet.
Hardware wallets are specialized devices designed to store your keys securely. They connect to a software interface on a computer or smartphone with USB or NFC to authorize transactions. The private key is always kept segregated from the internet within the device, so there’s no need to worry about hackers stealing them. The Trezor and Ledger are the most popular hardware wallets on the market. They’ll set you back anywhere from $100 – $200. That may be too steep for someone just starting out with bitcoin, but it’s well worth it if you’re in it for the long run.
If you don’t want to spend that kind of money, you can just print your keys onto a piece of paper or something more durable like plastic or metal. The bitcoin community calls that a paper wallet. Paper wallets offer a low-tech, but highly secure means of storing bitcoin long term. As long as you keep the paper somewhere safe, there’s no risk of your keys being stolen by hackers. Offline storage is also often referred to as cold storage as you can not spend bitcoin from a paper wallet, but only withdrawal all of it one time by depositing it to a software wallet.
Author’s note: I originally published this piece on cryptocove.ca