How to Store Your Bitcoins? Where are your bitcoins stored?
Bitcoin Wallets store the private keys you need to access your Bitcoin address and spend your funds. But which type is best for you?
Just like with your bank account or physical wallet, you need a place to store your bitcoins after you buy them.
Bitcoin is stored in digital wallets – a type of computer software that connects to the Bitcoin network. Just like bank cards have account numbers, digital wallets have a unique address that can be shared with others when you make a transaction.
It is worth mentioning that every letter and number in this letter is important. Always check the Bitcoin address before sending or receiving funds.
Keep your Bitcoin private keys private
In addition to the public key, a Bitcoin address also contains a private key. And as the name implies, this key must not be shared with anyone. Anyone with access to your private key can easily access your wallet and steal your funds. Similarly, if you fail to store your private key securely and you lose it, you will likely never be able to recover your bitcoins.
An easy way to understand public and private keys is to think of your public key as your home address. Anyone can see it and use it to send transactions to your home or for that matter. Your private key is like your front door key. This is something that only you want to own, and this is what prevents other people from accessing the contents of your digital wallet.
A private key is used to verify that you own the public key. It allows you to access your wallet and sign off on transactions. Some wallets automatically generate a secure seed phrase. A combination of words that allows you to unlock the wallet if you lose your keys. Print this sentence or write it down on a piece of paper and keep it in a safe place. Never take a picture or screenshot of your badge words.
Best Place to Store your Bitcoin
Types of Bitcoin Wallets
Also, as with bank accounts, there are different types of wallets to store your bitcoins in, each offering its own set of advantages and disadvantages. In a broad sense, there are two main types of Bitcoin wallets:
Hot Wallets: These types of Bitcoin wallets are connected to the Internet and are usually available online or on your smartphone.
Cold Wallet: These types of Bitcoin wallets cannot be accessed through the internet. These often include physical devices (such as USB sticks), where Bitcoin and other cryptocurrencies can be securely stored offline.
Hot Wallets
Although relatively less secure, hot wallets are the most popular in the crypto world due to their convenience. Because hot wallets are already connected to the internet, this means people can access and exchange funds instantly – important if you want to trade the crypto market quickly. Some popular examples in this category include mobile wallets (e.g., BitPay), web or online wallets (e.g., Coinbase), and desktop wallets (e.g., Bitcoin Core).
When you register on a cryptocurrency trading platform, a web wallet will automatically be created to store your bitcoins. One of the downsides of using web wallets on exchange platforms is that your private keys are held by a third party. Remember the analogy of the front door key? Now imagine that someone else has the key to your house. If they want, the owner of the key can decide to lock you out or someone can get in without your knowledge if the owner lets the key slip into the wrong hands.
To put things into perspective, in 2019, the New Zealand-based exchange Cryptopia was hacked, and over $17 million in ether and other cryptocurrencies were stolen, forcing the exchange to shut down. A former employee of the exchange was also convicted of stealing $170,000 in crypto by making copies of CryptoPia’s private keys and storing them on USB drives. This gave him access to over $100 million in crypto.
On the other hand, an online exchange wallet is the easiest to set up and use, and some reputable exchanges now have insurance funds to compensate users in the event of a hack. It is worth noting, however, that it should not be relied upon entirely.
As mentioned earlier, there are also mobile and desktop wallets (otherwise known as software wallets) that give you more control and security. Unlike wallets created by crypto exchanges, most mobile and desktop wallets give you access to your private keys. But it also means that if your mobile phone is hacked or stolen, the thief can get a copy of your wallet and bitcoins. Software wallets, therefore, require more security precautions. Electrum and Exodus are examples of software wallets.
Before downloading any software wallet, make sure you do your due diligence and read reviews from other users. Also, verify that you are downloading a legitimate copy of the original wallet. Some shady programmers create clones of various crypto websites and offer free downloads, making hacking possible.
Cool Wallets
Cold wallets like hardware wallets or paper wallets are the safest options when it comes to storing your bitcoins. These are completely offline products and cannot be accessed through the internet. This means that someone has to be in the same physical location to steal the wallet. When you use an online paper wallet generator, however, it’s important to note that there may be some security risks because you’re trusting a website with key generation. If you use one, make sure there are no back doors in the code (ways for website developers to see your keys).
They are recommended if you plan to hold your Bitcoin for a long time and do not plan to trade it very often. But, again, if you lose a hardware wallet, your bitcoin can be lost unless you keep a reliable backup of the keys. Some large investors keep their hardware wallets in secure locations such as bank vaults. Trezor and Ledger are notable examples of well-known hardware wallet providers.
If you can’t decide which wallet to go with, don’t worry. Many serious Bitcoin investors use a hybrid approach and keep most of their crypto wealth in cold wallets, spending less on the web or online wallets. This is the best of both worlds and ensures that your Bitcoin is safely stored.
