How to Safely Store Your Bitcoins - You Need a Bitcoin Wallet
In just a handful of years, bitcoin has achieved a feat unparalleled in history. It has managed to cement its position as the de facto global currency. A currency without borders and free from government control. A truly democratic phenomenon.
As bitcoin rises, it brings with it its own benefits and risks. Despite the plethora of benefits there are some risks inherent to a digitized and decentralized currency. First and foremost is the cyber security threat. In this article we will talk about bitcoin security and bitcoin wallets.
A short video explaining how bitcoin wallet works:
Despite the risks, it is important to remember that bitcoin itself or its underlying technology isn’t vulnerable to cyberattacks, but rather the flaws exists in the security of the individual bitcoin user. Think of it like this. You can either keep your money in a bank account or you could stuff it in your pillows. One is riskier than the other.
Similarly, there are digital equivalents stuffing bitcoins in your pillow covers and in this article I will tell you exactly what not to do to keep your finances safe and how to safely store bitcoins.
A bitcoin wallet is nothing more than a few lines of software code in a digital file. It contains unique key addresses that are used as unique identifiers. These private key addresses are strings of randomly generated characters, which represent bitcoins associated a bitcoin wallet.
These addresses are also used for recording transaction on the blockchain, the public ledger behind bitcoin. The following illustration depicts how the blockchain ledger works.
The blockchain ledger itself is completely impregnable. Our wallets, on the other hand, can be vulnerable to hacking, which is why taking proper measures to secure our bitcoin is so important. It is similar to keeping our credit card information safe.
How Do Bitcoin Wallets Work?
Contrary to popular belief, bitcoin wallets don’t literally have the bitcoins within them. The entire concept of a decentralized distributed ledger is that nothing exists in a single location. Instead, it is recorded as a transaction on the blockchain with each transaction identified by a unique key address.
What bitcoin wallets do is that it stores our private and public key addresses. It also communicates with the blockchain, ensuring transactional information is sent to the blockchain. In order to send bitcoins, we use the recipient’s public address, which is then matched with their private key address for authentication.
Public and Private Key Addresses
In order to understand what public and private key addresses are let’s take a look at email accounts. In order to receive an email, other people need to know our email address, right? Similarly, in order to receive bitcoins people need to know our public key address.
A private key address is more like the password we use to access our email account. It allows us to access our wallet and is also used for authentication of individual transactions.
Private key addresses must be kept secret, while public addresses are meant to be shared.
When we send bitcoins to someone, the blockchain only records the details of the transfer and identifies it with our public address. It is our wallet that goes through the ledger and determiners the total balance of bitcoins associated with its key address. The blockchain itself doesn’t record our account balances.
Types of Bitcoin Wallet
There are a number of different types of bitcoin wallets we can choose from. Each type of wallet has its own benefits and drawbacks. Let’s quickly take a look at the various types of wallet we have at our disposal.
1. Local Wallet
A local wallet is one that has to be downloaded onto a computer hard drive. The bitcoins stored on a local wallet are essentially stored in our hard drives.
2. Online Wallet
Online bitcoin wallets are similar to cloud storage services such as DropBox. However, these storage services are specially designed to safely store bitcoins.
3. Hardware Wallet
Hardware Wallets are like flash drives that are specially designed to hold bitcoins. These wallets offers the safest method of storing bitcoins.
4. Paper Wallet
Paper wallets are simply pieces of paper with public and private key addresses printed on them. It is the cash equivalent of bitcoins.
Advantages and Disadvantages of these wallets:
1. Local Wallet
A local wallet is the most basic form of a bitcoin wallet. You download it onto your computer, generate a key address and use it to store your bitcoins on your computer hard drive. You can also download a local wallet onto your smartphone or a USB device and use it as a portable wallet.
A local wallet should be connected to the internet only to make transactions, which helps to minimize the potential for theft.
2. Online Wallet
Online bitcoin wallets, as mentioned earlier, are like cloud storage services for bitcoins. These are by far the most popular form of wallets.
Remember to keep only a small amount of bitcoins on online wallets.
3. Hardware Wallet
Bitcoin hardware wallets are the bitcoin equivalent of an impregnable safe with the ability to retrieve the contents of the safe. Hardware wallets are essentially small storage devices that are used to store bitcoins.
The ideal way to use bitcoins is to keep the majority of your digital wealth in a hardware wallet and a small amount, if you intend to use them on a regular basis, in an online wallet. This way, you can spend bitcoins without having to access your hardware wallet and still rest assure that your bitcoins are completely safe.
4. Paper Wallet
Paper wallet is the cash equivalent of bitcoin. It is akin to generating and printing a private and public key address onto a paper. For example, you can put 0.05 BTC or roughly $300 on a newly generated key address and print it out on a paper.
The piece of paper now contains the key address which contains around $300 worth of bitcoins. You can use the key address printed on the paper to transfer the money to your own wallet. Or you could simply hand it over as cash.
Bitcoin Wallet Recommendations
1. Local Wallets
Armory is by far the most reputable bitcoin wallet. It is geared towards more advanced users. It can also be used for cold-storage options.
Bitcoin Core is a full node wallet, meaning, you will maintain a copy of the actual blockchain in your computer. It is an excellent choice for power users.
2. Online Wallets
Blockchain.info is a blockchain explorer service.
It also offers one of the most widely used online bitcoin wallet.
StrongCoin is considered as one of the most popular online wallets. It is also considered as one of the safest online wallets to date.
3. Hardware Wallets
Ledger Nano is considered as one of the most secure bitcoin hardware wallets. It also supports ether and number of other altcoins. Aside from the security of a hardware wallet, it also has a pin code confirmation for an added layer of security.
Trezor is a bitcoin hardware wallet and an offline transaction signing device. It offers a wide range of security features, including the ability to retrieve bitcoins stored on the device even if the device is lost or stolen.
Hopefully, you’ve understood not only how wallets work but also the merits and drawbacks of various different types of wallets. The key to successfully and safely using bitcoins is in understanding the advantages and disadvantages of different wallets. This allows us to appropriately use different wallets for their intended purposes.
Using the correct wallet for a specific task will not only make your digital finances safer but will also allow you to seamlessly manage your bitcoins and other cryptocurrencies. If you have any questions, do feel free to comment below. We are always eager to talk to our readers.
If you’re looking for more actionable information on the use of bitcoins, feel free to browse through some of the other blog posts. I can assure you, each and every article on the site will improve your understanding of bitcoins and prepare you for the age of digital money.
Are you new to Bitcoin? Read our detailed guideline.