You will need somewhere safe to store Bitcoin, before you go about buying any. This storage space is known as a ‘wallet’. It doesn’t actually hold the Bitcoins in it, but instead, it stores the private key that is required to access the bitcoin address – also known as your public key. Depending on which wallet method you decide to use, it may look like the bitcoins are actually in it which makes using them more straightforward. Wallets can hold more than one key, and usually hold many, and you are not limited to having just one wallet – indeed it is common to own several. There are a variety of wallet types that we will take a look at here.
Electronic wallets are a convenient way to store bitcoin. They are software that is either downloaded or stored in the cloud. If you download the wallet it is basically a file that is stored on your device or computer that can carry out transactions. Wallets stored in the cloud will generally have an interface that is more user-friendly but make sure to choose a trustworthy one as they will have your private keys.
Downloading a wallet onto your computer can provide greater security because you have more control over your private keys. The great thing about them is that they are also easy to set up and are usually free. There are a few key cons to consider though. The main one is that if your computer is stolen or the harddrive is corrupted then you will lose the bitcoins if they are not backed up somewhere else. The same goes for cybersecurity – if your computer gets hacked, then the hacker can access your wallet and your private keys and take your bitcoins, so security is a top concern.
The program that runs the bitcoin network called the Bitcoin Core protocol is the original software wallet and can be downloaded without becoming a fully operational node. However, to do so you will have to download the full ledger and all of the transactions since Bitcoin began in 2009. This is generally not feasible as at the moment it requires around 145GB of space and is growing.
To avoid downloading the entire ledger, most wallets sync to it and are called light wallets, also known as Simplified Payment Verification (SPV) wallets. One popular SPV wallet is Electrum, which offers an offline option for added security called cold storage. Exodus uses a cutting-edge user interface to track multiple assets. Others can hold an array of digital assets, such as Jaxx, and others are able to share accounts such as Copay.
The best thing about Online (Cloud-based) wallets is their convenience factor – users are able to access their bitcoins from any device using their log in details. They come packaged with apps for both desktop and mobile which makes bitcoin transactions simple to conduct, are easy to configure, and are free. The downsides to online wallets are their security concerns. Because they are stored by a third party in the cloud, they need to be trusted that they won’t all of a sudden closedown, or simply take your money. They need to have excellent security measures in place. Some of the most popular and trusted hosts are connected to exchanges such as Blockchain and Coinbase. Xapo and Coinbase also offer offline storage options for additional security.
These wallets are basically apps that are downloaded to your smartphone. They are very handy for physical transactions in shops, or for making transactions on the go so are extremely convenient. Mobile versions are available from the online wallets mentioned previously, and others have been designed for mobiles specifically like Abra, Bread, and Airbitz.
Hardware wallets are physical devices similar to a USB stick that can be connected to the internet when needed to make a bitcoin transaction. This makes them very secure against theft from hackers as they spend most of the time not connected to the net. Like normal currency though they can be stolen or lost which means that all of the bitcoins connected to the stored private keys will be gone. As such, some large accounts are kept in secure locations like bank vaults to keep them safe. Some good examples of this type of wallet are Trezor, Ledger, Case, and Keepkey.
Given the nature of bitcoins, it may be surprising to know that paper wallets are also an option for storage. These are simply pieces of paper that have the bitcoins public and private keys printed on them. They are good for long-term storage in the appropriate place of course. They make excellent gifts and are very secure from hacking as they are not connected to the internet. Like paper money, paper wallets can be easily lost if not taken care of properly. They are easily created using services like BitcoinPaperWallet and WalletGenerator. Simply print, save, and send bitcoins to that address – see our paper wallets tutorial here.
How Safe are Bitcoin Wallets?
There are varying degrees of safety depending on the type of wallet but one of the key factors is how well you take care of them. Hardware wallets are considered the safest option as they are kept offline in a safe place like a vault. This means that they are completely cut off from hackers taking your bitcoins from you. Always consider making backups or clones of your wallet because if you lose it without them, that’s your bitcoins gone forever.
Online wallets are considered the least secure option since a third party holds all of the keys. However, these types of wallets are also the easiest to use so you have to weigh up the safety versus convenience factor to decide what is best for you. A good approach that many serious investors in bitcoin users take is to have a larger amount that they keep offline stored on hardware, along with a smaller amount online and mobile that they can use for convenient spending. The option you select will come down to the strategy you use with your bitcoin and how technical you are willing to go with it. No matter what option you finally decide on you will be the key factor on your bitcoin security. Make sure to create backups of everything and keep the location of your backups as safe and secret as possible.
See here for more information on how to buy bitcoin, and see here for some bitcoin spending examples.
(Note: There are more options available than the businesses mentioned in this article, consider alternatives)