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STORING YOUR BITCOINS SAFELY, SECURELY, AND CONVENIENTLY

Unfortunately, nothing can be protected against loss with 100 percent certainty, but when done correctly, bitcoins can be stored extremely safely and securely, perhaps more so than any other financial asset. Stored incorrectly, however, bitcoins are vulnerable to loss due to technical failures (e.g., a computer or hard drive failure) or everyday disasters, and they can be an easy target for thieves as well. So before you purchase a significant amount of bitcoins, you need to learn how to—and how not to—store them.

In this chapter, we'll explain various methods of storing bitcoins and comment on their appropriateness for different use cases. Some storage methods are more secure than others but are less convenient. Once you are comfortable with the methods and concepts discussed in this chapter, you'll be prepared to handle bitcoins in any quantity.

Storing Your Private Key(s)

Where are your bitcoins stored? It's a surprisingly tricky question. You must know that (1) the amount of bitcoins in your account is recorded on the blockchain, and (2) to access those bitcoins, you need to use a private key. The blockchain may be stored in a different location than your private key, and because both are necessary to use your bitcoins, it would seem at first that it is difficult to say exactly where your bitcoins are stored. But millions of identical copies of the blockchain are distributed all over the world, and because no disaster will ever erase every copy of the blockchain, you don't need to worry about how and where it is stored. Instead, you should focus on your private key. You (and only you) know your private key, so wherever you store this key is where your bitcoins are. Consequently, storing your bitcoins really means storing your private key. If you use a Bitcoin wallet, which is a collection of addresses and private keys, your bitcoins are stored wherever you store that collection (usually on a computer, phone, or portable USB drive in a wallet file).

The remainder of this chapter explains the challenge of storing your private key (or collection of private keys) in a way that prevents accidental loss and theft. Bitcoin allows you to be your own bank. But being your own bank comes with great responsibility and requires you to take serious security precautions. Alternatively, you can trust a third-party service provider to be your Bitcoin bank, in which case you won't need to worry about security directly; instead, you'll need to trust your service provider to keep your bitcoins safe. Fortunately, storing bitcoins securely is easy, even for beginners (see "Paper Wallets" on page 39).

Hot Storage vs. Cold Storage

Bitcoin storage methods are often distinguished by whether they are hot or cold, depending on whether or not the private keys are stored on Internet-connected devices. Hot storage refers to private keys that are stored on an online device or computer. Cold storage refers to private keys that are not accessible via the Internet. For example, if you use an offline computer to generate a Bitcoin address and its corresponding private key, any bitcoins sent to that address are in cold storage. But how can others send you bitcoins if your address was generated on an offline computer? Well, you share it with them! You can safely copy your public Bitcoin address and post it on a website (or email it to all your friends). However, the private key exists only on the offline computer where it was generated and remains confidential.

Because sending bitcoins requires a private key and an Internet connection, hot wallets are more convenient to use, but cold storage methods are more secure and better suited for long-term bitcoin storage. Note that a hot wallet cannot become cold by going offline.[1] Once a private key has been exposed to the Internet, it is unsafe to assume that it will provide the same protection as one that was never exposed.

Sometimes, companies may advertise that they store their clients' Bitcoin funds in cold storage as a security feature but will simultaneously claim that those funds can be conveniently moved to a hot wallet automatically. This is a red flag. If any company states that it has an automated process for transferring funds from cold to hot wallets, most likely none of its funds are stored in cold storage. Cold storage requires a person to physically access an offline computer and manually authorize a Bitcoin transaction. You'll learn how to do this in "Storing Large Amounts of Bitcoins" on page 38.

  • [1] Bitcoin wallets are perfect thermal insulators.
 
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