How to Store Bitcoins?
The number of bitcoins or Satoshis you own is just an entry against your address (public key) in the Bitcoin blockchain. In order to spend those bitcoins, you need to have a private key which needs to be stored somewhere. If you lose the private key, then it means you have lost your bitcoins.
So in practice, storing bitcoins is all about storing and managing your private key.
There are three goals to keep in mind while storing and managing your private key.
- Availability: Your private key should be easily available to you whenever required.
- Security: Nobody else should get access to your keys. If they get the access, they can easily spend your coins or transfer those coins to themselves.
- Convenience: Key management should be easy to do.
However, it is difficult to achieve all three goals simultaneously. There is a trade off and you have o sacrifice one goal to achieve other two.
What is Bitcoin Wallet?
Bitcoin Wallet is a software that keeps a record of all your coins, manages your keys, and provides a nice user interface so you can spend bitcoins with a click of a button. If you want to spend 2 bitcoins at a local shop then the wallet software would give you some easy way to do that. Not just one key but Bitcoin wallets help you store the whole bunch different keys for you. You can easily create new private keys and utilize them to make anonymous transactions. Wallet interface that tells you how many bitcoins are there in your wallet at the aggregate level.
Technically, Bitcoin wallets can be classified into two categories.
Hot wallets are those wallets that are connected to the network. Your computer or mobile connected to the internet is a hot wallet. Hot wallets are convenient but less secure.
Cold wallets are wallets not connected to the internet. They are safer but not as convenient as hot wallets.
Now, let’s see how different Bitcoin wallets achieve these goals.
Desktop wallets store your private key in your computer hard-drive. Desktop wallets are more secure than mobile because they can’t get easily stolen. Desktop wallets fall into hot storage category since they are connected to the Internet. Hence, they are less secure than other offline wallets. However, if you have small amounts of Bitcoin or other cryptocurrencies then they will serve your purpose.
Commonly used desktop wallets are
If you are a long-term investor then you should either use a paper wallet or a Hardware wallet. Hardware wallets are specially made electronic devices that are secure and you can conveniently use them for day to day transactions.
Advantages of hardware wallets over the desktop and mobile wallets:
- Private keys are stored deep in a secured area of a microcontroller, and these keys cannot be transferred out of the device in plaintext
- Can’t be hacked or infected by computer viruses
- Are convenient to use
- No reports of hacking ever since their inception
The mobile wallet similar to desktop wallet except that the fact that it is portable. You can use your smartphone can pay for products with bitcoin, or send/receive funds. You can use the camera to scan the QR address, which automatically converts it to recipients address, saving your effort of typing in a long string of letters and characters. If your phone is NFC enabled, then you can use mobile wallets as tap and pay. However, since your phone can be lost or stolen, and your keys along with it, you could lose your bitcoins. Hence, you should either keep bitcoins worth very small amount or keep secure backups of wallet data.
A paper wallet is the cheapest alternative to store your bitcoins. Many websites such as bitaddress offer services to generate a bitcoin keys for you and create QR codes: one is the public key and the other is the private key, which you can use to spend bitcoins stored at that address.
What wallet you will use it all depends on how paranoid are you with your money. If you want to keep your keys safe, then hardware wallets are the best devices to store your keys. They will cost you less than $100 and are a good investment you plan a long-term investment in bitcoins. However, you can use mobile/desktop wallets if you want to use bitcoins for everyday purpose.