Storing and Securing Your Bitcoin
Now you know what Bitcoin is, and how to obtain them. There is only one more thing you need to know before you can begin using Bitcoin: storage and security. This is one of the more daunting aspects about using Bitcoin, because if you make a mistake you could lose your coins permanently. It requires some technical skill, though nothing too complex.
This isn’t a section you can skip. If you do, you may as well be juggling your key-ring over a sewer grate or leaving your wallet behind in a taxi-cab.
First, let me explain some terminology. When the media discusses Bitcoin, they often say that the coins are kept in wallets, which is true but misleading. The coins are actually in their deposit boxes (their public addresses), and a wallet is simply a service that collects all of a user’s deposit boxes into one place. Think of a wallet as your own little bank: you have your own row of deposit boxes, and all the private keys to those boxes as well. When you need to send Bitcoin from any of your public addresses, the wallet has your private key right there for you.
This wallet can be stored in many different places. There are five main ways to keep a wallet.
#1 — Bitcoin-Qt: The Real Deal
The first option is the original option. This is the computer program (called a client) that the core of developers working on Bitcoin release every so often, with updates to make the system better.
This client downloads the entire blockchain onto your computer. Since this is the record of every Bitcoin transaction ever made, there is a lot of data to store. As of June 2013, the blockchain was about 8Gbs in size.
This standalone program has its advantages.
When you are running the program, you are a node in the network, so you are helping the blockchain stay healthy by verifying transactions.
You are not trusting a third party with your private keys, they are stored locally on your hard drive.
The code is the most reviewed and most secure.There are some disadvantages as well.
Downloading the entire blockchain takes a very long time (hours or even days depending on your internet connection), and significant hard drive space.
It requires time to sync with the network if you haven’t run the program in a while. If you encrypt your wallet, then forget your passphrase, your coins cannot be retrieved.
You are connected to the internet, increasing the chance that someone could steal your private keys.
You can only access your coins from the computer that has the client.
While Bitcoin-Qt is a solid choice to use as your wallet, I would not recommend it for the first time Bitcoin user.
#2 — The Modified Clients
There are some clients that are also standalone programs, but have some different features from the main Bitcoin-Qt client. Here are a few of the more popular modified clients.
Multibit. This is considered a ‘lightweight’ client since it doesn’t require downloading the entire blockchain and uses fewer system resources. Setting up and syncing the client is much easier and faster than using Bitcoin-Qt. For first-time users who want a standalone program as their wallet, I recommend Multibit.
Electrum. This client doesn’t download any of the blockchain at all, it connects to a remote server. As such, it is very fast. It also allows users to create a ‘secret seed’ when they first set up the wallet. If your computer ever crashed, you could recover your coins using this system, unlike with the other clients I mention.
Armory. This client is very secure and very feature-rich.
There are many neat options for users, such as creating a “cold-storage” wallet for extra security. However, this client has more features than a new user will ever need.
#3 — Accessible Anywhere: Online Wallets
You don’t need to have a standalone program on your computer to use Bitcoin, you can use an online wallet. This is exactly what it sounds like: a website that offers to hold your Bitcoins in an easily-accessible online wallet. This has its advantages.
No syncing necessary, your Bitcoin is instantly available.
It can be accessed in more places than just your computer; all you need is an internet browser.
You can use browser plugins to make using Bitcoin online very simple.
Your coins aren’t stored on your hard drive, so if your computer crashes your coins will still be safe online.
However, there are some significant drawbacks to using an online wallet. You trust a third party with your money. While several online wallets have an excellent reputation, it is still a significant risk to let another party hold your private keys.
As I’ll explain soon, if you are connected to the internet you are already vulnerable to malicious attackers who could try to steal your coins.
Using an online wallet can make that attack even easier.
The online wallet services themselves can be — and have been — attacked. Several have been shut down because of these attacks.
So should you use an online wallet? I do, for small amounts. It’s a simple way to keep a small amount of coins available if I’m going out of town and want to make sure I can access some coins easily. But I would never recommend using an online wallet for large amounts of coins.
Which wallet to use? Mt. Gox and Coinbase have wallets built into their services, and both are fine to use, but my recommendation is Blockchain. This is the most widely used online wallet, and for good reason, it is simple but has an excellent reputation.
#4 — Bitcoin on the Go: Mobile Wallets
You don’t need a computer to use Bitcoin at all — most smartphones are capable of using a wallet app. They aren’t able to download much of the blockchain at all and aren’t particularly secure either.
Android has many different wallets available. Check the reviews first to make sure they are legitimate. I use an app simply titled “Bitcoin Wallet.” The iPhone is a little bit trickier — they, unfortunately, don’t allow their apps to use Bitcoin.
However, you can get a limited function wallet for download through their iTunes store.
Should you use a mobile wallet? I would definitely use one, but with the same warning as the online wallet: only in small amounts. It’s neat to carry Bitcoin with you wherever you go, and if you ever do happen upon a business that advertises they accept Bitcoin, consider buying something small as a show of support!
#5 — Paper wallet
Not only do you not need computers to use Bitcoin, you don’t need smartphones either. In fact, you can keep Bitcoin on nothing but paper.
First of all, why would you even want to keep your coins on paper? Well, that’s simple — paper wallets are, by far, the safest way to store your Bitcoin. If you have large amounts of coins, or you don’t want to spend the coins but just save them, then you should consider using a paper wallet.
It doesn’t seem to make sense that Bitcoin, a digital currency, would be able to be stored on paper. But remember, the beauty of Bitcoin is in public-key cryptography, and the public ledger (or blockchain). To create a paper wallet, all you need to do is create a new public address and private key, put some Bitcoin in the public address, then print off the private key and store it somewhere safe.
To use your Bitcoin later, you can input the private key. Often paper wallet generators create a QR code so that you can simply scan the private key.
While the process is simple enough, it gets more complicated to create a paper wallet in a totally secure way. I’ll walk you through creating a secure paper wallet later, but first, you need to understand why proper storage is so important.