Dealing with any kind of currency comes with a few basic obligations. The most important of these is having a place to safely store your funds. Cryptocurrencies like Bitcoin need to be stored, but because cryptocurrencies are digital, they are held in a secure electronic location.
Where can I store my cryptocurrency?
These digital places are called wallets. Wallets are often referred to as a “Bitcoin address” that has a unique personal address used to receive bitcoin.
Bitcoin is not stored in a wallet in the same sense that cash is held in your physical wallet. The bitcoin you buy is safe once you store your keys safely. Wallets hold at least one associated private key and a single public key. In a nutshell, it is the combination of the private key(s) and public key that create the concept of a Bitcoin wallet.
Anyone who knows the address (a code that looks like a long serial number) can send bitcoin to this wallet. In this sense it is similar to the account number and sort code of a conventional bank account. However, unlike a bank account, one wallet can have multiple receiving addresses generated by its public key.
Example of a Private Key
Example of a Public Key
Not your keys, not your coins
Only choose wallets where you own your keys. Some wallet providers have third-party ownership of keys, meaning that if the platform gets hacked or becomes compromised, you could lose all of your funds. Investors always need to remember that if you don’t own your keys, you don’t own your Bitcoin.
For this reason, it is extremely important to both choose your wallet provider carefully and store your details in a safe place. Investors should always secure a backup.
If you forget or lose your wallet password/private key, you can use your backup key/seed phrase to recover your bitcoin.
Some wallets generate an extra key, on top of the private and public key. It's called a backup key and can sometimes come in the form of a mnemonic/seed phrase. A seed phrase can be a set of up to twenty-four words randomly generated from the private key. In some cases, your backup may contain two twelve word mnemonic phrases.
Seed phrases must be written down on paper and stored with the highest degree of security. The phrases are never visible to the wallet client operator and therefore, they cannot help you retrieve them.
Different types of wallets
There are different types of cryptocurrency wallets. Key considerations when choosing your wallet include the amount of bitcoin you plan to hold, the frequency with which you plan to spend and last but not least, the trade-off between heightened security and convenience.
What are Cold Wallets?
Cold wallets refer to a method of “cold storage” for your bitcoin and come in the form of paper wallets, hardware wallets or on a USB. They’re completely offline. Two of the most prominent types of cold wallets are hardware wallets and paper wallets.
A paper wallet is the combination of the private key(s) and a printed public key. You can either use a paper wallet generator to print your wallet or simply copy/paste your private keys into a document and hit print.
It's crucial to clear any information about the wallet from your computer and to store it safely. As an additional precaution, it could be worth it to laminate the paper to avoid issues with durability.
Above all, paper wallets must stay on paper, so avoid any digital storage or digital photographs of the contents.
Hardware wallets are cold wallets that need to be online to be able to transact. These wallets are designed with the sole purpose of securely storing Bitcoin. The device itself and its pin act as layers of authentication before your bitcoin can be sent to another wallet. Only buy hardware devices from well-known manufacturers, such as Ledger, Trezor or Keepkey. Never buy second-hand devices.
What are Hot Wallets?
In contrast to cold wallets, hot wallets are always connected to the Internet. People choose hot wallets for convenience rather than security. They're useful for holding smaller sums of bitcoin to transact regularly. Different types include web, desktop and mobile wallets.
Web wallets are usually managed by third parties. They’re simple to use, easily set up and can’t be physically stolen. However, they are only as secure as the provider that is hosting the web wallet. This means if anything goes wrong with the provider. i.e a security breach, your bitcoin might be compromised.
No third party can access your coins since the keys are displayed only to you during the creation of the wallet. As described during the wallet creation process, you can back up your wallet on a piece of paper.
Multi-signature (often referred to as multisig) wallets hold more than two keys. The keys are divided amongst the relevant parties to ensure the safety of one's coins. Multi-signature solutions are often used by web wallet providers or amongst persons who share wallets.
Wallet clients that offer multi-signature solutions, will never be able to access your coins because they only hold one out of the three keys.
Desktop wallets are downloaded and stored on your computer. With a desktop wallet, you are in total control of your coins and their security since your private key is stored on your hardware.
You can either download a desktop wallet as a “full node” or a “light client”. A full node wallet has access to blockchain data and often requires hundreds of gigabytes of space.
Most desktop wallets are “light clients” - Simplified Payment Verification (SPV) wallets. Instead of downloading the whole Bitcoin blockchain, they simply synchronise themselves to it.
Desktop wallets are one of the more secure options, However, they are still connected to the Internet and there are potential risks associated with their use.
This type of wallet is active on your mobile and that's where it stores the private key. These wallets are useful for quickly transacting small amounts of bitcoin on-the-go, especially with the comfort of scanning QR codes.
You can employ various methods to protect your mobile wallet such as setting a strong password, multi-factor login, and backing up your private key securely. Nonetheless, these wallets don’t offer great security, nor privacy since we all know that it’s easy to break or lose your phone or worse, for it to be stolen.