Table of Contents
Storing Bitcoin in a Bitcoin wallet
Types of cryptocurrency wallets
Top security practices for storing Bitcoin
The bottom line
Jul 25, 2022
8 min read
When someone buys Bitcoin, they’re linking the funds to a crypto wallet. Keeping the wallet secure is vital to storing Bitcoin safely and protecting the investment.
Investing in Bitcoin is about more than buying and selling; investors also need to know how to store it. Investors don’t want to wind up like James Howells, the man who accidentally threw out a hard drive with about 7,500 Bitcoin on it—worth over $517 million at Bitcoin’s all-time high in November 2021. Or, they don’t want to fall prey to hackers and scammers who are set on stealing Bitcoin.
Bitcoin investors can choose from a variety of options for storing their Bitcoin, including online platforms, apps, and physical storage devices. By learning about the differences—and the pros and cons of each—investors can decide on the best way to store Bitcoin based on their preferences and needs.
The Bitcoins themselves remain part of the public Bitcoin blockchain (a database that a network of computers store and update online) rather than inside the wallet. The wallet contains private keys that let the wallet holder transfer or spend the Bitcoin tied to the wallet, as well as public keys that they can safely share to receive Bitcoin.
Many modern Bitcoin wallets also have a hierarchical-deterministic framework. Essentially, the wallet software uses an initial seed phrase (essentially a recovery password) to generate a master set of private and public keys. The Bitcoin wallet can then generate new key pairs for every transaction, which can help improve the user’s privacy and security by making it more difficult to track the flow of Bitcoin. The framework also allows someone to use the seed phrase, also called a recovery phrase, to recreate the wallet with other compatible wallet programs.
When there’s a story about someone losing their Bitcoin, the Bitcoin is still part of the blockchain, but the person has lost access to the seed phrase private key that lets them use the Bitcoin. Similarly, when a hacker or fraudster steals Bitcoin, they’re often stealing the seed phrase private key and transferring the Bitcoin to a wallet they control, making the Bitcoin inaccessible to its rightful owner.
Investors can set up and use crypto wallets to buy, sell, and store their Bitcoins. There are pros and cons to each of the options, and many investors may use several Bitcoin wallets at a time. For example, one wallet with Bitcoin could be for active trading or spending the crypto and another for Bitcoin that’s held as a long-term investment.
Broadly speaking, the different types of Bitcoin wallets are:
When crypto investors open an account and buy Bitcoin from a centralized exchange, like Coinbase or FTX, they don’t actually take control of the Bitcoin wallet. Instead, they have an account with the company, and the company uses custodial wallets to manage users’ funds. It can be an easy and safe way to get started, but users also have to trust that the exchange won’t get hacked, turn out to be a scam, or block access to their funds.
Bitcoin investors can alternatively set up non-custodial wallets and retain complete control over their Bitcoin. Software wallets are generally online, on desktops, mobile apps, or browser extensions. While the investors don’t need to trust or rely on a centralized exchange to use their Bitcoin, they’re also now completely responsible for the safety of their wallet. Hackers may be able to infect a device or website and take over or steal information from a software wallet.
A hardware wallet is a non-custodial option that could be safer than a software wallet. These are physical devices, sometimes similar to USB sticks, that are generally kept offline, which helps protect them from software vulnerabilities. Users need to connect the device to a computer or phone via Bluetooth or a wire to conduct transactions. But, even then, many hardware wallets keep the seed phrase and private keys secure from prying eyes.
Some hardware wallets go a step further by removing any digital components from the equation and simply storing the seed phrase on a piece of paper, plastic, or even metal. The wallet is essentially hack-proof, but users need to be certain it doesn’t get lost, damaged, or stolen. When they want to use the funds, they can import the seed phrase into a compatible software or hardware wallet.
Setting up a custodial or software wallet is generally free, although there may be transaction costs to use the platforms. There may be an initial cost for hardware or other physical wallets, but these can also be one of the best ways to store Bitcoin that doesn’t need to be frequently accessed.
Bitcoin wallets are also called hot wallets or cold wallets depending on whether they’re connected to the internet. For example, a custodial wallet or web wallet will always be a hot wallet, while a paper wallet is always a cold wallet. With a hardware wallet, investors can keep access to their Bitcoin in cold storage (i.e., offline) until they want to use it.
It’s an important distinction because there’s an ever-present trade-off between accessibility and security when it comes to Bitcoin and other digital currencies. Although wallets need to be online and hot to interact with the Bitcoin blockchain, the connectivity also makes them potentially susceptible to hackers.
Keeping a Bitcoin wallet safe essentially comes down to three things: setting up a wallet with a trusted company, keeping the login or seed phrase secret, and not losing the seed phrase. Attacks can come in a variety of forms, from hackers trying to install malware on a computer to scammers trying to trick investors into divulging their seed phrase. Here are a few best practices for staying safe:
The seed or recovery phrase can be plugged into a variety of Bitcoin wallets to recreate and control the associated Bitcoin. Never share the phrase with anyone—not even the company that created or sold the Bitcoin wallet. Some scammers pose as customer support on social media or forums and trick investors into giving up their seed phrase or sharing their screen and then revealing the seed phrase.
Exchange accounts and Bitcoin wallets often require a password or PIN to open and use the wallet. If someone steals or takes control of the account or the device that has a software wallet on it, they may be able to steal the Bitcoin. Use a strong and unique password that can’t be easily guessed or cracked. A common mistake is using variations among passwords, such as the program’s name plus another word or series of numbers, which could become vulnerable after a data breach.
Some crypto exchanges and wallets support multi-factor authentication (MFA), which is when someone needs to enter an additional code to access the account or open the wallet. MFA could help keep someone who has a Bitcoin wallet’s password out of the wallet because they won’t be able to also get the MFA code. Some scammers get around this by temporarily taking control of someone’s phone number, which is why using an authentication app or device may be a safer option than receiving MFA codes as a text message.
Security vulnerabilities on computers and phones can put software wallets at risk, and there are even examples of malware that’s specifically designed to compromise crypto wallets or redirect crypto transactions. Installing the latest software updates and regularly scanning devices with anti-malware software could help stop or remove these threats.
While hackers might seem like the scariest threat, many people are simply tricked into sharing access to their Bitcoin wallet. There are many types of social engineering (like, psychological manipulation) attacks, and they’re often the first part of a multi-step plan. For example, a scammer posing as customer support is part of a social engineering attack. So is a phishing email—which can appear to be from a trusted source—fooling someone into clicking on a link and installing malware.
Cold wallets can help protect Bitcoin from hackers and scammers, but it’s also important to have a secure place to store the physical device. Some people create several copies, giving one to a trusted family member or keeping it in a safe deposit box in case the one in their house is lost or destroyed.
Bitcoin lives online as part of the Bitcoin blockchain, and when someone buys Bitcoin, they’re linking the funds to a crypto wallet. They might have indirect access to the wallet via a crypto exchange, or direct access if they have a software or hardware Bitcoin wallet. In either case, keeping the account or wallet secure is vital to storing Bitcoin safely and protecting the investment.
Good cyber hygiene habits, such as using strong passwords and not clicking on links from unknown sources, can go a long way towards secure crypto storage. And for investors with a non-custodial wallet, the most important thing to remember is to never share or lose the seed phrase.
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