If you are reading these lines, you probably already own your first bitcoin or has at least heard of it. But how do you keep bitcoin and other cryptocurrencies safe and sound? How can you protect yourself from hacks or thefts? In the following article, we give an overview of all bitcoin storage solutions, from Paper Wallet to Desktop Wallet ор Hardware Wallet. [toc] Bitcoin is a virtual P2P cryptocurrency based on blockchain technology. It was developed by the person(s) behind the pseudonym “Satoshi Nakamoto” and has been around for more than ten years. The P2P network, based on a PoW (proof of work) mechanism, is a decentralized federation of independent computers around the world. These computers solve complex mathematical algorithms to add new blocks to the blockchain and validate transactions on the network. The advantages over conventional cash systems: Transactions are…
- ..irreversible and cannot be reversed.
- ..more or less anonymous, as there are no real names associated with bitcoin addresses.
- ..fast and global, it doesn’t matter in which country the respective recipient of the transaction is located, it is confirmed within minutes.
- ..secure through the use of cryptography.
These transaction characteristics, combined with the fact that the algorithm will never give you more than 21,000,000 bitcoins and the entire population of the world can use them, makes Bitcoin the most exciting investment of our time. Since the beginning of 2017, the price has risen significantly due to greater interest from (retail) investors and reached the previous high of $20,000 in December 2017. After dropping to $3,300 in early 2019, it has now gone back up to [mcrypto coin = “BTC”]. You can buy or sell bitcoin from various exchanges and brokers. Among the most well-known are eToro, Skilling, Libertex (CFD broker), Binance, crypto.com and Coinbase. Brokerage services like eToro often offer their own wallet through which customers can directly hedge their investments. In this article you will learn how to protect your valuable bitcoin investment with wallets, how they work and what to look for.
What is a bitcoin wallet?
A bitcoin wallet is software that allows secure storage and protection of bitcoin with a private key. To look at it literally, Bitcoin itself is not stored in the wallet. It resides on the blockchain at all times. However, the private key is what is stored by the wallet. Only those who hold the private key have access to send and receive bitcoins from the wallet. According to their medium, bitcoin wallets can be broadly divided into hot and cold wallets.
Types of bitcoin storage wallets
A hot wallet is a type of cryptocurrency wallet that is connected to the internet and can be accessed from any device with an internet connection. Hot wallets are convenient to use as they allow easy sending and receiving of cryptocurrency, but they are also more vulnerable to hacking attacks and other online threats. On the other hand, a cold wallet is a type of cryptocurrency wallet that is not connected to the internet and cannot be accessed from any device with an internet connection. Cold wallets are often considered more secure than hot wallets as they are not at risk of being hacked or accessed by unauthorised users. Cold wallets can be either physical devices, such as hardware wallets or steel wallets, or paper documents that contain the necessary information to access your cryptocurrency. In general, hot wallets are more suitable for everyday use, such as making small purchases or sending and receiving small amounts of cryptocurrency. Cold wallets are better for long-term storage of larger amounts of cryptocurrency as they offer a higher level of security. However, it’s important to note that no wallet is completely secure and it’s important to follow best practices for protecting your cryptocurrency whether you use a hot or cold wallet.
A desktop wallet
Desktop wallets are installed on your own computer and are available for all common operating systems (Windows, Linux, macOS). They allow you to create a bitcoin address, send/receive bitcoins and manage the private key. One of the most famous desktop wallets is Electrum.
Mobile wallets have the same functionality as desktop wallets, but have the distinct advantage of being usable anytime, anywhere. To send Bitcoin to someone else in real life or pay your bill at a Bitcoin dealer, you can’t carry your desktop computer with you at all times. Mobile bitcoin wallets for smartphone offer additional features like “Touch2pay” via NFC scan or QR code. Different mobile wallets are available for both systems, Android and iOs.
Web wallets are online applications that also allow sending/receiving bitcoin and private key management. However, the information is stored online, so you better be careful with your choice of web wallet.
Cold storage refers to the practice of storing your bitcoins offline rather than in an online wallet that is connected to the internet. This can be a more secure way of storing your bitcoins as it reduces the risk of your funds being hacked or stolen by cybercriminals. There are several different cold storage methods, each of which has its advantages and disadvantages.
Hardware wallets are physical devices that store your bitcoins offline. They are considered one of the most secure cold storage methods because they use advanced security measures, such as encrypted chips and secure element technology, to protect your private keys. To access your bitcoins, you must enter a PIN or password on the hardware wallet itself. Some popular hardware wallets include Ledger Nano and Trezor. See our detailed comparison of hardware wallets.
Paper wallets are physical documents that contain the private keys and public addresses of your bitcoins. They can be created using a variety of online tools, such as bitaddress.org or walletgenerator.net, and printed out for storage. Paper wallets are relatively easy to create and can be stored in a safe place, such as a safe deposit box. However, they are vulnerable to loss or destruction, so it is important to have a backup.
Steel wallets are physical devices that store the private keys of your bitcoins on a piece of steel rather than on a device with an internet connection. They are similar to paper wallets in that they are created using a website and then printed out, but are made of a more durable material. Steel wallets are water and fire resistant, but can still be lost or stolen.
Brain wallets are wallets that are created by remembering a strong password or passphrase instead of writing it down or storing it on a device. This method relies on the idea that a password that is difficult to guess or crack will be more secure. However, it is important to note that if the password is forgotten or not remembered correctly, the funds in the brain wallet will be lost forever. It is important to note that no cold storage method is completely foolproof. For example, a hardware wallet can be lost or stolen, and a paper wallet can be destroyed or lost. Therefore, it is important to consider using several cold storage methods for added security. This can include using a hardware wallet for everyday use and storing a paper or steel wallet as a backup in a secure location. It’s also a good idea to make regular backups of your cold storage wallets and store them in multiple locations. Overall, cold storage can be an effective way to protect your bitcoins from online threats, but it’s important to carefully consider the risks and choose a method that’s right for your needs.
How does a bitcoin wallet work?
As mentioned at the beginning, a bitcoin wallet does not actually contain bitcoin, only the corresponding private keys to access it on the Blockchain.
What are private and public keys?
Bitcoin and other cryptocurrencies use public key cryptography to sign transactions. The public key is the address to which you send a transaction. But only the person with the corresponding private key can access it. That’s why it’s so important to keep the private key secret. The phrase “Be your own bank” comes from the fact that if you own both the public and private keys in combination, you will always have full control of your money (Bitcoin) without it being able to be challenged.
What are bitcoin addresses and how are they created?
Everyone who sees a bitcoin address for the first time wonders “What does that mean?”. If one is not experienced in the matter, this is also understandable: 1FsaeyODSnFke3WUYlaPThNrwFFm9plrQ To obtain such an address, one first requires the key pair – private and public key. Since the address is nothing but the short form of the public key encoded in Base58 and can be recovered using the private key.
How does the transaction work?
A bitcoin transaction from sender to receiver contains three pieces of information:
- From which current sender address does the bitcoin come?
- How many bitcoins should be sent?
- Recipient address.
As you know from the previous paragraph, you need the key pair – bitcoin address (public key) and private key to sign the transaction. The private key hereby signs the above three bitcoin transaction details for the recipient. This signature transmits the transaction to the Bitcoin network. It still needs to be confirmed by the miners to finally reach its recipient.
Why do I need a wallet for my bitcoin?
“If the keys aren’t yours, the coins aren’t yours” is a popular phrase among crypto-investors and has its own explanation. As you have learned, in order to have control over your bitcoin, you need to own the key pair consisting of a public and private key. If you buy bitcoin on an exchange, you leave control of the private keys to the exchange, leaving you vulnerable in the event of a fraudulent exchange shutdown or hacker attack. Back in the early days, this happened with Mt. Gox Exchange, which had to close its doors in a surprise move. After several years and lawsuits, former MtGox customers are still waiting for a payout. In the recent past, we also saw an attack on Binance, the biggest crypto exchange so far. In Binance’s case, the damage amounted to 7,000 bitcoins (value on the day of the hack: $40,000,000). The exchange has sufficient resources to recover from the hack. However, the hack of one of the largest and one of the most secure crypto exchanges on the market makes it clear how important it is to be the master of your own private keys if you invest in bitcoin for the long term. As we know, where there is a lot of money on the internet, hacktivist groups are not far behind. Exchanges sometimes have to manage billions of dollars of cryptocurrency and are not necessarily specialized cybersecurity specialists. Over the past two years, there has been a growing trend of hacker efforts around the world. Crypto assets worth $2,700,000 were stolen in a day in 2018, Coindesk reported.
Which wallets are recommended?
We’d like to introduce you to the following industry-standard bitcoin wallets to get you started safely and properly.
Hardware crypto wallets are the best option if you want to protect access to your bitcoin. Security risks are minimized compared to software wallets since it’s a physical device. With this in mind, the possibility of a hacker attack is very low as the hacker will also have to come into physical contact with the device. SatoshiLabs and Ledger’s hardware wallets, the Trezor One and Ledger Nano S, are the most popular products on the market. Both wallets support a range of altcoins. At the time of writing the Ledger Nano S can safely store 57 types of crypto assets, the Trezor One 14 others. All major cryptocurrencies such as Bitcoin, Ethereum, IOTA, Cardano, Litecoin, Binance Coin, Monero, EOS, Dash or Stellar are there. There are also many tokens that are based on the Ethereum ERC-20 standard. Other common features include the use of the FIDO U2F authenticator, a USB interface and the low weight of 16 g (Ledger Nano S) and 12 g (Trezor One). The Trezor Model One is the first hardware wallet and is the invention of developer Slush, who founded SatoshiLabs more than 5 years ago and is still the managing director. Ledger ‘s Ledger Nano were created in France and have their own screen and keyboard. Unlike the Trezor One, the Ledger is not completely open source, as the Ledger Wallet firmware code is not publicly available. However, the information is detailed enough to warrant a full degree of trust. Another difference is the password encryption of the two hardware wallets. This serves as an additional protection mechanism in addition to the word (seed) list. While the password for the Trezor One must be entered from the keyboard of the computer to which the wallet is connected, for the Ledger Nano S a PIN must be entered using the keys on the stick. [affiliatable id=’86131’]
Desktop and mobile wallets
Software wallets are particularly suitable for small investors who don’t want to pay extra for a hardware wallet, but still want to have full control over their investments. Electrum is a popular bitcoin wallet and uses a decentralized network of servers to synchronize the blockchain, so it doesn’t need local space on your hard drive. Private keys are encrypted and stored only on your computer. Restore access to the bitcoins with the seed phrase, which must be noted during wallet creation and stored. It is also possible to view the account balance of a bitcoin address in “View Only” mode without the computer connected to the Internet. Electrum Bitcoin Wallet is available for: Windows XP, Windows Vista, Windows 7, Windows 8, Windows 10, OS X, Linux and also for Android smartphones. For iOs smartphones, Edge Mobile Wallet is recommended. This wallet provides automatic encryption.
When choosing a software wallet, you should always make sure that the developers are serious. For this, an extensive Google search, research through forum posts to prove to yourself that the developer is trustworthy is recommended. Downloading the software should only be done through the provider’s website. Otherwise, the user runs the risk of downloading backdoor software that could allow an attacker to gain access to your bitcoin later. Even hardware wallets should only be purchased directly from the manufacturer. Scammers have already equipped wallets with a “pre-configured” seed of words for the buyer to use. There is then no obstacle for fraudsters to access the cryptocurrencies.
If you are not an active trader, you should secure your bitcoin software or hardware wallet. Otherwise, full third-party security is not guaranteed – for example, the aforementioned exchange gets hacked and already purchased currencies are lost. For this, the most important thing is the preservation of the private key and the seed word list. Keep your cryptocurrency on questionable crypto exchanges as short as possible. Always transfer your coins to your chosen wallet. There are plenty of choices. If you don’t want to put yourself through the stress of storing cryptocurrencies, you should register with a reputable and licensed broker such as eToro, Skilling or Plus500 (CFD broker). Brokers take care of custody and there investments are legally secured.