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How to Store Bitcoin: A Complete Guide for Beginners

2021-04-13

The increased individual sovereignty that comes with owning cryptocurrency involves additional responsibilities, the most important of these being storing your Bitcoin securely. While storing your cryptocurrency on an exchange like Binance Australia allows for quick access to trading, exchanges shouldn’t be used for long-term storage of large cryptocurrency amounts.

Navigating the waters of Bitcoin storage can seem intimidating at first (after all, you’re the bank!), but once you have a few key terms and best practices under your belt, security becomes second nature.

From public and private keys to hot and cold wallets, this guide will go over the fundamentals of securing your Bitcoin safely to set you up for storage success.

Public Keys and Private Keys

“Not your keys, not your coins” is a phrase widely considered as one of the most important rules in the cryptocurrency community, but what exactly does it mean? Let’s start off by defining what these ‘keys’ are.

Each wallet has a public key and a private key. A public key (also commonly called a ‘wallet address’) is used to receive funds and can be shared with anyone. A Bitcoin public key looks something like this: 3EktnHQD7RiAE6uzMj2ZifT9YgRrkSgzQX.

A private key is used to control the funds in your public key. Anyone with your private key can access the funds in your wallet, and therefore your private key should never be shared with anyone. Private keys can be expressed in an alphanumeric format (similar to a public address) or, more commonly, in the form of a seed phrase, which is a list of sequentially ordered common English words (typically 12 or 24 words).

When setting up a new wallet, you will usually be presented with the seed phrase for the wallet. Most people choose to record the seed phrase physically on a piece of paper and store it somewhere safe, though some choose to invest in more durable solutions, such as engraving the words on a titanium plate. No matter which option you opt for, the crucial thing to remember is to store your seed phrase in a secure place that only you are privy to (and won’t forget about).

So, when are private keys “not your keys”? In short: whenever you aren’t given them. All centralised exchanges and some wallets (called ‘custodial wallets’) hold funds on your behalf to streamline the process that allows you to easily access, trade, and move your funds. But, technically, you don’t have full ownership of those funds — the exchange/wallet does. That’s why it’s important to remember that only when you have the private key to a wallet do you truly control the coins in the wallet.

Types of Wallets

Now that you know what “not your keys, not your coins” means, let’s talk about the different types of wallets. There are two overarching categories of wallets in which your assets can be stored: hot (online) wallets and cold (offline) wallets.

Hot wallets, such as mobile and desktop wallets, are wallets that generate and store your private keys online. Being connected to the internet makes transacting with hot wallets quick and easy, however, these wallets should be treated similarly to your classic leather wallet in that only small amounts should be stored in them. 

Just like someone on the street will have an easier time stealing your cash than breaking into your hidden safe, hackers find it much easier to leverage security risks associated with hot wallets, such as viruses, malware, and keyloggers, than attempting to hack into cold wallets (which, in most cases, involves physically stealing your private key).

Cold wallets, such as paper wallets and hardware wallets, generate and store your private keys offline, and therefore offer significantly greater security than hot wallets. There is a trade-off in usability, however, since both paper wallets and hardware wallets need to be used in conjunction with a device connected to the internet in order to send funds.

Paper wallets are the most rudimentary form of cold storage and are simply a public and private key (usually in an alphanumeric format, not as a seed phrase) printed on a piece of paper. Paper wallets can quickly be generated offline by accessing a paper wallet generator website offline, though each paper wallet can only hold one cryptocurrency (i.e. to store Bitcoin and Ethereum, you will need two separate paper wallets).

Hardware wallets are USB-like devices and are generally regarded to be the most secure storage option. Offering more durability and convenience than paper wallets, hardware wallets connect to your PC or smartphone and allow you to manage multiple cryptocurrencies via a dedicated software wallet. In fact, hardware wallets are built in such a way that you can even connect them to infected devices without any risk of the private key leaking. To date, no successful hack has retrieved the private keys from a hardware wallet in a real-world scenario.

However, unlike most other wallets, hardware wallets come at a price since they are physical devices. There are a number of hardware wallets available on the market, each with its own features and supported cryptocurrencies. If you decide to purchase a hardware wallet, remember to purchase the device directly from the company or from an authorised reseller in order to avoid purchasing devices that have been tampered with.

The Bottom Line

Storing your Bitcoin securely essentially boils down to how secure your private key (or seed phrase) is. Cold wallets are currently the benchmark for long-term storage as your private key is generated offline, significantly reducing the chance of your funds being compromised. As long as your private key is stored in a secure location that only you have access to, you will have complete control over your Bitcoin (or other cryptocurrencies).

There are also additional security measures that some choose to implement — such as splitting the seed phrase into parts and storing each part in a separate location, or scrambling the order of the seed phrase — so that even if someone discovers the location containing your private key (or part of your private key), it will be incomplete or unusable without further information. Ultimately, the amount of security you wish to employ depends on your individual risk preferences. 

Learning how to store Bitcoin securely is undoubtedly a learning curve for most of us used to relying on banks to keep our money safe, but a rewarding one. After a bit of practice in sending transactions to and from different wallets (tip: if in doubt, reduce the amount!), you’ll be able to reduce your reliance on third parties and experience full control over your money.

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