We looked at how to buy and sell Bitcoin in part 8 of our Bitcoin basics series. We will be looking at how to store Bitcoin in part 9 of this series.
Having bitcoin, like storing large quantities of paper money, necessitates taking certain precautions to protect one’s wealth. While some traders who spend their days trading between Bitcoin and other cryptocurrencies may leave their bitcoins on an exchange, using a wallet is the safest way to keep bitcoin in the long run.
As we have previously discussed, the term “wallet” is not totally correct – some prefer the term “keychain” – and it is even more incorrect to say that a wallet “stores” bitcoins; instead, a wallet “stores” a user’s public and private keys, which are used to access a public Bitcoin address and sign transactions, respectively.
Bitcoin wallets come in various formats, each with its own set of advantages over the others. Your requirements may differ; therefore, it is crucial to consider both your trading and investment habits and your security requirements before committing to a long-term wallet.
Wallets for Desktop
Desktop wallets are software programs that run on desktop and laptop computers running standard operating systems like Microsoft Windows, Apple’s macOS, and even Linux. The convenience of having access to one’s bitcoin address on the same computer from which one trades is appealing, yet desktop wallets are often not as accessible or functional in the wild as mobile wallets.
Many computers all over the world run the de facto Bitcoin client, known as Bitcoin Core. This software allows users to create a Bitcoin address to send and receive bitcoins and store their private key, forming ‘nodes’ on the network that handles the critical role of relaying transactions.
Desktop wallets like Bitcoin Core can be quite large to download and manage. They also demand users to update the program regularly to stay up to date with the Blockchain as new transactions are authenticated and added.
Not all desktop wallets, however, function as nodes. Some choose to act as a software wallet to store both keys merely and is created by third parties. These usually are much easier to download and maintain, and they may include certain features or focus areas that investors may find intriguing.
Wallets for Mobile Phones
Mobile wallets are software applications (apps) that may be downloaded and installed on smartphones, just like their desktop counterparts. These are often accessible on Apple’s iOS (iPhones), Android phones, and, in some cases, Microsoft’s less popular Windows Phone.
Transportable wallets give investors and traders the convenience of being able to take their wallets with them wherever they go since desktop wallets are relatively mobile but fundamentally aren’t pocketable. Users of some mobile wallets can now make comfortable and quick payments with bitcoin and other cryptocurrencies.
Because smartphones lack the processing power and memory of most computers, mobile wallets do not download the entire bitcoin blockchain, instead of relying on a tiny “portion” of it and routing most transactions through “trusted” nodes.
This effectively offloads some of the processing and memory required to utilize a bitcoin wallet to other computers connected to the Bitcoin Blockchain.
While a mobile wallet, like a desktop wallet, stores both a user’s public and private key, most mobile wallets use QR-code scanning or Near Field Communications to do so (NFC).
In the former, mobile wallets can use their smartphone’s camera to scan a QR code. The mobile wallet can then interpret the code as a new bitcoin wallet address to send bitcoins.
In some circumstances, cellphones having an NFC chip (such as those of Apple’s newest iPhones or Samsung’s Galaxy S phones) that consumers can utilize to enable transactions. This allows users to send bitcoins by simply tapping their phone against a reader without having to enter any information. Using popular services like Apple Pay, Samsung Pay, or Android Pay follows a similar procedure.
While desktop computers and mobile phones can be considered “hardware,” there are several electronic gadgets available that are expressly designed to store one’s public and private keys. These are sometimes known as “hardware wallets” and are sometimes used to make payments.
Hardware wallets can resemble USB drives; however, this varies by brand.
Hardware wallets usually have online and offline components. An investor uses an online wallet to store their public address and to indicate which transactions will be ‘signed.’ To complete a transaction, users must connect their hardware wallet to a computer via USB, where a signature will be generated, transferred to the wallet, and then entered into the Bitcoin Blockchain.
Some hardware wallets, in particular, provide consumers with protection by storing a user’s private key in a “protected area” on the device, which means that the private key cannot be divorced or used without the device.
Some hardware wallets include a backup service, allowing users to restore their private keys, bitcoin balances, and transaction histories into a new device if they fail, become lost, or become damaged. These backups are typically protected by a PIN tied to the device or established by the user.
For many users, hardware wallets are immune to viruses that occasionally target software wallets is appealing. These devices, however, are not impervious to corruption, theft, or damage.
Wallets made of paper
Using a so-called “paper wallet” is one of the most cost-effective methods of protecting bitcoin.
A user prints off a paper copy of two QR codes in a paper wallet: one is the public address where bitcoins are received, and the other is the private key used to sign outgoing transactions. A user scans either a QR code himself or invites a transacting party to use a paper wallet.
Paper wallets reduce some of the risks associated with storing one’s private key on the internet because an investor must trust the establishment where their key is kept. As a result, paper wallets are immune to cyber-attacks or other criminal actions to steal bitcoins through the internet.
Paper wallets, on the other hand, have their own set of flaws. Paper wallets, like hardware wallets, can be stolen or damaged, and paper degrades over time – Users should be cautious when storing their paper wallets. They should never utilize the same one for an extended length of time.
Storing Bitcoins in a Wallet – How safe is it?
Fundamentally, each form of Bitcoin wallet has its own set of advantages and disadvantages. It is up to each user to properly secure their accounts and choose the most convenient and inexpensive solution for them.
While online or software (desktop or mobile) wallets provide ease and quick access to the internet, they sacrifice security. They are a prominent target for internet hackers attempting to steal bitcoin or other cryptocurrencies over the internet. On the other hand, physical storage, such as hardware or paper wallets, is susceptible to theft, destruction, and degradation over time.
Using multiple different types of wallets and ensuring that one’s bitcoin allotment does not exist only on one wallet is a good rule of thumb to follow.
There are further procedures that can be taken to protect one’s account. Users of online wallet services can utilize two-factor authentication, which means that in addition to checking in with a login and a sufficiently complex password, they can also enter a unique code from a device of their choice as a “second layer” of security.
We will look at why you should invest in Bitcoin in part ten of our Bitcoin Basics series.