So, you’ve bought some Bitcoin and you need to secure it, but what’s the safest way to store Bitcoin?
Unlike traditional assets, most Bitcoiners store their own Bitcoin on whichever device they choose. But what is the safest way to store Bitcoin?
Every Bitcoin address has a public and private key, and having the private key in your possession means you have access to the bitcoins. So, keeping this private key safe, and er private is key (no pun intended).
There are many different types of wallets, such as software, hardware, multi-signature wallets, cold storage wallets, and exchange wallets, so where is the safest place to store your Bitcoin?
Where To Safely Store Bitcoin
Where to store Bitcoin is the question many investors want to know when they first get involved in the space, but the truth is they’re not stored anywhere. Bitcoins never actually leave the blockchain.
The design of Bitcoin is that everything remains on the blockchain, and so any wallet is just an interface that secures your private keys and makes your bitcoins more accessible.
Sure, it looks on the wallet interface that they’re in there, as it tells you all your transaction and balance history, but the bitcoins actually reside on the blockchain only.
So, now we know bitcoins are not stored anywhere but the blockchain, let’s look into the best place to ‘store’ your bitcoins.
Bitcoin Exchange Wallets
Let’s get this out of the way first: This is an absolute no no. Do not store your bitcoins on an exchange wallet.
Although there are some very reputable exchanges, being a centralized host they are more vulnerable to being hacked. And with cryptocurrency exchanges not yet able to get full insurance cover, any hack could potentially see all your bitcoins gone forever.
The infamous Mt. Gox, which was the largest Bitcoin exchange in the world and handling over 70% of all BTC transactions back then, was allegedly hacked after filing for bankruptcy, and its estimated that 850,000 BTC were stolen, meaning most of its customers lost all their bitcoins.
Back then Mt. Gox was the pioneer of the Bitcoin space, and the questionable hack has never been solved. And since then, there have been a few too many other shady exchanges reporting losses to its customers, whether through hacks or CEOs going missing presumed dead.
The world’s biggest cryptocurrency exchange Binance was hacked in May 2019, and over 9000 BTC were stolen. At the time it had a value of about $40m and Binance covered the losses with its own emergency insurance, the Secure Asset Fund for Users (SAFU).
But not all exchanges are big enough to cover that much of a loss. And what if it had been 90,000 BTC, would Binance’s SAFU have been able to cover that?
As trusting as some of these exchanges are, it’s really not a good idea to keep your bitcoins stored on them even over night.
Bitcoin Custodial Wallets
Bitcoin custodial wallets are becoming ever more ubiquitous, and this is largely due to the bigger money and institutional money getting into Bitcoin.
The problem with custodial wallets are the similar issues with exchange wallets. There’s a saying in the Bitcoin space: ‘Not your keys, not your Bitcoin,’ meaning if you don’t have access to your private keys they’re not actually your bitcoins.
The beauty of Bitcoin is that you have full sovereignty over your finances. You are your own bank and as long as you keep your private keys safe and thoroughly check every transaction you make, nothing can go wrong.
But this is where the problem lies for many. If you have ever made a BTC transaction, you will know how nerve wracking it can be. One mistake and your bitcoins could be gone forever. Now imagine if you’ve invested millions of dollars.
Custodial wallets and services offer to take care of your bitcoins for you. Financial giants like Fidelity, Coinbase, and Gemini all offer institutional grade custody, and BlockFi offer custodial solution for the average person and will even pay interest on your bitcoins.
All the above custodial companies store your bitcoins in cold storage vaults and there can be no doubt your bitcoins are safe from being hacked.
But what happens if you have your bitcoins stored in the most respectable custodian and the government all of a sudden bans Bitcoin and demands it from everybody. Do you think the regulatory compliant custodian is going to give you your bitcoins? Or will they do as the government says? I’ll leave you to ponder that.
Bitcoin Paper Wallets
Bitcoin paper wallets are considered one of the safest ways to store your bitcoins, but personally I wouldn’t recommend it.
Basically, it’s a sheet of paper with your private keys on it. The private keys can be the string of letters and numbers or printed off as a QR code, or both.
To get one you head to a paper wallet provider, which will generate a random address with a public and private key for you, you click on paper wallet and print it off.
But the problem is that it’s all done on the Internet, and if your device is infected with malware, it’s possible that someone could be monitoring what you’re doing.
Also the platform where your private key was generated is liable to being hacked. And lets not forget paper degrades over time.
Sure you would keep a check on it, but for me keeping a paper copy just isn’t the best way to store your bitcoins.
There are more advanced ways of generating a paper wallet, but it takes a bit of know how, and isn’t recommended for the beginner.
If you do decide that you want to store your bitcoins on a paper wallet, however, make sure you print out at least three copies and keep them all in three separate and secure locations.
Bitcoin Software Wallets
A Bitcoin software wallet is either downloaded natively onto your device or is a web-based wallet that you access online. These are also known as hot wallets, and many people use these as their bitcoins are more accessible wherever they.
These are definitely the most accessible, and make sense for every day spending, but the problem with storing anything on a software wallet is that they’re more susceptible to phishing attacks and infected devices.
This is because your Bitcoin software wallet is downloaded from the Internet and you need an Internet connection to access it.
Some of them, such as Electrum are very respectable, and have excellent security features, such as 2FA, multisig, and even cold storage, but as with exchange wallets, a software wallet, you’re putting your faith in a centralized entity again.
The Electrum team have been around since 2011, and their code is open-source, and I don’t doubt their integrity, but being a web-based entity, they are a target for hackers.
Bitcoin Hardware Wallets
Bitcoin hardware wallets are a special, security-hardened hardware device made specifically for storing cryptocurrencies. They look a bit like an SSD or USB, but they are made with the security of Bitcoin in mind.
Any Bitcoin hardware wallet comes with a backup seed phrase, which should only be needed in an emergency, such as if your device is lost, stolen or damaged.
A hardware wallet is arguably the most secure way of storing your bitcoins, especially for a Bitcoiner that needs regular access to his bitcoins without the need of any other party to get involved.
It’s like owning your own tamper-resistant vault, which hosts your cryptographic identity (your Bitcoin balance), and once created, it’s used without the private key ever leaving your device.
A Bitcoin hardware wallet is connected to your computer, and although the wallet is connected to the wallet’s web interface, any transaction is signed within the wallet.
This is then broadcast from the hardware device to the blockchain, without any sensitive data being exposed to the Internet.
Hardware wallets are user friendly and have pin code, which makes logging in more secure, and any transactions need to be verified on your device and the wallet desktop interface.
They’re not ideal for every day spending, but are the ideal storage device for long-term hodler. The best Bitcoin hardware wallets are either the Trezor or the Ledger devices. They start from about $35 up to $135, but even the cheapest of them is secure.
If you decide to get one, it’s imperative that you don’t buy a second-hand one, and only buy from a seller with excellent reputation, and even then: if you purchase one and it arrives with the seal broken, do not use it. Simply send it back explaining that you don’t want one with a broken seal.
For me either hardware wallet offers the best security for anyone wanting to self-custody their Bitcoin, but there’s also another way that is more secure, but maybe not as accessible.
A multi-signature wallet (multisig) is a wallet/storage where multiple people, or devices are needed to sign with their private keys to make any transaction.
It can be set up with however many signatures you’d like, and is ideal for something like a company’s Bitcoin storage, or for someone who is security conscious but leaves their device exposed.
It’s not as accessible a hardware wallet, but it does eliminate any single point of failure.
A multisig wallet is either one Bitcoin address, or several addresses that require multiple people to sign the transaction to release the funds.
It can be arranged that 3 of 4 signatures are needed to make a transaction, which is a good idea if one device is lost, or if one person loses something.
The security of a multisig wallet is obvious to anyone, but to add to the security, even if one or two of the devices fall victim to a hacker, the funds cannot be transferred without the agreed amount of signatures.
Because they are software and can be downloaded for free, they’re obviously cheaper than hardware wallets, and although the process of making a transaction is longer than it is on a hardware wallet, it is arguably more secure.
And being extremely secure-minded, you can even have a multisig wallet with your hardware and cold wallets.
Wrapping It All Up
Bitcoin must be stored in a safe place. With it being a digital money, it’s imperative that you take the right precautions to protect your private keys.
There’s no doubt your Bitcoins are secure on the blockchain, after all it’s the most secure network ever created, but once you use something that connects to the Internet your bitcoins become more vulnerable.
Exchange wallets should only be used for traders, and not long term hodling.
Custodial wallets are a better option. They are popular among the less technical and institutional investors, but for the Bitcoin purist, they are also a no no. Remember: not your keys, not your Bitcoin.
Paper wallets allow you to self-custody, but they come with dangers. And while nothing is 100% secure, I believe a hardware wallet to be the most secure way to store your bitcoins, especially if you use a multisig approach.
Author: Tommy Limpitlaw