How to store Bitcoin
There are three things to know about storing your Bitcoin, or really any cryptocurrency.
First, from the owner’s perspective, a Bitcoin is an encryption key code, and they are effectively pretty similar to a long, complex password — the cryptography part of cryptocurrency.
Second, each Bitcoin wallet has two of these keycodes: A public key and a private key. Everyone can see the public key, and look up its transaction history on the Bitcoin blockchain. Then there is the far more important private key.
Third, and most importantly, in a very real way that private key code is your Bitcoin. The private key is a key code that is used to access your wallet that is then used to send Bitcoin to someone else. Lose it and the Bitcoin is lost forever — just like a dollar bill thrown into a fire.
How is Bitcoin stored?
When you’re thinking about how to store Bitcoin, one answer is the same way you’d store any important password — very, very carefully.
There is no such thing as a physical crypto coin. A Bitcoin is really an alphanumeric key code 256 characters long — so forget about memorizing it. You can, in fact, just write it down on a piece of paper, and as long as you copied it correctly, it’s as safe as a piece of paper can be.
More practically, Bitcoin is usually stored digitally, either on a dedicated hard drive (usually a USB flash drive) known as a cold wallet or on a software wallet app — a hot wallet. The difference? A cold wallet is “air-gapped,” which means it is not connected to the internet. There is no way for a hacker to reach it while unplugged.
A hot wallet is an online wallet. A personal wallet on a mobile or desktop, or an exchange wallet managed — and protected — by a cryptocurrency exchange for your account.
Both have advantages and disadvantages, and the hot wallet vs cold wallet argument is neverending.
The safest way to store Bitcoin
How to safely store Bitcoin is another matter. Like any currency, storing cryptocurrency is a matter of weighing security against convenience.
The simple answer is that a cold wallet is the safest way to store Bitcoin — no hackers. But, a flash drive can be lost or destroyed. A hot wallet survives if your phone dies. And while exchange hot wallets are hackable — and billions have been stolen from them over the years — good exchanges have good security, and some are protected by major insurance firms. And, of course, they manage the vast majority of their cryptocurrency custody using cold wallets as well.
Many people — and reputable exchanges — recommend keeping most of your crypto in a cold wallet, and a small amount that you might want to use for trading in a hot wallet.
Any offline place where private keys are stored is a cold wallet, including any old thumb drive or a sheet of paper. But if you want to know how to store Bitcoin on a USB drive safely, you’ll want a dedicated cold wallet with a user interface for a smartphone or computer, encryption, and the capability to store many different types of cryptocurrency. They can cost up to about $200, although many well-reviewed and time-tested models are available cheaper. Finding the best cold wallet for your needs is a quick Google search away.
Bitcoin paper wallets
A Bitcoin paper wallet might sound like something pretty straightforward, but they are actually somewhat complex services that allow you to print both your public and private keys as scannable QR codes. The good ones are open-source, use random number generators, and may let you run the program on your computer while offline. They were often the best place to store Bitcoin in the cryptocurrency’s early days, but they are less used now that reliable hardware wallets are widely available.
What is a hot wallet and how are Bitcoins stored in them? Well, that’s a more complex question than it is for cold wallets.
Hot wallets are software apps for mobile phones or computers, standalone web wallets, or the interface of a cryptocurrency exchange account. One of the best hot wallet features is that aside from a password and two-factor authentication — if 2FA isn’t available, look elsewhere — they generally offer a recovery phrase. This is a long string of random words which will allow you to recover access to a hot wallet if the password is lost.
The first step in learning how to buy Bitcoin is to start with an exchange wallet, which is essentially your account interface. As a means of crypto custody, they are far and away more practical in the event you want to trade your Bitcoin with any regularity. Now that PayPal allows users to trade and store Bitcoin and several other cryptocurrencies, your PayPal account is a hot wallet.
Web wallets are generally exchange wallets, and the first rule is to find a trustworthy exchange — one that has a track record, is fiscally stable, and is regulated in a trustworthy jurisdiction. Web wallets come in two flavours. A custodial wallet has control of your keys but provides backups and security features. A non-custodial wallet is a decentralized wallet that lets the customer keep their own keys.
A mobile wallet is an iOS or Android software wallet. It’s where to store your Bitcoin if you want to use it — say for face-to-face payments using QR codes. A mobile wallet’s crypto information can be backed up on your computer, or sometimes cloud storage.
Multisig is short for multi-signature, which is the core difference. Generally used for business accounts, a multi-sig wallet — hot or cold — is a form of crypto custody that requires passwords from several people to unlock or move the contents. It is where to store Bitcoin owned by a company or group. A multi-sig wallet prevents one person from absconding with the Bitcoin, acting unilaterally, or being hacked for the private key needed to move them. Often a multi-sig wallet will not require all passwords to operate. Having, say, three of five signatures required to move crypto is basically a form of corporate due diligence that won’t cripple access if one signatory loses a password or dies.
When it comes to cryptocurrency, custody is a term that has its roots in traditional banking and finance — a company entrusted to safely and securely store assets. Depending on the jurisdiction, it can come with legal responsibilities. And generally, it refers to a large amount of wealth — the exchanges custody crypto for their clients, or the institutional investors putting tens or hundreds of millions of dollars into Bitcoin as a store of value to hedge against inflation.
Best security precautions when storing Bitcoin
There’s a common phrase in the crypto industry when it comes to the security of your Bitcoin: “Not your keys, not your crypto.”
The public and especially private key codes that permit access to your Bitcoin are ultimately in the control of whoever possesses them. If that’s you, make sure they’re safe — a hardware wallet should be kept in a waterproof, fireproof document box, at the very least. If that’s someone else, at the very least do some research into the hot wallet maker or exchange.
There’s one basic reality when it comes to Bitcoin ownership: You store Bitcoin in a hot wallet for convenience. In a cold wallet, Bitcoin storage is all about security.