When the media discusses Bitcoin, they often say that the coins are kept in wallets, which is true but misleading. The coins are actually in their deposit boxes (their public addresses), and a wallet is simply a service that collects all of a user’s deposit boxes into one place. Think of a wallet as your own little bank: you have your own row of deposit boxes, and all the private keys to those boxes as well. When you need to send Bitcoin from any of your public addresses, the wallet has your private key right there for you.
This wallet can be stored in many different places. There are five main ways to keep a wallet.
#1 — Bitcoin-Qt: The Real Deal
The first option is the original option. This is the computer program (called a client) that the core of developers working on Bitcoin release every so often, with updates to make the system better.
This client downloads the entire blockchain onto your computer. Since this is the record of every Bitcoin transaction ever made, there is a lot of data to store. As of June 2013, the blockchain was about 8Gbs in size.
This standalone program has its advantages.
When you are running the program, you are a node in the network, so you are helping the blockchain stay healthy by verifying transactions.
You are not trusting a third party with your private keys, they are stored locally on your hard drive.
The code is the most reviewed and most secure.
There are some disadvantages as well.
Downloading the entire blockchain takes a very long time (hours or even days depending on your internet connection), and significant hard drive space.
It requires time to sync with the network if you haven’t run the program in a while.
If you encrypt your wallet, then forget your passphrase, your coins cannot be retrieved.
You are connected to the internet, increasing the chance that someone could steal your private keys.
You can only access your coins from the computer that has the client.
While Bitcoin-Qt is a solid choice to use as your wallet, I would not recommend it for the first time Bitcoin user. There are better choices. If you do want to use the main client, visit here.
#2 — The Modified Clients
There are some clients that are also standalone programs, but have some different features from the main Bitcoin-Qt client. Here are a few of the more popular modified clients.
Multibit. This is considered a ‘lightweight’ client, since it doesn’t require downloading the entire blockchain and uses fewer system resources. Setting up and syncing the client is much easier and faster than using Bitcoin-Qt. For first-time users who want a standalone program as their wallet, I recommend Multibit.
Electrum. This client doesn’t download any of the blockchain at all, it connects to a remote server. As such, it is very fast. It also allows users to create a ‘secret seed’ when they first set up the wallet. If your computer ever crashed, you could recover your coins using this system, unlike with the other clients I mention.
Armory. This client is very secure and very feature-rich. There are many neat options for users, such as creating a “cold-storage” wallet for extra security. However, this client has more features than a new user will ever need.
#3 — Accessible Anywhere: Online Wallets
You don’t need to have a standalone program on your computer to use Bitcoin, you can use an online wallet. This is exactly what it sounds like: a website that offers to hold your Bitcoins in an easily-accessible online wallet. This has its advantages.
No syncing necessary, your Bitcoin are instantly available.
It can be accessed in more places than just your computer; all you need is an internet browser.
You can use browser plugins to make using Bitcoin online very simple.
Your coins aren’t stored on your hard drive, so if your computer crashes your coins will still be safe online.
However, there are some significant drawbacks to using an online wallet.
You trust a third party with your money. While several online wallets have an excellent reputation, it is still a significant risk to let another party hold your private keys.
As I’ll explain soon, if you are connected to the internet you are
already vulnerable to malicious attackers who could try to steal your coins. Using an online wallet can make that attack even easier.
The online wallet services themselves can be—and have been— attacked. Several have been shut down because of these attacks.
So should you use an online wallet? I do, for small amounts. It’s a simple way to keep a small amount of coins available if I’m going out of town and want to make sure I can access some coins easily. But I would never recommend using an online wallet for large amounts of coins.
Which wallet to use? Mt. Gox and Coinbase have wallets built into their services, and both are fine to use, but my recommendation is Blockchain. This is the most widely used online wallet, and for good reason, it is simple but has an excellent reputation.
#4 — Bitcoin on the Go: Mobile Wallets
You don’t need a computer to use Bitcoin at all—most smartphones are capable of using a wallet app. They aren’t able to download much of the blockchain at all, and aren’t particularly secure either.
Android has many different wallets available. Check the reviews first to make sure they are legitimate. I use an app simply titled “Bitcoin Wallet.” The iPhone is a little bit trickier—they unfortunately don’t allow their apps to use Bitcoin. However, you can get a limited function wallet for download through their iTunes store.
Should you use a mobile wallet? I would definitely use one, but with the same warning as the online wallet: only in small amounts. It’s neat to carry Bitcoin with you wherever you go, and if you ever do happen upon a business that advertises they accept Bitcoin, consider buying something small as a show of support!
#5 — Paper wallet
Not only do you not need computers to use Bitcoin, you don’t need smartphones either. In fact, you can keep Bitcoin on nothing but paper.
First of all, why would you even want to keep your coins on paper? Well, that’s simple—paper wallets are, by far, the safest way to store your Bitcoin. If you have large amounts of coins, or you don’t want to spend the coins but just save them, then you should consider using a paper wallet.
It doesn’t seem to make sense that Bitcoin, a digital currency, would be able to be stored on paper. But remember, the beauty of Bitcoin is in public-key cryptography, and the public ledger (or blockchain). To create a paper wallet, all you need to do is create a new public address and private key, put some Bitcoin in the public address, then print off the private key and store it somewhere safe. To use your Bitcoin later, you can input the private key. Often paper wallet generators create a QR code so that you can simply scan the private key.
While the process is simple enough, it gets more complicated to create a paper wallet in a totally secure way. I’ll walk you through creating a secure paper wallet later, but first you need to understand why proper storage is so important.
The Threats
You now know the different ways to store your coins, but what are you keeping them safe from? There are several threats to your digital money, and being aware of them will help you avoid them as much as you possibly can.
- Yourself You are probably the greatest threat to your own coi This may sound strange, but it’s true, there are many horror stories online of people making mistakes and having lost their Bitcoin. There are two primary mistakes that Bitcoin users make. One is to encrypt a Bitcoin wallet, then forget the password. The second is hard drive damage or other technical error that causes the loss of the private key.
Some of the standalone Bitcoin clients allow you to encrypt your wallet, so that if someone gains access to your computer they cannot get your coins. However, people sometimes set up this encryption, then forget about it—until they want to spend their coins. Then they need the password—oops! They can’t remember.
And if this happens to you, you’re sunk; there is no way to recover those coins. I recommend that if you think encryption is necessary, you write down your password and keep it in a safe place. This is obviously true for an online wallet as well, since you need a password to log in.
Since many users store their coins on a local drive, another problem is hard drive failures leading to lost coins. This is a shame, since it is so easily avoidable: all you need to do it create a copy of the wallet file and store it on a USB drive or an online storage system, such as Google Drive or Dropbox. If you do have a backup (you should), I recommend encrypting that copy—just write down the password first!
2. Physical Theft: Roommates and “Friends”
While this is far from the most dangerous threat most Bitcoiners will face, coins can be stolen just like cash. If you have a paper wallet, or a mobile wallet, or a client on a laptop, a thief could simply walk off with your coins. If they know how to use Bitcoin, and they get access to your wallet, they could transfer your coins to another address they own.
This doesn’t seem to happen all too frequently, but when I do hear about it, typically it occurs in college dorms or other settings where people have tech savvy acquaintances. If this concerns you, just keep your wallet encrypted and keep a close eye on it.
- Active Attacks: Hacking There are a few tech-savvy criminals out there who try to steal as many Bitcoin as they They typically target exchanges or online wallets were there are lots of users, so individual users typically aren’t at risk unless they have coins stored online.
Several exchanges have been hacked in the past few years, leading to various amounts of lost coins. As the Bitcoin community grows, and as the infrastructure grows, it is likely that these types of attacks will become mitigated once bigger companies implement more rigorously tested safety measures. For now, the best approach is to store only small amounts in the exchanges or online wallets.
- Passive Attacks: Malware These are likely an even greater threat than active attacks to the average Bitcoin user, since they target the individual computer that might hold the A passive attack is accomplished with malicious software meant to compromise your computer. These can include things like keyloggers, which record all of your keystrokes and send them to the attacker. Keyloggers are commonly used to obtain passwords, and if an attacker has your passwords they have your Bitcoin.
Alternatively, the malware might be a piece of software that searches your computer for a wallet file, and if it finds one, it sends that file (or just the private keys) along to the attacker.
This type of attack can even come from a browser; if you allow a bad script to run it can wreak havoc, especially with online wallets.
This malware is unfortunately all too easy to contract, especially if you don’t have good protection against it and are unsafe in your web browsing.
Avoiding These Risks
There are some specific measures you can take to avoid these risks. A few of them are simple, but some require technical knowledge and some time commitment. You determine how safe your coins are; if you don’t have many coins to protect or you are so rich that you don’t care, then you don’t need to feel compelled to follow these suggestions.
- Have a Clean Operating System Your operating system (OS) is the type of software you use to run your There are three main OS used today: Windows, Mac OS, and Linux. Malware is most happy running on Windows, so it is the least safe client to run a Bitcoin client on. A Mac isn’t a whole lot better, but Linux is significantly safer to use for Bitcoin. If you plan on keeping a significant amount of coins on a computer, I would recommend installing a Linux distribution and learning how to use it. They are free and have nearly all the same features that their expensive counterparts have, besides being safer.
In fact, I would recommend getting an older laptop, wiping the hard drive completely, and installing Linux. Finding an old laptop online, through Ebay or Craigslist, is usually simple and cheap. This gives you the most security, since you are certain the OS is clean and cannot have malware. If you are looking for a good distribution of Linux (there are many kinds of Linux to install), I recommend either Ubuntu or Mint.
- Recognize the Internet is Dangerous The internet is an accident waiting to happen, in terms of Bitcoin safety. Your computer—and coins
—have a direct connection with anyone else in the world. You have a few options to mitigate this risk. You can operate offline altogether, by using a paper wallet or offline service (the Armory client allows for this). This is the best option for large amounts of Bitcoin, and it is generally true that the more you are able to do offline, the better. Storing Bitcoin offline is called ‘cold storage.’
Or you can carefully work on a computer connected to the internet. Using Linux, you will be somewhat safer, since it isn’t as easy for an attacker to directly
access you, or contract malware. If you are using Windows, you need to ensure you are up to date on your protective software. I recommend using Microsoft Security Essentials, a free program that gives excellent protection. Also make sure to regularly update your software and run the appropriate scans to make
sure you are clean. Just remember that even if your scans show you are clean, it is possible to have malware on a Window system.
Whenever you are browsing the internet, be careful where you go and what you click on. The same is true for downloading files, and torrents. Malicious software is frequently spread through falsely labeled downloads.
- Use 2-Factor Authentication Online exchanges and wallets nearly
all offer a service called 2-factor authentication. This means that when you try to log into your account, or when you try to send Bitcoin, it requires that an outside source verify the requests are genuine and not from a malicious source. Typically, this happens by sending you a text on your smartphone or by requiring you to input an authentication code generated by a program elsewhere.
You should always enable 2-factor authentication. I use the Google Authenticator app on my phone, which I prefer, but there are plenty of other systems like this.
- Use Paper Wallets I’ve mentioned paper wallets multiple times, and that’s because they are the most secure and simplest way to store your To generate a truly secure paper wallet, you need to make sure that your private keys are never on an OS that isn’t clean and that they never see the internet. To do that, you need to follow these steps.
- Find a paper wallet generator that is I would suggest using Bitaddress to create your wallet.
- You can print off the paper wallet from Bitaddress above, but this is not truly secure, since the private keys are created by a third party while connected to the internet. You need to use their tools while To do this, save the Bitaddress page (as an .htm file).
- Put the file on a USB
- Open the file on a clean OS that is not connected to the internet—and preferably never has
- Generate a new Bitcoin address using the Bitaddress
- Print off the paper
- Delete the file and make sure that there is no electronic record of the
private key remaining on the computer or USB drive.
- Ensure the printed paper wallet remains secure from theft, fire, flood, bugs, or other If you lose your paper wallet, or is it not readable, you cannot retrieve your Bitcoin! Remember, to use Bitcoin, you must have a private key that corresponds to your public address. A paper wallet
—properly created—ensures that the private key only resides on a piece a paper, and no one else can use the coins in that particular public address. That’s why if you lose your paper wallet, you lose your private key, and you lose the ability to access your coins too.
- Send coins to the public address of your paper wallet. You’re done!
Now, if you want to use those coins, you import your private keys into whatever wallet you are using. Bitaddress, and most paper wallet generators, generate a QR code that allows for quick recovery of your private key when you need it by scanning the code with a smartphone or webcam.
A quick note on paper wallets: If you do choose to ‘withdrawal’ from the wallet, make sure you take out all the coin from that wallet at once. A paper wallet that has been used once means it is no longer a paper wallet; you will need to create a new one to be completely secure again.
