Bitcoin Wallet: The Art of Storing
There are several methods of storing Bitcoin. These range from paper wallets to online wallets, from hardware wallets to Smartphone wallets. Your particular requirements will determine which method is right for you.
Bitcoin is mathematics. A wonderful, enormous, powerful form of mathematics. Bitcoin packages the galactic force of large numbers into formulae which it uses to build a fortress for money that is a thousand times more secure than any physical vault.
But we don't want to bore you with the mathematical details. You only need to understand the core message, which is quite simple: you have a private key and an address. You can think of these as being like your account number at the bank and your signature or password. The address is public, and this is what Bitcoin is transferred to. The private key, on the other hand, is secret. You can use it to transfer your Bitcoin.
The key fact: whoever has the private key, has the Bitcoin. That is everything. If you understand this, then you can decide for yourself how to store your money with confidence.
A private key is a chain of approximately 50 characters. Storing Bitcoin basically means keeping the private key of your address safe.
How can you best do this? In most cases, a piece of software – the wallet – does this for you. However, you can also print it out so that it becomes a paper wallet. Or you can use some kind of hardware for the task, in which case you have a hardware wallet. And, of course, you can also entrust the storage of your key to another person. Sometimes it is better to trust an expert rather than doing everything yourself.
We will look at these methods of managing your Coins in more detail below.
By far the most common method of storing Bitcoin is using a wallet. This is a type of software that manages your key. It displays the addresses at which you can receive Coins, and also allows you to send Bitcoin.
Wallets are available for both computers and smartphones. There are even wallets that can be installed as a plug-in for your browser. No matter which device or operating system you use, you can definitely find a safe, easy-to-use wallet.
In most cases, a normal wallet is a good option. But you should be aware that it is only as secure as your own system. If your computer is infected with a virus, then your bitcoins may also be at risk. There are some viruses that search your hard drive for private keys and save your keyboard inputs. This means they can even steal password-protected Bitcoin.
Whether you need a password or not depends on how many Bitcoin you are storing. If your wallet only contains Coins up to a value of five or ten euros, then a password is not so important. After all, you don't have a lock on your everyday wallet. If, on the other hand, you are storing a hundred, a thousand or even more euros in your wallet, then you should definitely use a good password.
“Good” means a password consisting of at least eight, or ideally ten, characters. This should not be a word or a combination of words, and should also include numbers or special characters. “Piano” would be a pathetic password, whereas “8P%iA6#nO” would be quite decent.
You should also be aware that you could lose your Bitcoin if you lose your password. So definitely write it down or store it in some way so that you will be able to remember it.
In order to avoid losing Bitcoin if you lose your smartphone or if your hard drive crashes, you should also write down a backup phrase (a “seed”). This is a really great concept. You write down 12 to 24 words. Your wallet can use these to work out all the private keys that belong to it. Just like a seed. If your smartphone falls in the water, then it is dead and gone. But the Bitcoin can be recovered using the seed.
Just try it. Everyone who has recovered a wallet using the seed knows just how magical the feeling is. The mathematics is working for you.
Wallets for your PC:
Bitcoin gives you the wonderful freedom of managing your money completely independently. However there may be reasons to give this up and entrust your private key to another person. This then becomes an escrow or online wallet.
What reasons? One might be that you do not trust yourself to keep your Coins safe, whereas someone providing an online wallet may have much more expertise. It also means you have someone to talk to if something should go wrong.
Another reason is that an online wallet offers the convenient option of logging in from any location. Online wallets can also do some things that normal wallets cannot. You can, for instance, use BitBucks to transfer Bitcoin to another user without being charged any network fees. This can, at times, save you a fair amount of money.
However, you should understand that the money in an escrow wallet does not really belong to you. Therefore we recommend that you only keep a limited amount in such a wallet. Perhaps a similar amount to what you would keep in your physical wallet. This is not about storing money safely, but rather about having quick, easy and cheap access to your money.
A wallet, as we have seen, is only as secure as the system on which it is based. Not everyone is an expert who knows how to keep their system safe. For many people, it can be alarming to keep large amounts of money lying around on the computer. You might even end up losing sleep over it.
So some people had a clever idea: you can store the key on a separate piece of hardware, instead of on your computer. A small chip is enough to store the key. When a transaction is signed off, the chip does this, so that the actual computer never sees the key. And what your computer doesn’t know, a hacker can’t steal.
There are many types of hardware wallets. Some are simply microchips that you can plug into a USB drive; others are more like mini-computers that can also be connected to your computer or laptop via a USB port.
Hardware wallets are strongly recommended for larger amounts because many of them are not only safe, but also wonderfully easy to use. The manufacturers have invested a lot of time and love into making them as comfortable as possible to use.
But what happens if you lose your hardware wallet? Much like with a lost smartphone, you would be well-advised to write out a seed. It is the ultimate backup.
A “cold wallet” means that you store your key in some way such that it does not come into contact with the internet. If, for example, you copy the wallet data onto a USB stick, delete it from your computer and then store the USB stick in a vault, then you have a cold wallet.
There are also wallets such as Electrum or Armory that enable you to generate a transaction on an offline system, then transfer this via a USB stick to your online computer and send it. In this way you can make transfers without (too much) effort and without allowing your private key to come into contact with the internet.
We have seen that if any wallet gets lost, it can be reconstructed using a seed. So what’s the use of keeping a wallet? Ultimately, wallets are connected to the internet and therefore will always be a weak point.
If you are storing larger amounts, then you should consider using a so-called paper wallet. You write the seed or private key on a sheet of paper (some wallets allow you to display the private key), file this away and delete the wallet. Of course, this means that you will not be able to directly pay out your Bitcoin; first you will have to put it back into a wallet. However, if you wish to save money using Bitcoin, this doesn't really matter.
It is also important to think about how you generate the paper wallet. If you already have a virus on your computer – or if your key is generated by infected software – deleting your wallet won’t help much. So the ideal method is to download a key generator, transfer it via USB to a laptop that is not connected to the internet, generate the key or seed there and then write it down by hand.
If you also write down your address(es), then you can transfer Bitcoin to your paper wallet without these ever being connected to the internet. Isn't that fantastic?
Incidentally, many people use a steel plate for this paper wallet, as it is much more durable than sheets of paper. Your imagination is unlimited.
Of course you also have the option of keeping your wallet in your head. If you are able to memorise 12 to 24 random words, then you don't need to write them down. You can travel anywhere in the world, from country to country, and always have your wallet with you in your head. Isn't that crazy? That's Bitcoin.
Most people, however, find it difficult to remember so many words. Those who build memory palaces have a clear advantage here. But it can be even easier: you choose a good – ideally a really good – password that you will be able to remember. A brain wallet generator will then work out a “hash” from this (this is a cryptographic concept that you don't need to understand). The hash is a random-seeming character string, which can then be used as a private key.
Most experts advise against brain wallets, as it is a risky concept. If you use too good a password, then you run the risk of forgetting it. If, on the other hand, you use a poor one, then anyone could crack it. There are programs that, for example, search through dictionaries in all languages in order to break into brain wallets. So your password – or passphrase – needs to be really good.
However, if you are dealing with modest amounts, it can be a fun experiment.
We at BitBucks on the other hand, didn't create our wallet to store your savings in form of Bitcoin. It's more about creating a simple and secure payment tool, for the quickest and easiest way to pay with Bitcoin. Download our simulation app on iOS and Android now and help us bringing BitBucks into the life of everybody!