Due to Bitcoin being a highly technical system, the average user is not fully equipped to securely store their own Bitcoin. Storage and transaction risks are a major hinderance to adoption, however this can easily be overcome with a basic understanding of how Bitcoin works.
It is important to stress that the Bitcoin Blockchain is the most secure financial system ever created – Bitcoin’s foremost value proposition. Additionally, Satoshi built it in such a way that every user – provided they are capable – has complete control over their Bitcoin. Custodial services are unnecessary (even though I offer one myself, LOL).
In a previous post, I explain that Bitcoin is intrinsically electricity. Electricity which is capable of generating cryptographic codes which secures data on the Blockchain. The most important bits of data are called Private Keys (PrivKey).
PrivKeys are generated randomly and is the source of its Public Key (PubKey), making up key pairs. These further correspond to specific Bitcoin addresses. One-way cryptography makes it impossible to derive the PrivKey from the PubKey but trivial to verify a PubKey given the PrivKey. This is how Private Keys function as signatures for your transactions.
If your Private Keys are leaked, copied or stolen then the coins attached to that PrivKey will be spendable by someone other than the rightful owner.
How do PrivKeys get Stolen?
If your storage is reckless then it is likely that your PrivKeys are visible, either physically or digitally.
Leaving recovery phrases exposed or paper wallets openly visible means that anyone who reads your keys can recover and spend those coins.
The same applies to digital storage. If your digital security is weak then a hacker can gain access into your device and view your keys. Pretty much all software is “hackable” which is why it is suggested to store PrivKeys offline.
Custodial storage exists in a few different guises. The main services are:
- SPV (Simple Payment Verification) wallets.
- Storage services.
In each case the service providers are the actual holders of your PrivKey. This means that you are implicitly trusting the people/company in charge of your coins and you are comfortable with their specified methods of storage.
Needless to say this is the worst form of personal storage. Just ask any Cypriot who “trusted” their banking system prior to 2012.
How do I know who to trust?
Trust no one.
This is a beautiful feature of Bitcoin in that you needn’t rely on any soul but yourself to secure your money.
If you still prefer to outsource your storage then, at the very least, you should research the storage protocols of the service you have chosen to store on your behalf; and know who to sue when they inevitably lose/steal your coins.
Active traders will need to store some liquidity on exchanges – only chose those with 100% audit-able reserves and bulk cold storage.
Users from the older generation may not have the basic understanding nor the inclination to learn the technicalities of new technology, but still wish to hold Bitcoin. If this is the case, choose a provider that you can trust as much as humanly possible. I would also sooner trust personal acquaintances over and above any companies.
Types of Personal Storage
For the savvy user there are multiple storage options available. It is also useful to separate your long-term savings from the coins which you may want to transact with at short notice.
For day-to-day access a trustworthy SPV mobile wallet is the most convenient. Some good providers include; Bread Wallet, Samurai Wallet and Mycelium. These wallets are designed so that you store your own PrivKeys on your local device. Each also offers node tethering options (this becomes very important when the Blockchain forks).
For long-term savings there are 3 methods for securely storing your Bitcoin:
- Hardware wallet
Hardware wallets are designed to store your PrivKeys completely offline. Perfectly secure and very easy to use. My favourite is Trezor which can be purchased over here. Ledger Nano and KeepKey are also good options.
- Paper wallet
Paper wallets are another method for storing Keys offline. This is much cheaper than a hardware wallet but has some drawbacks. Paper storage is less durable than hardware and access to spend your coins is much slower and laborious.
- Brain wallet
Depending on your level of paranoia, there are varying degrees of Brain wallet storage. You can go so far as to memorize your PrivKeys, securing millions of dollars in value with only your memory – totally un-hackable. Provided you remember the 52-digit string. e.g. L1UdCDJQX3pxptFDByZAjtAPG5Kau5CvFE6q6hFnwwERcTGyRfwA
Other wallets allow you to make use of passphrases. This is usually a memorable word or phrase from which all data in the wallet is derived. If the phrase is forgotten the wallet will be inaccessible.
Hopefully this information proves useful and you now have the relevant information needed to secure your Bitcoins.