Just like we store cash or bank cards in physical wallets, bitcoins are stored in wallets — digital wallets. Digital wallets can be hardware or web. Wallets can also be left on mobile devices. On computer desktops, or print out private keys and addresses for access, just to be safe. But how secure are these digital wallets? The answer to this question depends on how the user manages the wallet. Each wallet contains a set of private keys. Without these private keys, bitcoin owners cannot access the currency. The biggest danger to Bitcoin security is the possibility of loss or theft of private keys by individual users. Without the private key, the user will never see her bitcoins. In addition to losing their private keys, users can also lose their bitcoins due to computer failure (hard drive crash). The computer where the digital wallet is located is hacked or physically lost.
Below, we'll take a look at some of the best ways to safely store bitcoins.
1. Due to theft, computer failure, loss of keys, etc., users may lose Bitcoin and other encrypted currency tokens.
2. Cold storage (or offline wallets) is one of the safest ways to hold bitcoins, as these wallets cannot be accessed over the internet, but hot wallets are still convenient for some users.
3. Those interested in the most secure storage should consider using hardware wallets for long-term storage of all bitcoins and cryptocurrencies.
Online wallets are also called "hot" wallets. There is a hot wallet on the computer. .Wallets that run on Internet devices such as mobile phones or tablets. This can create vulnerabilities as these wallets generate private keys for your coins on these internet devices. While hot wallets are great for quickly accessing your assets and transactions, they also lack security.
It might sound far-fetched, but people with insufficient security when using these hot wallets can get stolen. This situation is not uncommon. It can happen in many ways. For example, in the image Reddit is unwise to brag about how much bitcoin you hold on such a public forum, you use little to no security and store it in a hot wallet.
These wallets are designed to store small amounts of cryptocurrencies. You can compare a hot wallet to a checking account. Conventional financial wisdom would say to only put money in checking accounts and keep most of it in savings or other investment accounts. The same goes for hot wallets. Hot money includes mobile, desktop, web, and most exchange-hosted wallets.
The important thing to note here is that holding cryptocurrencies in an exchange wallet is not the same as holding cryptocurrencies in your personal wallet. Exchange wallets are escrow accounts provided by exchanges. Users of this wallet type are not holders of private keys for cryptocurrencies in that wallet.
If the exchange is hacked or your account is compromised, your funds will be lost. Cryptocurrency exchanges do not offer SIPC or FDIC, so safe storage of cryptocurrencies is especially important. The phrase “not your keys, not your coins” is a recurring concept in cryptocurrency forums. As mentioned earlier, it is unwise to keep large amounts of cryptocurrency in any hot wallet, especially exchange accounts. Instead, it is recommended that you withdraw most of your funds to your own personal "cold" wallet (described below). Trading accounts include Coinbase.Gemini.Binance and more.
While these wallets are connected to the internet, resulting in a potential attack vector, they are still very useful for quick transactions or the ability to cryptocurrencies.
The next wallet, and the safest storage option, is the cold wallet. The simplest description is a wallet that is not connected to the internet, so there is much less risk of damage. These wallets can also be called offline wallets or hardware wallets.
These wallets store users' addresses and private keys on something not connected to the internet, and often come with parallel software so users can view their portfolios without putting their private keys at risk.
Perhaps the safest way to store cryptocurrencies offline is with a paper wallet. A paper wallet is a type of cold wallet that you can generate from some websites. It then generates public and private keys that you print out on paper. Only with that piece of paper can you access the cryptocurrencies in those addresses. Many people laminate their paper wallets and store them in a bank safe or even in a safe at home. Paper wallets have no corresponding user interface, other than a piece of paper and the blockchain itself.
Hardware wallets typically securely store users' private keys on USB drive devices. It has a big advantage over hot wallets in that it is immune to viruses that may be on your computer, as the private key never touches your online computer or potentially vulnerable software. These devices are often open source, allowing the community to determine their safety, rather than companies declaring that they are safe to use.
Cold wallets are the safest way to store bitcoin or other cryptocurrencies. However, in most cases they require more knowledge to set up. Anyone interested in cryptocurrencies must understand the concepts of secure storage and hot and cold wallets.
Services that allow bitcoin investors to buy physical bitcoins are emerging. The coins you buy will be stamped with a tamper-proof label covering a predetermined amount of bitcoins. In order to buy physical coins, you may have to pay a slightly higher premium than you would for bitcoins because of the manufacturing and shipping costs of the coins themselves.
Additional Safety Precautions:
Back up your entire bitcoin wallet as soon as possible and often. In the event of a computer failure, regular backups of your history may be the only way to recover the currency in your digital wallet. Make sure to back up all wallet.dat and then store the backups in multiple safe locations (e.g. USB, hard drive, and CD). Not only that, set a strong password on the backup.
Keep your software up to date. Wallets running on non-updated Bitcoin software can be soft targets for hackers. The latest version of the wallet software will have a better security system to improve the security of Bitcoin. If your software is updated with the latest security patches and protocols, you may avoid a major crisis due to the enhanced security of your wallet. Keep updating your mobile device or computer operating system and software to keep your bitcoins more secure.
The concept of multi-signature has become popular; it involves the approval of transactions by many people (such as 3 to 5 people). Therefore, this limits the threat of theft as a single controller or server cannot conduct transactions (i.e. send bitcoins to an address or withdraw bitcoins). Those who can transact decide from the start that when one of them wants to spend or send bitcoin, they need the rest of the group to approve the transaction.