Not only has Bitcoin’s value gone up over the past year, but the available options for Bitcoin storage have also increased. The choices can be especially intimidating for Bitcoin novices.
No matter what you choose, however, there is always a tradeoff between convenience and security. And while privacy is also a factor, in this section we assume you are not willing to go the extra step of anonymizing and completely eradicating your financial trail.
Your coins are secure when nobody but you is able to access them. This can be hard to measure, as there are a large number of unknowns. A good way to think about security is to imagine how expensive it would be to compromise your Bitcoin.
Security can be improved through physical forms of protection, such as safes and vaults. A laptop kept in a car in an abandoned parking lot surely offers different security than one kept in a well guarded building.
Similarly, the security of an encrypted file depends on how random the encryption key is. A password with 10 characters might already be cracked after one hour, while a password with 20 characters will take thousands of centuries to crack.
The security of your phone and computer depend on its hardware and frequency of updates. A modern smartphone with the latest software might take resources worth over a million U.S. Dollars to hack remotely, while an older phone could be taken over by anybody if you click on a problematic link.
Loss is a security concern that is most difficult to grasp. You may lose your phone or forget your password. Fire and natural disasters—while seeming old-fashioned—can still pose a threat to your virtual currency.
- Concerned about keeping your bitcoin safe? Find out how to securely store your bitcoin with our guide (opens in new tab).
It is far easier to measure convenience than security. How easy is it for you to spend your coins? How fast can you access your funds? An online wallet is probably the most convenient, as you only need any computer or phone nearby to access it.
A wallet installed on your mobile phone is still relatively convenient, as you will likely have it with you most of the time.
A multi-signature paperwallet distributed around the globe will be very hard to assemble for thieves, governments or hackers, but to reassemble the wallet you will have to get on a couple of planes.
When to choose security, when to choose convenience
When deciding between security and convenience, make a decision on when you will want to access your funds again. If you are holding Bitcoin for the long run, choose the most secure option, and take into account the risk of loss and your ability to remember passwords in the long run.
When keeping Bitcoin for shopping, don’t keep more than you intend to spend, and keep them with you on your phone so that you have them ready when you need them.
A structured approach for deciding how to store your Bitcoin
Bitcoin usage can be defined by two independent variables: transaction volume and transaction value. Whether these values are high or low changes which Bitcoin wallet is best for you.
Transaction volume is the rate of Bitcoin transactions you make. This might mean one transaction per day or only one per week. What counts as high or low in this case is arbitrary.
Transaction value is the Bitcoin value of a given transaction. What defines a large Bitcoin value is similarly ambiguous. A good rule of thumb to have is to consider a low transaction value as less than or equal to the amount of money you would be comfortable carrying around as cash in your pocket. Everything larger than that can be considered high value.
Consider using multiple Bitcoin wallets to mitigate risk
There is absolutely no need for you to restrict yourself to one solution. Maybe the way you use Bitcoin includes all the use cases listed below, such as regular small payments, regular large payments, and long-term investments.
Use multiple options in parallel to make the most out of keeping Bitcoin both accessible and secure.
High frequency with low amounts: Mobile Wallet
If you are making a lot of transactions with low value (e.g., because you mostly use Bitcoin to buy socks, tea, or a VPN), then you should use a mobile wallet that you control the keys to.
With a mobile wallet, your Bitcoin are always accessible as long as your phone has power. If you use a modern smartphone with an up-to-date operating system, your Bitcoin are secure. Don’t forget to backup your seed phrase on a piece of paper and store that paper somewhere securely!
What makes a good mobile Bitcoin wallet? There are plenty of Bitcoin wallets. Finding the right one for you may take a bit of time. Feel free to download more than one and try setting them up. Explore the user interface a bit before deciding where to keep your Bitcoin.
You also don’t have to make an immediate decision. You can send funds to two wallets at once, or move your funds to a different wallet.
Fees: Bitcoin transactions cost money, but estimating the correct amount is a big engineering challenge. Some wallets allow you to set fees yourself, while others only let you choose between “expedited” and “economy” transactions, which can be grossly overestimated.
Custody: In a good mobile wallet, you yourself are in control of your funds, nobody else. Period.
SPV or not: SPV, or Simplified Payment Verification, is a technology that lets your lightweight phone app connect directly to the Bitcoin network. This may be a bit slower and consume more data, but it also means your wallet will always be online. Another drawback of SPV wallets is that they might get confused during a network fork.
High frequency transactions of high value: Hardware Wallet
If a lot of money is at stake, like if you are conducting a business that frequently deals with Bitcoin, or if you are paying some of your staff in cryptocurrency, then you need a hardware wallet. Hardware wallets look like USB sticks and store your Bitcoin private keys on a specialized chip, similar to the secure enclave in an iPhone. Reputable hardware wallets include Trezor and Ledger Wallet.
Even if your phone or computer gets hacked, your hardware wallet would be unaffected. Since the wallet is password protected, someone who steals or finds your wallet would not be able to access it.
Low-frequency transactions of high value: Paper Wallet
If you have significant savings in Bitcoin that you do not need to spend or move frequently, a paper wallet is best for you. Don’t use an online service to create your paper wallet, but rather create one yourself.
The most secure option is to get yourself a copy of the operating system TAILS, which comes with the Bitcoin wallet Electrum installed. Crawl under a blanket or tent, boot it up, and create a Bitcoin wallet. You write down the seed on a piece of paper and shut down the computer.
As TAILS by default keeps no data on your USB stick and wipes the internal RAM, there are no traces of your seed left on the computer. As long as you can secure the paper, your Bitcoin are secure. If you lose the the paper, you lose everything.
To send your Bitcoin, you will have to again boot into a TAILS instance and restore a wallet using the seed from your paper.
Low-frequency transactions of low value: Online Wallet
If you only keep a small amount of Bitcoin and rarely spend them, have a look at an online wallet service, like blockchain.info.
Unlike with your mobile wallet, you don’t have to worry what happens when you switch devices. You can log into your account using an email address and a password. When you sign up, carefully go through the security options to protect your account from hackers while keeping it accessible only to you. Using a strong password and a password manager is a good idea!
Lexie M writes about information security, bitcoin, and privacy. She is excited about empowerment through technology, space travel, and pancakes with blueberries and blogs for ExpressVPN who is TechRadar’s number one VPN provider (opens in new tab). This is an excerpt from Lexie’s eBook called “Bitcoin Security and Privacy : A Practical Guide” which is free to download on iOS, Android, Kindle Kobo and Nook (opens in new tab).