Bitcoin wallets store private keys that you need to enter a Bitcoin address and spend your money. They are designed for various types of device and come in different forms. You can also use paper storage to skip having them on your computer in the first place. Surely, it is essential to secure and back up the Bitcoin wallet you are using.
Bitcoin is a modern equivalent of cash and more merchants start accepting Bitcoins everyday. But how are Bitcoin stored? Usually we store fiat money into a physical wallet and Bitcoin are stored in similar way except that a wallet is digital.
To be honest, you do not technically store Bitcoin anywhere. What you store are secure digital keys that are used to access your public addresses of Bitcoin and sign transactions. This is the information that is stored in a Bitcoin wallet.
Bitcoin wallets have a variety of forms. Currently there are three main types of wallet: desktop, web, mobile. There also is a hardware wallet but no smoothly working wallet has been created yet.
Bitcoin desktop clients are the basis for conducting Bitcoin transactions. These clients host a collection of keys (or wallet address) on that computer. These keys allow you to receive and send Bitcoin through the Bitcoin Network. Only you have an access to these keys hence they must be kept secure. We recommend you to create a backup of your wallet. If your file gets corrupted or you accidentally delete it, your Bitcoins will be lost forever.
Desktop-based wallets are great but they are not very useful when you are on the street trying to purchase something in a physical store. And this is where the mobile wallet stands out. Running as an application on your smart-phone the wallet stores the private keys for the Bitcoin addresses and enables you to pay for goods directly with your phone. Sometimes the Bitcoin wallet takes advantage of the smart-phone’s feature called Near Field Communication (NFC). It enables you to tap the mobile phone in front of a reader and pay the amount with Bitcoins even without entering any information at all.
There is a one feature that is common with all mobile wallets – they are not complete Bitcoin clients. The whole Bitcoin client has to download the whole Bitcoin block chain which will be forever growing and already is multiple gigabytes in size. This could be a hefty problem with your mobile service provider, as they would be more than happy to send you a large bill for downloading over the mobile Internet network. Many mobile phones would not be able to bear the block chain in the memory in any case.
Instead of that, mobile clients are often created with simplified payment verification system (SPV). They download only a small subset of the block chain which rely on other trusted nodes in the Bitcoin network to make sure they have the correct information.
Web-based wallets collect your private keys online with a computer that is connected to the Internet and is controlled by someone else. There are several such online services and some of them link to desktop and mobile wallets, replicating your Bitcoin addresses between the devices that you own.
The advantage of a web-based wallet is that you can access it from anywhere regardless of the device you are using. Although, it also has a major disadvantage – it can put the organization that runs the website in charge of your private keys and it takes all your Bitcoins out of your command if it was implemented incorrectly. Yes, it is a scary thought, especially when you begin to gather lots of Bitcoins.
Hardware wallets are the dedicated devices that hold private keys electronically and ease payments. However they are limited in number at the moment. Trezor introduced a demo version of their hardware on 15 March, 2014 in Berlin in the Bitcoin Exchange Berlin (BXB) free-entry event organized by Aaron Koenig. There also is a Nymi wristband which acts as a Bitcoin wallet and for authentication uses your heart rhythm data as a security key.
Are Bitcoin wallets safe?
It actually depends on how you manage them. Private keys that are stored in your wallet are the one and only way to access the transaction data that is stored in your Bitcoin address. If you lose those private keys – you will lose all your Bitcoins. Hence it is very important to keep your private keys safe.
How can I secure my Bitcoin wallet?
There are a couple ways to secure your Bitcoin wallet:
The first way is to encrypt your wallet with a strong password. It makes difficult to reach your wallet, but still possible. If your computer has a malware implemented, hackers can log your keystrokes and find your password.
Back it up
If all your private keys are stored in one wallet and if you misplace that wallet or if it gets corrupted – you will lose your keys. By backing up your wallet you will make a copy of your private keys and it is very important to back up your full wallet. Some of the addresses are used to store the change from transactions and may not be shown for you by default. Hence you need to back the whole thing up in a more than one different place and keep it safe from prying eyes.
Take it offline
People who are afraid to store Bitcoin keys digitally for the fear that it may stolen by hackers, have an option of cold storage. The cold storage wallets register private Bitcoin keys offline that it would not be stolen over the Internet.
It is a good idea to cold store most of your Bitcoin fortune and transfer just a small amount to separate Bitcoin addresses in your main wallet with an Internet connection making it very easy to spend. That way only a small amount of Bitcoins is at risk even if your computer hard drive is erased durin the crash or your smart-phone was lost.
Many software Bitcoin wallets has a cold storage option. You could also go completely analog and simply use paper for offline storage as the form of “paper wallet”.
There are a few sites that offer paper Bitcoin wallet services. One of them is Piper wallet. It generates a Bitcoin address for you and creates an image that contains two QR codes – one is the public address used to receive Bitcoin while the other is the private key which is used to spend your Bitcoins that are stored at that address.