Unlike a bank, with Bitcoins you are responsible for keeping your Bitcoins safe. If you do it right, this is very safe. However, there are people who do not know exactly how to do it safely and then you run the risk of losing them. In the next blog post I will explain in which ways you can store Bitcoins and which methods are unsafe and safe.
As strange as it sounds, your Bitcoin is stored in the public blockchain on the internet. This public blockchain can be viewed by everyone. The bitcoin is stored at a public address. But only you know that this public address belongs to you, unless you make this known somewhere, of course.
However, only if you have the corresponding private key can you also move the Bitcoin to another Bitcoin address. To pay, transfer the Bitcoin to the merchant’s Bitcoin address. But you can also move Bitcoin to a Bitcoin address that belongs to an Exchange (for example to exchange it for Dollars) or you can move it to a Bitcoin address of your own Bitcoin wallet.
It is therefore very important that you keep your private keys safe. After all, someone who has access to these keys also has access to the associated Bitcoin.
Unlike a bank where you always use the same bank account, it is wise to use a new address every time you receive Bitcoin transactions. After all, if you wouldn’t do that, someone who paid you once in Bitcoin could keep an eye on the receiving address and also see new payments coming in.
In the past, before the invention of the HD wallet, these keys for all these addresses were randomly generated, so you had to keep (AND backup) all keys safely. That was quite cumbersome and the chance that you lost private keys due to a wrong backup was quite high.
Fortunately, it has become a lot easier these days. With the introduction of the so-called Hierarchical Deterministic (HD) Wallet, all public/private keys are created using a special formula and a seed. A seed is a set of 12 or 24 English words. If you keep this seed safe you can recreate all public / private keys. That is why when creating a new HD wallet, you are always asked to write down these seed words properly and keep them safe.
You should NEVER store these words on a computer (unless you are an IT expert who knows how to do this securely with secure encryption methods). There is malware that is on many computers that can automatically recognize these kinds of seeds and then steal them. If someone owns the seed, they have access to all your Bitcoin.
It is best to write the words on a piece of paper and keep them somewhere safe. For example, in a safe in your home. However, a piece of paper is of course not safe against water damage or fire. That is why there are solutions to keep these seed words safe, for example in the form of a Cryptosteel capsule.
Nowadays all Bitcoin wallets are HD wallets
With a free Bitcoin wallet app you can store Bitcoins fairly safely on a smartphone. However, it is wise to only do this for small amounts. Kind of comparable to your own wallet, with which you usually only walk around with small amounts.
It is very important that you use only well-known Bitcoin wallet apps. We prefer well-known Bitcoin wallets that have been in the market for a long time and have proven themselves. For Android, for example, this is Mycelium and for iPhone it is BitPay.
Here’s a handy help to find a Bitcoin wallet for your smartphone.
Unfortunately, fake Bitcoin wallet apps also exist (especially on Android). If you put Bitcoin on it, you lose it right away. So you should never install these unknown Bitcoin wallet apps.
A hardware wallet is ideal for safely storing larger Bitcoin amounts. A hardware wallet is a small computer that only runs the manufacturer’s firmware. So a virus or malware can never get on the same device.
We strongly recommend that you always purchase such a hardware wallet directly from the manufacturer, NEVER via intermediary channels such as Amazon, Bol.com or Ebay. After all, a smart scammer can replace the original firmware with a version that can steal your Bitcoin and then sell this modified hardware wallet through an intermediary channel. If you order the hardware wallet directly from the manufacturer, it will also be sent sealed so that you can see if someone has opened the box.
You also sometimes see second-hand hardware wallets being offered on the marketplace by scammers where someone has already filled in the seed. This is completely unreliable. After all, the person who sold the hardware wallet also has access to the seed and therefore also to all bitcoin that you are going to put on the hardware wallet. So NEVER do it.
It is also possible to create a paper wallet and store bitcoin on it. This paper wallet has a public address where you can deposit Bitcoin and a private address which you need if you want to withdraw the bitcoin. This is nice to give someone a gift on, for example, a birthday.
However, it is of course crucial that no one else has access to the private keys you create for such a paper wallet. The problem is that you need software to create such a paper wallet. On the internet you can find various websites that can create such a paper wallet for you for free. However, it has also happened that someone had built a so-called backdoor into this software and thus Stolen 124.85 BTC. So there are definitely risks involved.
Our advice: Don’t.
It is also technically possible to store your Bitcoins on your own computer. However, there is now so much malware that is able to recognize Bitcoins on your computer and then immediately state that you are at great risk.
Our advice: Don’t.
It is also possible to store your Bitcoin online with a so-called third party such as Coinbase or Blockchain.com. The advantage is that it works easily. However, you do run more risk with this. Such an online service can be hacked, a government can decide to confiscate your bitcoin, such a third party has access to all your private keys and you will have to trust them very well.
Our advice: Don’t.
At a Bitcoin exchange such as Kraken, Bitstamp or Bitvaro you can, for example, exchange euros and dollars for Bitcoin or vice versa. It is also possible to leave your purchased Bitcoin there. You run similar risks with this as with the online Bitcoin wallet. If the Bitcoins are meant to be traded continuously then there is no real alternative and you will have to accept the extra risk.
However, if you have purchased Bitcoins as a long-term investment, it is wise to remove this Bitcoin from the exchange and transfer it to your own wallet on your smartphone or hardware wallet.