Once bitcoins have been acquired, the next question is how you want to store them. Since Bitcoin is a form of currency and wealth storage, this is a very important step because security is a huge concern. There are two major types of storage: hot and cold. The differences are as follows:
- Cold storage deals with a wallet that is either entirely offline, or is at least encrypted with its password stored offline. This can be in the form of a wallet stored on a USB drive or online backup site, as well as a paper wallet.
- Hot storage concerns coins that are easily accessible for sending funds.
For those who plan to actually use their coins for purchases and trades, hot storage is just fine. For those who want to keep them secured for years, cold storage is the way to go.
How to Use Cold Storage
As stated, cold storage is considered as a wallet that is highly protected. A way to set this up on a local system would be to install Bitcoin QT on an offline computer and encrypt the wallet before ever using it. Cold storage also forms part of websites such as Coinbase and Blockchain.info, although this must be done by choosing cold storage options on these sites.
The important thing to realise about cold storage is that it’s only as safe as you make it. Even if you encrypt your wallets, if the system you are accessing them from to send funds (a process that requires unlocking the wallet prior to sending) has been compromised, it’s possible for attackers to still get access to your coins. As a result, it is important not only to create addresses safely when using cold storage, but also to access them safely.
The official Bitcoin site provides an excellent tutorial on how to both create and utilise cold storage. The guide helps explain everything that is needed to create and secure the coins. Just keep in mind that security only matters if you’re doing everything you can to keep it secure. The biggest flaw most people seem to admit to with regard to their wallets being stolen often lies in the steps they skipped or things they ignored along the way.
The majority of Bitcoin users opt for hot storage. This allows easy access to the coins whenever one wants to spend them. It also makes Bitcoin effortless to accept. In a sense, this is what we call the true wallet: coins rendered accessible at any point without too much effort. This type of storage has a few different options:
- Local storage
- Online wallets
Local storage is the only manner in which coins can be stored with absolute control. There is no risk to storing coins locally when it comes to sites shutting down or rogue employees running off with coins. You are in direct control of your wallet, including what is done with it and all keys associated with it.
The downside to local storage is that you need to keep constant backups in a safe and secure location every time a new address is generated or a transaction is sent. Not doing so puts all of the coins in the wallet at risk in the case of a system crash or some other complication. You are also responsible for keeping the wallet-storing system secure from intruders, both online and offline.
There is also the possibility that you might accidentally throw them out or lose them.
Online wallets are best compared to being like an online bank account. You store your coins in the wallet, which you can then access whenever you need them. This takes a lot of the risk out of holding coins locally, given that backups are handled by the online wallet service. At the same time, though, it opens the doors to a new kind of risk: service breaches. An employee of a site might decide they want to run off with all of the coins. The site could go out of business. There are a lot of variables that should be considered.
When it comes to online wallets, a site like Coinbase is by far one of the most trusted. They are backed by venture capitalists and have proven themselves to be a reliable online wallet provider. Storing and using coins on Coinbase is also just as easy as with a bank account: simply transfer the coins in by using the deposit addresses and transfer them back out through withdrawals.
Exchanges are like online wallets in the sense that they work in a similar manner. For people to trade coins through an exchange, they need to have a method for storing coins there. This is in effect an online wallet. The storing of coins on exchanges is great for those who want to do trading, as it makes things much faster and easier. But it also brings with it a couple of problems.
Exchanges are major targets for both attackers and scams. When it comes to being able to trade the latest and greatest coins, some scammers will set up new exchanges for the sole purpose of taking everyone’s money. And when it comes to attackers, exchanges are known to be carrying quite a big stash of loot for the taking. This makes them prime targets.
Additionally, exchanges often charge large fees for withdrawing, with some requesting 0.002BTC per withdrawal. The client and network itself, on the other hand, would only require a fee of 0.0001BTC, or 5% of that amount. While this isn’t a big deal for a couple of transactions, if you happen to be dealing in bitcoins pretty often, these will add up all too quickly.
Picking a Wallet Storage Method
Generally speaking, most people will either store their coins locally (in an encrypted wallet) or through a site like Coinbase. Coinbase allows for the transaction of coins from anywhere at any time, while the local wallet can only be accessed when you are on the system hosting it. There is really no right or wrong here; it is simply a matter of convenience.