Bitcoin is here to stay, at least for now. The number of bitcoins in existence is roughly 12 million (and growing), with a fluctuating value of $610 (at the time of writing) for each one. As they become more commonplace - and more businesses and companies accept them as payment - the likelihood that you’ll encounter the cryptocurrency is getting bigger.
You can buy bitcoins from an exchange (as you would for any other currency), you can accept them as payment for goods and services rendered, or you can mine for them. That’s all well and good, but where do you put them for safekeeping once you have them? As with paper money, you put them in your “wallet”.
Bitcoins aren’t real. They exist as lines of code in the public ledger, a huge online record accessible by all that keeps track of all bitcoins and transactions. The whole bitcoin system is built and relies upon this ledger, or block chain. In fact, your bitcoins are never really separated from it...what you have are the digital keys that lead to bitcoins in the ledger and legitimise your claim to them. You store these keys in a bitcoin wallet, and this wallet has an address (think of it like email) consisting of a string of letters and numbers. This address allows you to send bitcoins out, and others to send bitcoins to you.
The Four Types of Bitcoin Wallets
These wallets come in four flavours - desktop, mobile, web, and hardware. Each does essentially the same thing. They store the digital keys that lead to your bitcoins, and they allow you to spend (i.e. send) those you have.
1. Desktop Wallets
Like any other desktop application, you first need to download and install the appropriate software. There are many to choose from, available for Windows, Mac, and even Linux. Multibit, Bitcoin Core, and Armory are three powerful options. Once you’ve installed it, you follow the simple instructions to create a new wallet (usually the usual name, password, and email address). It’s very simple and straightforward. Once created, you’re ready to start giving out the wallet address (either to friends, customers, or as part of a mining pool) and receive the bitcoins.
One word of caution about desktop wallets: Part of the installation includes downloading the block chain (public ledger), which is currently in excess of 6 gigabytes and growing. It will consume a great deal of your available bandwidth, and is constantly growing and updating itself.
2. Mobile Wallets
On the mobile front, your options are a bit more limited. There is only one officially recognised mobile wallet in the Apple App Store. bitWallet (iOS) is available for both the iPhone and iPad. If you’re an Android user, you have much more choice, including Bitcoin Wallet, Bitcoin Wallet by Coinbase, Mycelium Bitcoin Wallet, and Blockchain. With these mobile apps, you can safely store, track, and send bitcoins in your account, all while on the go. They work as a simplified desktop wallet, and do not usually involve downloading the massive block chain.
3. Web Wallets
Again, the basic idea is the same, only you don’t need to download and install anything (think of it like cloud storage). Your wallet is available from anywhere you have an internet connection. Blockchain, Bitgo, and Coinbase are three web-based options. While the “access anywhere” functionality is obviously appealing, it also means that someone else has control of your bitcoin (keys). They have ultimate control, even if your account is password-protected and/or encrypted. Some of them address this concern better than others, so if you go the web route, do your homework before selecting one.
Web wallets are also subject to online attacks and hacking, which could potentially result in the loss of any and all bitcoins in your account. Unlikely, perhaps, but certainly not impossible. They are convenient, but security and control can be a big issue.
4. Hardware Wallets
The most limited in choice, but the best in terms of security and accessibility. A hardware wallet allows you to keep your keys in a physical item (like a USB stick). You plug it in or attach it to a computer when you need to, but otherwise it is separate and disconnected from the internet, and therefore not subject to hacking or cyberattacks of any type. Unfortunately, there are not a lot of options yet. Both Trezor and the Bitcoincard are in the early stages, but definitely worth keeping an eye on. Hardware Wallet is another ideal option. You can use it to carry your (virtual) bitcoins with you as you would real money, or store the device in a locked security box. Obviously, whatever you do, treat it with care. If you lose or damage it, your bitcoins are gone.
A Word on Extra Steps
Once you select one of the four types of wallets (or combination thereof) and create a wallet, you’re ready to deal in and store bitcoins. But that shouldn’t be the end of it. There are a few extra steps you should take in order to beef up and maintain the highest security possible.
- Wallet Password - as with any service that requires a password, your security is only as good as the strength of that password. Using a simple word (like “password”...heaven forbid!) or easy-to-guess series of numbers (12345) will negate any actual security afforded by having a password in the first place. When creating your wallet, be sure and use a strong password, with random letters, numbers, and symbols. Use a password generator if you need help. Store your password somewhere equally safe...and be aware that if you lose it, your bitcoins are probably gone. There are no easy password recovery options with bitcoin.
- Wallet Software - Ensure that your software - whatever it is - is up-to-date and current. As flaws are discovered, weaknesses are fixed, and new features are added, the software provided will provide an update. Either utilise automatic updating, or check frequently, to make sure your wallet is the best available version of itself.
- Backup, Backup, Backup - You’ve probably heard how important it is to regularly backup your files. It’s even more important with bitcoin. Get in the habit of frequent backups of your entire wallet. You need to have it in case your computer is lost, stolen, or damaged. Without the backup, unless the necessary files can be recovered, your wallet and bitcoins are gone. Just like that. Store the backup in several locations. Encrypt the file before storing it. Be secure...treat the file like money, because it is.
- Finally, consider an offline storage solution (like a hardware wallet) to keep the majority of your bitcoins safe and secure for the long haul. Most experts suggest keeping only a small percentage in your wallet for everyday purchases and transactions (remember that ONE bitcoin is currently worth about $610 USD) while removing the bulk to a safe storage solution free from the possibility of attack or system failure.
Bitcoins have demonstrated remarkably growth in the five years since their introduction, but not without some major hiccups (like the closing of Mt. Gox). Be careful. And while some analysts predict the bitcoin will eventually settle on its real value of $0, others see it climbing to thousands and thousands of dollars EACH. It’s a risk...but so is any investment. Go into it knowing that, and armed with plenty of research and healthy sense of paranoia, and you just might see tremendous growth and profit.
Photo by BTC Keychain
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