Security is always a top priority when it comes to storing wealth. In the realm of traditional finance, we rely on banks to keep our money and assets safe with a layer of security granted by the FDIC. In return for this service, the banks are allowed to lend your money to other entities and collect interest on these loans. Bitcoin, on the other hand, is a digital currency that doesn’t exist in physical form. Instead of keeping your bitcoins in a bank or a safe in your house, your bitcoins are stored on the Bitcoin blockchain and you the individual are in charge of taking care of your assets. The blockchain stores and records every bitcoin transaction. It also stores and records the balances of every individual that owns bitcoin. These balances can only be accessed by using one’s unique private keys. Your private keys in combination with the recipient’s public key is what makes secure and encrypted Bitcoin transactions possible. Wallets are where your private and public keys are stored and there are 5 different types. Each type of wallet is designed to be used to do different things at different times.
A web wallet or “hot wallet” is usually the type of wallet you will use when first buying bitcoin from an exchange. These types of wallets are always connected to the internet and are accessed through different browsers or exchange sites. Web wallets are the least secure as they can be prone to DDOS attacks so it is a good idea to move your bitcoins to a more secure type of wallet after purchase. There are two types of web wallets.
- Non-custodial wallets are accessed through your browser or phone app to a third-party site where the customer owns and controls of their private keys. Having control of your keys means that you have full control over your funds.
- Custodial wallets, on the other hand, is a type of digital wallet which keeps your private keys but provides backup and security for your funds. These types of wallets are the more secure of the two.
Mobile wallets are really popular for storing bitcoins because they are mobile-based and easy to use. Most mobile wallets are compatible with both iOS and Android. There are a few things to look for when using a mobile wallet.
- Currencies–Wallets like Mycelium only store Bitcoin while the Edge wallet stores multiple currencies.
- Ease of Use–Easy navigation and a good user interface is always nice and appealing.
- Private Keys-Be sure the wallet gives you full control of your private keys.
- Backup and Security–Backing up your data is always a good idea in case you lose or replace your phone.
- Compatibility-Being compatible with different devices and operating systems is nice when using your mobile wallet on multiple devices.
Paper wallets are a bit technical and may not be for everyone. To create a paper wallet, you print your private keys and public address on paper. You then transfer your bitcoin to the public address and put the wallet in a safe place. If the paper wallet is either stolen or lost, you will lose your Bitcoin so caution must be taken to preserve this type of wallet.
Desktop wallets are installed directly onto your desktop computer and are a good place to store your Bitcoin instead of leaving it on an exchange. Wallets like Electrum only store Bitcoin while Exodus stores multiple cryptocurrencies. Some desktop wallets also let users exchange your Bitcoin for other cryptocurrencies. Keep in mind that these wallets are connected to the internet so adequate security should be in place to keep your funds safe.
Hardware wallets are the most popular for security. These hardware devices connect to your computer and require a passcode to access. Trezor and Ledger wallets can store multiple cryptocurrencies and accounts. These types are popular because you can disconnect them from the internet and store them in a safe place. They also have a passphrase so you can recover your account in the event your device gets stolen or damaged.
Owning Bitcoin puts you in full control of your funds and not knowing how to correctly store them can be devastating because once they are gone, they can never be recovered.