Once you have some bitcoin, you will want to keep it safe and secure. There are a variety of ways to do this, including software wallets, exchanges, and hardware wallets. Each comes with its own advantages and disadvantages.
Before securing your bitcoin, think about what you want. Do you want a third party to handle your bitcoin like a bank handles your physical money? Or would you rather have complete possession, control, and responsibility for your bitcoin?
Device-based software wallets are the most secure, convenient tools for storing and spending your bitcoin. Since software wallets don't store your bitcoin with third parties like banks or websites, they are a lot like the physical wallets you already use. You have the funds, and no one else can access your money.
Every software wallet has an important piece of secure data called a "private key" which it uses to verify that the bitcoin you try to spend really is yours. That private key can be moved between devices, so if you lose it, you lose access to your funds.
For most software wallets, this private key is represented by a 12-word backup phrase. Treat this backup phrase just like the cash in your wallet or purse. Anyone with access to it can get access to your bitcoin, so we recommend putting it in a secure place, like a safe or lockbox. You may wish to create multiple copies in case one is lost.
You can increase the security of your software wallet by adding a spending password, PIN, or touch ID with some wallets like the BitPay wallet.
One of the most powerful ways to prevent bitcoin theft is to store your funds in a multisignature bitcoin wallet address. This kind of address requires at least 2 out of 2 different bitcoin wallets to approve a transaction before it can be spent.
If you choose to use multisignature security for your funds, you can divide up spending access between multiple devices you own or share spending access with friends you trust.
Bitcoin Exchange Accounts
Bitcoin exchanges usually hold your funds – and your private keys – for you on their websites. Some users prefer to store their bitcoin in exchanges so that they don't have to worry about remembering a private key or backup phrase.
Because the exchange holds your bitcoin for you, it works a lot like a bank holding your money. Like banks, these sites can be hacked or experience service outages. Unlike banks, there is no insurance if you lose your money. Think carefully before choosing this option for storing your bitcoin.
Bitcoin exchanges are not built to work directly with the Bitcoin protocol like software wallets, so they can create problems for users who want to make bitcoin payments on a regular basis. Instead of broadcasting transactions to the Bitcoin network in real time, bitcoin exchanges usually send transactions once every few hours. They occasionally deduct fees from the outgoing amount.
Imagine how hard it would be to use your banking app or debit card in a mall that only accepted cash. This paints a picture of the potential hassles you can face when using your exchange to make bitcoin payments when you're shopping online.
It doesn’t matter what the device is. As long as your device is connected to the internet, hackers may target you and compromise your best-laid security plans. But no one can hack a hard drive that sits in your filing cabinet.
Hardware Wallets are like that hard drive. They store your private key offline so online hackers never have a chance to grab it.
Popular hardware wallets include the Ledger walletand the TREZOR wallet.