What are the Safest Ways to Store Bitcoin?

After reaching a peak in price in late 2017 and subsequently fading from popularity, cryptocurrencies like Bitcoin have experienced a more another significant surge through 2019 and 2020, surpassing their previous all-time highs. As this has taken place, so too has the number of publicized hacking events increased as well. Given that many investors are new to the system and may not know how to keep their investments secure, hackers are coming up with ingenious ways of stealing funds. Some of the most prominent thefts have been those that have taken place in plain sight: some hacks even blatantly reroute tokens bound for one wallet for another. The victims watch as their tokens are stolen away from them, with nothing they can do about it.

KEY TAKEAWAYS

• Users can lose bitcoin and other cryptocurrency tokens as a result of theft, computer failure, loss of access keys, and more.
• Cold storage (or offline wallets) is one of the safest methods for holding bitcoin, as these wallets are not accessible via the Internet, but hot wallets are still convenient for some users.
• Those interested in the safest storage should consider using a hardware wallet for all of their long-term Bitcoin and cryptocurrency storage.

Just the way we keep cash or cards in a physical wallet, bitcoins are also stored in a wallet-a digital wallet. The digital wallet can be hardware-based or web-based. The wallet can also reside on a mobile device, on a computer desktop, or kept safe by printing the private keys and addresses used for access on paper. But how safe are any of these digital wallets? The answer to this depends on how the user manages the wallet. Every wallet contains a set of private keys without which the bitcoin owner cannot access the currency. The biggest danger in bitcoin security is the individual user perhaps losing the private key or having the private key stolen. Without the private key, the user will never see her bitcoins again. Besides losing the private key, a user can also lose her bitcoin by computer malfunctions (crashing a hard drive), by hacking, or by physically losing a computer where the digital wallet resides.

Below, we'll take a look at some of the best ways to store bitcoin safely.

Hot Wallet

Online wallets are also known as “hot” wallets. Hot wallets are wallets that run on internet-connected devices like computers, phones, or tablets. This can create vulnerability because these wallets generate the private keys to your coins on these internet-connected devices. While a hot wallet can be very convenient in the way you are able to access and make transactions with your assets quickly, they also lack security.

This may sound far-fetched, but people who are not using enough security when using these hot wallets can have their funds stolen. This is not an infrequent occurrence and it can happen in a number of ways. As an example, boasting on a public forum like Reddit about how much Bitcoin you hold while you are using little to no security and storing it in a hot wallet would not be wise.

These wallets are meant to be used for small amounts of cryptocurrency. You could liken a hot wallet to a checking account. Conventional financial wisdom would say to hold only spending money in a checking account while the bulk of your money is in savings accounts or other investment accounts. The same could be said for hot wallets. Hot wallets encompass mobile, desktop, web, and most exchange custody wallets. 

It is important to note here that holding cryptocurrency in an exchange wallet is not the same as holding it in your personal wallet. Exchange wallets are custodial accounts provided by the exchange. The user of this wallet type is not the holder of the private key to the cryptocurrency that is held in this wallet. 

If an event were to occur where the exchange is hacked or your account becomes compromised, your funds would be lost. Cryptocurrency exchanges do not provide SIPC or FDIC insurance, making safe storage of cryptocurrencies especially important. The phrase “not your keys not your coin” is a heavily repeated concept within cryptocurrency forums. As mentioned previously, it is not wise to keep large amounts of cryptocurrency in any hot wallet, especially an exchange account. Instead, it is suggested that you withdraw the majority of funds to your own personal "cold" wallet (explained below). Exchange accounts include Coinbase, Gemini, Binance, and many others.

While these wallets are connected to the internet, creating a potential vector of attack, they are still very useful for the ability to quickly make transactions or trade cryptocurrency.

Cold Wallet

The next type of wallet, and the safest option for storage, is a cold wallet. The simplest description of a cold wallet is a wallet that is not connected to the internet and therefore stands a far lesser risk of being compromised. These wallets can also be referred to as offline wallets or hardware wallets. 

These wallets store a user’s address and private key on something that is not connected to the internet and typically come with software that works in parallel so that the user can view their portfolio without putting their private key at risk. 

Perhaps the most secure way to store cryptocurrency offline is via a paper wallet. A paper wallet is a cold wallet that you can generate off of certain websites. It then produces both public and private keys that you print out on a piece of paper. The ability to access cryptocurrency in these addresses is only possible if you have that piece of paper. Many people laminate these paper wallets and store them in safety deposit boxes at their bank or even in a safe in their home. Paper wallets have no corresponding user interface other than a piece of paper and the blockchain itself. 

A hardware wallet is typically a USB drive device that stores a user’s private keys securely. This has serious advantages over hot wallets as it is unaffected by viruses that could be on one’s computer because private keys never come in contact with your network-connected computer or potentially vulnerable software. These devices are also typically open-source, allowing the community to determine their safety rather than a company declaring that it is safe to use.

Cold wallets are the most secure way to store your Bitcoin or other cryptocurrencies. For the most part, however, they require a bit more knowledge to set up. It’s essential for anyone interested in owning cryptocurrency to learn about safe storage and the concepts of both hot and cold wallets.

Physical Coins

Services are cropping up which allows Bitcoin investors to buy physical Bitcoins. The coin you purchase will have a tamper-proof sticker covering a predetermined amount of Bitcoin. In order to purchase the physical coin, you may need to pay a slight premium over the value of the Bitcoin that you're buying, owing to the cost of the manufacture and shipment of the coin itself.

Other Security Precautions

Backup

Back up your entire bitcoin wallet early and often. In case of a computer failure, a history of regular backups may be the only way to recover the currency in the digital wallet. Make sure to backup all the wallet.dat files and then store the backup at multiple secure locations (like on a USB, on the hard drive, and on CDs). Not only this, set a strong password on the backup.

Software Updates

Keep your software up to date. A wallet running on non-updated bitcoin software can be a soft target for hackers. The latest version of wallet software will have a better security system in place thereby increasing the safety of your bitcoins. If your software is updated with the latest security fixes and protocol, you may evade a big crisis because of the enhanced security of the wallet. Consistently update your mobile device or computer operating systems and software to make your bitcoins safer.

Multi-Signature

The concept of a multi-signature has gained some popularity; it involves approval from a number of people (say 3 to 5) for a transaction to take place. Thus this limits the threat of theft as a single controller or server cannot carry out the transactions (i.e., sending bitcoins to an address or withdrawing bitcoins). The people who can transact are decided in the beginning and when one of them wants to spend or send bitcoins, they require others in the group to approve the transaction.

 

Paper Wallet

What Is a Paper Wallet?

A paper wallet is a piece of paper with your private and public keys printed out. Some paper wallets might also have a scannable barcode created by an app. It is a way to store and take access to your cryptocurrency offline. When you print your keys, they are removed from the cryptocurrency network, but the tokens remain; however, they are inaccessible without your keys.

Paper wallets were generally used before cryptocurrency became popular. Storage technology has improved since the method was popular, but it remains a valid way to store your keys in certain circumstances.

You might encounter a time when you need to store your cryptocurrency on paper; therefore, it's essential to understand what a paper wallet is, how it works, and the risks if your circumstances require you to create one.

KEY TAKEAWAYS

• A paper wallet is a printed piece of paper containing keys and QR codes used to facilitate your cryptocurrency transactions.
• Because they are removed from the internet, at one point, paper wallets were considered to be more secure than other forms of cryptocurrency storage.
• While many people believe that the risks of losing, misreading, or damaging a paper wallet outweigh the potential security benefits, it remains an option for storing your keys.

Understanding a Paper Wallet

A cryptocurrency wallet is a place where you store your public and private keys. A paper wallet is a piece of paper with your keys printed out on it. When you choose to print your keys, they are generally removed from your digital wallet and the network. No one can hack your paper wallet or retrieve your keys unless they physically take the paper on which you have them stored.

Removing them from your digital wallet also means that if you lose your paper wallet, you'll not be able to gain access to those cryptocurrencies again.

Paper wallets are generally created by paper wallet generator apps. These programs should be able to be used while you're disconnected from the internet. Ideally, also you'd use the program on a device with up-to-date antivirus and malware detection software. This won't always be feasible, but at the very least, you should run a free malware check on your computer before generating the keys.

The keys and QR codes are printed out, and the paper wallet is created. To use the codes, the wallet app on your device should be able to scan—or sweep—the paper wallet, which "transfers" the coins to the software wallet.

A quick response (QR) code is a barcode your app generates that allows your wallet to quickly scan your paper wallet into your hot wallet.

Paper Wallet Considerations

Paper wallets were considered one of the safest ways to store cryptocurrency for several years. However, they have fallen out of favor with many cryptocurrency fans because they are susceptible to environmental factors, can degrade with time, be misplaced, or otherwise be damaged.

They can still be useful if printed out clearly, stored securely, and kept safe from damage. However, you should consider several factors before deciding to use a paper wallet.

Device Security

It's essential to ensure your device is safe from cyber-attacks, malware, and viruses by using security software to scan it. When you print your keys, the security gap lies within the devices you're using to print them out. Computers, phones, and tablets can all be hacked into or infected by malware, ransomware, viruses, or other forms of cyberattacks.

Often, these programs can search and monitor for a specific activity like cryptocurrency use. They can scan browsing history and caches in the system where temporary information is stored or even view your screen while you're generating your keys.

It's also essential to ensure your device's wireless and Bluetooth are off because hackers can use those signals to access your device and wallet.

 

Make sure you don't take or keep digital pictures or scans of your wallets because hackers can acquire those pictures.

If you're using your smartphone or tablet, you could place it into airplane mode to disable all signals temporarily before generating your keys. It would be best if you could print from a device that is connected to a printer through a wired, non-networked connection. When you're finished, make sure you empty any recycle bins, temporary files, and caches and remove any digital backups that might be created.

Printers connected to larger networks often store information; hackers may be able to access this storage and find the keys during or after the generation process.

Printing

Printers are not always reliable, and any problems, while you're printing, can lead to the loss of your keys and cryptocurrency. Paper jams, inkspots, or a poorly aligned printer head can all cause serious problems when you're creating your paper wallet.

It's possible that the wallet or program you're using will allow you to print your keys before they are deleted from your device, but you should make sure that is the case before you print to prevent losses caused by a faulty printer.

Certain types of printer ink can bleed over time, and different kinds of paper accept and hold ink differently. If you're going to print out your wallet, ensure you use a printer that you know works well, a paper that will last a long-time, and ink that will not fade or bleed.

Physical Storage

Once you've created your paper wallet, you should consider how you're going to store it. You'll need a secure place, like a fireproof and waterproof safe, to keep them in. Depending on the fair market value of the cryptocurrency you're placing in a paper wallet, you might consider safe deposit boxes at your bank or financial institution.

Is a Paper Wallet a Good Idea?

Paper wallets were once the most secure method for storing cryptocurrency. It is still a valid way to store your tokens if you have no other storage method. However, you should consider it a temporary method until you can access another way to store them.

Is a Paper Wallet a Cold Wallet?

Yes. A paper wallet is a form of cold storage because it removes internet accessibility.

How Do You Get a Paper Wallet for Cryptocurrency?

Creating a paper wallet can be as simple as writing your keys down on paper using an app to generate a QR code, and printing the key and code.

Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date, this article was written, the author does not own cryptocurrency.

 

What Is Cryptocurrency Cold Storage?

Since the launch of Bitcoin in 2009, the world of cryptocurrencies has grown larger and more popular, particularly in recent years. There has been an increase in the usage and acceptance of virtual currencies alongside a growing number of tokens and investors. However, with the increase in prominence, a higher incidence of thefts, fraud, and hacking has also come. Because there is no regulatory framework for virtual currencies, there is often no recourse for owners who become victims of fraud or theft.

The onus to keep cryptocurrency secure typically falls on the investor. Users must decide how to store their cryptocurrency in the safest, most secure way possible and still be able to access them.

So, where should you store your cryptocurrency? Cold storage is one of the most secure storage methods—find out what it is and learn some of the most common techniques for keeping your cryptocurrency safe.

KEY TAKEAWAYS

• Cold storage refers to taking your cryptocurrency keys offline so that they are more secure.
• Cold storage is less convenient than other security methods, but that means it is more secure.
• There are several different cold storage methods to choose from.

What Is Cryptocurrency Cold Storage?

Cold storage is removing your cryptocurrency keys from your wallet and storing them somewhere that is not connected to the network or internet. Additionally, cold storage methods shouldn't have the ability to communicate with any other electronic device unless it is physically plugged into that device when you're accessing your keys.

Cold storage became a concern early on in cryptocurrency's development because of concerns over key theft by hackers. Originally, it consisted of writing down the keys on a piece of paper and removing them from the wallet. Cold storage has since advanced because users have billions of dollars worth of cryptocurrency.

Understanding Cryptocurrency Cold Storage

It's important to explore the concept of a cryptocurrency wallet to understand storage. For cryptocurrency users, wallets function somewhat similarly to physical wallets, which hold cash. However, these wallets hold cryptocurrency keys. They are digital storage tools that have both a public and private key.

These keys are strings of cryptographic characters necessary to complete cryptocurrency transfers to or from a wallet. The public key is similar to an email address—it identifies your wallet so that other users can send you coins. The private key is like your email password, used to access your email account to check your email.

For safety, you can store the keys somewhere other than your wallet—if the storage medium is connected to the internet, it is referred to as being hot; cold storage is not connected to the internet.

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Cryptocurrency Wallets Explained

Cryptocurrency Cold Storage Methods

The most commonly used cold storage methods are paper wallets and hardware wallets. However, the number of cold storage techniques is limited only by the user's imagination. Some are more obscure, while others can be ultra-secure.

Paper Wallets

Paper wallets are probably the least safe or secure cold storage method. It involves printing your public and private keys on paper and possibly adding a QR code that can be scanned to make transactions faster. A paper wallet with a QR code contains all the information needed for spending the coins, so its safety is crucially important. Paper wallets can be misplaced, the ink can fade, or you could accidentally leave one on your desk and spill coffee on it. If you choose this method, be sure to have a safe box or another secure storage method.

Hardware Wallets

Hardware wallets are storage devices that look like a USB drive that can be plugged into the device you use to access your wallet. Hardware wallets are one of the more safe and more secure ways of placing your keys in cold storage. You can use anything from a standard USB storage drive to an advanced device with a battery, Bluetooth, software, and other features.

Air-gapped devices have no connection ability and are more secure than ones that can connect wirelessly. You can buy commercial hardware wallets from retailers and merchants; many are water and virus-proof—some even support multi-signature (multi-sig) transactions. Multi-sig is a cryptocurrency signature method that requires more than one user to approve a transaction using private keys.

 

Many advanced hardware storage devices are available, but it's important to remember that the less convenient a storage method is, the more secure it is. Likewise, the fewer features a method has, the more secure it is.

Sound Wallets

Sound wallets are an obscure and expensive way to store your keys, depending on your chosen medium. Sound wallets involve encrypting and recording your private keys in sound files on products such as Compact Discs (CDs) or vinyl disks (records). The code hidden in these audio files can be deciphered using a spectroscope application or high-resolution spectroscope.

Deep Cold Storage

Placing your hardware wallet in your safe is secure, but it isn't considered deep cold storage because it is easy for you to access. Deep cold storage is any method that is very inconvenient and requires time and effort to retrieve your keys. This could be anything from placing your hardware wallet in a waterproof container and burying it six feet down in your garden to use a third-party service that stores your cryptocurrency keys in a vault that requires multiple steps to access.

Burying your keys deep in the garden has several drawbacks like lots of digging and remembering where you buried them, but so does the ultra-secure vault service. Vault services generally require your identity, proof of address, or other means of identification. Additionally, it can take hours or days to access your keys, depending on where they are physically stored.

Is Cold Storage Best for Cryptocurrency?

Cold storage removes your private keys from your wallet, so it is currently the best method for storing your cryptocurrency private keys because it denies anyone accesses to them.

What Happens When You Put Cryptocurrency in Cold Storage?

When you place your keys in cold storage, they are removed from your wallet. You still see your cryptocurrency in your wallet because ownership is stored on the blockchain, but you cannot use them until you move the keys you want to use back to your wallet.

Is Coinbase Wallet Cold Storage?

The wallet provided by the exchange Coinbase is not cold storage. However, Coinbase offers a vault to all customers, which takes private keys and stores them offline.1 For institutions, the exchange provides cold storage through Coinbase Custody, a third-party fiduciary with offline storage.

 

Cryptocurrency Wallet

What Is a Cryptocurrency Wallet?

A cryptocurrency wallet is an application that functions as a wallet for your cryptocurrency. It is called a wallet because it is used similarly to a wallet you put cash and cards in. Instead of holding these physical items, it stores the passkeys you use to sign for your cryptocurrency transactions and provides the interface that lets you access your crypto.

Modern cryptocurrency wallets make the blockchain accessible to everyone. When cryptocurrency was first introduced, sending cryptocurrency was a manual task that required entering long keys. Today, the software does most of it for you.

The first wallet was that of Bitcoin's developer, Satoshi Nakamoto. The second wallet belonged to Hal Finney, who corresponded with Nakamoto and reportedly was the first to run the Bitcoin client software wallet. Nakamoto sent him 10 bitcoin as a test, and the cryptocurrency craze began.

KEY TAKEAWAYS:

• A cryptocurrency wallet is a device or program that stores your cryptocurrency keys and allows you to access your coins.
• Wallets contain a public key (the wallet address) and your private keys needed to sign cryptocurrency transactions. Anyone who knows the private key can control the coins associated with that address.
• There are several different types of wallets, each with its own features and levels of security.
• Many cryptocurrency wallets can be used to store keys for different cryptocurrencies.

Understanding Cryptocurrency Wallets

Cryptocurrency wallets are software applications on computers or mobile devices such as phones or tablets. They use an internet connection to access the blockchain network for the cryptocurrency you're using.

Cryptocurrencies are not "stored" anywhere—they are bits of data stored in a database. These bits of data are scattered all over the database; the wallet finds all of the bits associated with your public address and sums up the amount for you in the app's interface.

Sending and receiving cryptocurrency is very easy using these applications. You can send or receive cryptocurrency from your wallet using various methods. Typically, you enter the recipient's wallet address, choose an amount to send, sign the transaction using your private key, add an amount to pay the transaction fee, and send it.

Many wallets have integrated QR codes and near-field scanner technology that allows you to scan a code, select an amount, enter your key, select the transaction fee, and click send.

Receiving is even easier—the sender enters your address and goes through the same routine. You accept the payment, and the transaction is done.

Cryptocurrency Wallet Types

They are two main types of wallets, custodial and noncustodial. Custodial wallets are hosted by a third party that stores your keys for you. This could be a company that provides enterprise-level data security systems businesses use to preserve and secure data. Some cryptocurrency exchanges offer custodial wallets for their customers. Noncustodial wallets are wallets in which you take responsibility for securing your keys. This is the type that most cryptocurrency wallets on devices are.

There are two subcategories of wallets, hot and cold. A hot wallet has a connection to the internet or to a device that has a connection, and a cold wallet has no connection. Lastly, there are three subcategories of wallets—software, hardware, and paper. Each of these types is considered either a hot or cold wallet.

So, you can have a noncustodial software hot wallet, noncustodial hardware cold or hot wallet, or a custodial hardware cold wallet. These are the most common types, but you may also encounter other combinations.

Software Wallets

Software wallets include applications for desktops and mobile devices. These wallets are installed on a desktop or laptop computer and can access your cryptocurrency, make transactions, display your balance, and much more. Some software wallets also include additional functionality, such as exchange integration if you're using a wallet designed by a cryptocurrency exchange.

Many mobile wallets can facilitate quick payments in physical stores through near-field communication (NFC) or by scanning a QR code. Mobile wallets tend to be compatible with iOS or Android devices. Trezor, Electrum, and Mycelium are examples of wallets that you can use. Software wallets are generally hot wallets.

 

You use private keys to access your cryptocurrency. Anyone who has your private key can access your coins.

Hardware Wallets

Hardware wallets are the most popular type of wallet because you can store your private keys and remove them from your device. These devices resemble a USB drive, and modern hardware wallets have several features.

You can make a cryptocurrency transaction on your computer or device by plugging in the hardware wallet. Most of them can sign cryptocurrency transactions automatically without requiring you to enter the key, circumventing a hacker's ability to log your keypresses or record your screen.

These devices often cost between $100 to $200. Ledger and Trezor are both well-known hardware wallets. Hardware wallets are generally considered cold wallets because they don't have an active connection until they are plugged in.

 

Some new hardware wallets come with the ability to connect to your device through Bluetooth. Use these with caution because Bluetooth is a wireless signal that can be accessed by unwanted parties when it is turned on.

Paper Wallets

Early crypto users would write or type their keys on paper, which they called paper wallets. These evolved to include the keys and QR codes so wallets on mobile devices could scan them. However, paper wallets are easily damaged or lost, so many crypto owners do not use them anymore.

However, there is nothing wrong with using a paper wallet if you take measures to store it properly in a safe or deposit box and check on it once in a while to ensure it hasn't deteriorated.

Crypto Wallet Security

Wallet safety is essential, as cryptocurrencies are high-value targets for hackers. Some safeguards include encrypting the wallet with a strong password, using two-factor authentication for exchanges, and storing any large amounts you have offline.

 

There have been many cases of malware disguised as wallets, so it is advisable to research carefully before deciding which one to use.

Seed Words

Most modern wallets generate a twelve-word mnemonic seed phrase. An example phrase could be "airport bedroom impression sample reception protection road shirt..." which seems random but is created and linked to your keys by your wallet. You can use the phrase to restore the wallet if the device is lost or damaged. These words should be carefully stored in a safe place because anyone who finds them will be able to access your cryptocurrency.

Cryptocurrency Exchanges

Cryptocurrency exchanges have started offering custodial key storage for their users. However, you should use this service cautiously. Cryptocurrency exchanges are highly-prized targets for cybercriminals.

Additionally, if the cryptocurrency exchange goes out of business, there may be no guarantees that you'll get your cryptocurrency back. For example, Coinbase, a popular exchange, announced in its quarterly report to the Securities and Exchange Commission in May 2022 that:

...custodially held crypto assets may be considered to be the property of a bankruptcy estate, in the event of a bankruptcy, the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings and such customers could be treated as our general unsecured creditors.

General unsecured creditors are lower in priority on the list of creditors in a bankruptcy proceeding. Therefore, if there are not enough assets to liquidate and meet financial requirements for higher priority creditors, it is possible to lose your crypto assets if your custodial wallet company declares bankruptcy.

The best cryptocurrency key security measures involve removing your keys from your wallet, placing them in a form of cold storage, and securing them in a vault, safe, or deposit box. The more steps it takes for you to access your cryptocurrency, the harder it is for a criminal to access them. This way, you ensure you don't lose your keys. It also ensures that someone you have entrusted with your keys doesn't lose them or deny you access to them.

Which Cryptocurrency Wallet Is Best?

There are various wallets you can choose from with many options. It's best to read as many reviews as possible to find one that fits your needs while ensuring your keys are secure.

What Is the Safest Crypto Wallet?

The safest crypto wallet has no connection on its own or to a device with internet access. It also should not deny you access to your crypto because the custodian has financial issues. Many so-called "safe" wallets have wireless connection technology that determined cybercriminals can access.

Do I Need a Wallet for Cryptocurrency?

Yes. You cannot access your cryptocurrency without your private keys and an interface that accesses a blockchain. All wallets can store keys, but only hot wallets can access the blockchain, so it's important to keep your keys off your hot wallet until you need them.

Investing in cryptocurrencies and other Initial Coin Offerings ("ICOs") is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein.