This article focuses on different types of Bitcoin storage along with an introduction of a private key and public key.
How to store bitcoins?
Bitcoin is a digital currency widely used for investment purpose or as a medium of exchange. Despite the popularity, its storage is very challenging. In order to access Bitcoin for further storage, or for sending and receiving, a digital wallet is required. As bitcoin is equivalent to cash, Bitcoin wallet can be compared with the physical wallet.
Understanding Bitcoin wallets
A Bitcoin wallet is a secure wallet for storage of Bitcoins. It is a collection of Elliptic Curve Digital Signature Algorithm (ECDSA) key pairs which are adopted by Bitcoin to ensure its security. This key pair consists of a public key and a private key which encrypts data. Since no any central parties control bitcoin, the wallet stores the information of public and private key pairs which is used for receiving, sending and storing bitcoins.
Instead of storing Bitcoins literally, wallet stores secured information that is generally used to access the bitcoin addresses and carry out transactions. Bitcoin wallet does not store the “coins” rather, it stores the transaction information.
Bitcoin wallet provides the ownership of the bitcoin balance to an individual. A user needs to sign the transaction with the private key of the address containing the coins for initiating any transaction. In case of loss of private key, there is no way to reclaim them. So, it is very important to have a secure private key.
Public and Private Key:
Cryptocurrency wallet consists of two basic elements: a private key and a public key.
There exists a mathematical relationship between public and private keys through which the transactions are verified. It is almost impossible to reverse the engineering of both the keys.
Public key stores the address which is used for receiving the bitcoins. Likewise, a private key is used to send/spend the bitcoins.
A private key is randomly generated 32-byte number. It is highly encrypted code base which is impossible to reverse engineer. It is analogous to a password. It helps in creating the digital signature for verifying the identification of the person involved in the transaction. As private keys give access to spend the Bitcoins, so it is very important to secure these keys.
Public key is derived from the private key. These keys can be shared with other people on the network. A public key is generally used to receive the bitcoins. The bitcoin wallet is the hashed version of public keys.
Bitcoin storage can conceptually be divided into hot and cold storage.
Cold storage wallet is the wallet solutions for those not connected to the internet. It
generates and stores private keys offline. In this case of wallets, the payments are received online with a watch-only wallet. Here the unsigned transactions are generated online and transferred offline for signing. Then this signed transaction that needs to be broadcast should be transferred online.
This wallet provides greater protection against online threats including virus and hackers. Some of the methods of cold storage include USB drive or any other media, paper wallet, hardware wallets.
It is online and is readily available storage. It is easier to spend but is maximally vulnerable to malware or hackers. It may be best applicable to small amounts and day-to-day spending not for the whole amount. Some methods of hot wallets are: mobile wallet, web wallet.
Types of Bitcoin Wallet:
There are several types of wallet including online, offline, mobile, hardware, desktop, and paper. Although cryptocurrency wallets are built to be secure however, their security differs from each wallet. Bitcoins can be stored in :
A Hardware Wallet:
Hardware wallets are specially designed wallets that store the private keys in a secured physical device. It is also considered as one of the safest ways for storing the cryptocurrencies since no any verified record of hacks from a hardware wallet exists.
Hardware wallets provide easy storage and transfer of Bitcoins, as most of its software is open source. This device is immune to computer viruses. Moreover, in case of any malware, the keys remain safe which makes it possible to be used in any computer. Most of the hardware wallet even comes with a seed backup in case if the device is lost or stolen.
Some of the devices have screens adding an extra layer of security. Nevertheless, it is very important to find the trustworthy manufacturer before investing in an authentic device. The only disadvantage of this storage is the need to have it along with you every time before sending the cryptocurrencies.
For example: Trezor, Ledger Nano S, KeepKey
An Online Wallet:
Web wallets is an online wallet that generates and stores the user’s keys online. Actually, a real or virtual server holds the data which is constantly online and requires someone to control them.
Web wallets provide quicker BTC trades and regarded as the best option for small value storage and transactions. Although it is cheaper and easier to get started, it is one of the least secure options for storing the Bitcoins. It can be made partially secured if multi-factor authentication options are enabled.
There are a different service provider that offer different features to link with mobile or desktop. The web wallet is used by the service providers and exchange where a user needs to deposit all their coins into the exchange wallet before using the services. Also, to initiate a transaction, the user needs to submit a Bitcoin withdrawal request for logging in every time creating a dependency on the service provider.
For example Green Address, blockchain.info, Coinbase
A Desktop Wallet:
A desktop wallet is accessed via the private computer. It is basically a software that can be downloaded and installed on a computer which stores your private keys in the hard drive. Desktop wallet gives access to the pre-existing Bitcoin addresses or lets user generate the new one. These wallets doesn't let you depend on the third party services.
Nonetheless, it is still subjected to hacking, if this machine gets infected by the security malware specially designed to root out the keys and steal Bitcoin. Your Bitcoins are safe as long as your computer is clean and safe. Similarly, the need of having a computer along for making any transaction possible is another drawback of this type of wallet.
Examples: Electrum, Exodus, Bitcoin Core
A Mobile Wallet:
Mobile wallet runs as an app on smartphones. It resembles a desktop wallet in terms of functionality and operation. This wallet is an essential tool for those involved in daily trading of Bitcoin where the keys are stored within the mobile device allowing easy and direct payment options.
Despite being a highly convenient solution for storage, Mobile wallets are prone to hacker attacks. Anyone that gains the access to this mobile device could find the keys leading to lose control of the wallets. There are a variety of Bitcoin wallets available for iOS and Android.
For example: Electrum, Mycelium, Bitcoin Wallet, Hive Android, and Mycelium Bitcoin
A Paper Wallet:
A paper wallet is a simple yet most secure wallet available. It is a way of storing a private or public key on a piece of paper for sending and receiving Bitcoin.
Paper wallets let the user generate a public key and private key online using any website or even offline for greater security. These generated keys can either be handwritten, printed or stored as a QR code. Generally, the keys are printed in the QR code and scanned for making transactions.
Paper wallets involve the storage of these generated keys in a physical location. That’s why it is immune to hacker attack, malware or any kinds of digital theft. The only way to steal using this method is by accessing the paper. As paper can easily be misplaced or lost, it is generally advised to create multiple copies of a document.
A Multi-Signature Wallet:
There has been a lot of cases when people have lost a lot of Bitcoin after having lost the access of keys.Multi-signature wallets are the safest and secure way to store Bitcoins.
Bitcoin is lost if we lose the access to private keys and if we look at the past, there have been numerous incidents related to this. The solution for this problem was brought in the form of multi-signature wallets where it requires multiple keys instead of a single key for moving the bitcoins. It can be analogously compared with a joint account in the bank.
These wallets are based on multisig technology. This type of wallet required M-of-N signatures. For instance, if a user configures their multisig wallet for 3-of-5 authorized signature then at least 3 out of 5 authorization is required in order to validate the transaction.
It is typically easier to implement so it is way cheaper than the hardware wallets. Using this type of wallet also lets the user access their funds if they lose 1 or two private keys. Also, it is highly applicable to the startups where the power is divided among different personal.
For example BitGo, CoPay
Summing it up, a Bitcoin wallet is a must, in order to access them. Among various ways for storing Bitcoins, no matter what you choose, it is most important to secure the private keys. Historically, many people have lost a lot of cryptocurrencies, but if handled carefully, the risk can be minimized. After all, if those are lost or stolen, there’s nothing that can be done to get them back.