Have you ever accidentally drowned your smartphone in the washing machine? Most of us have been there. (It wasn't just us, right?)
If you have ever lost or destroyed a smartphone, you know the feeling of panic. It's not fun to make a mistake with tech that holds so much of your personal life in data form. If you've been particularly unlucky, you know how painful it can be to lose your data to a massive hack. In either case, protecting data is becoming increasingly important as our digital lives become a greater part of our real lives.
Bitcoin is digital cash – so it's essentially just data, too. You have to keep it safe. So how do you protect bitcoin? How do you pick a bitcoin storage solution that will keep your bitcoin safe, while still doing everything bitcoin does best?
To help you sort through your own bitcoin security options, we've broken down the pros and cons of today's two most popular ways to store bitcoin: bitcoin exchanges and bitcoin wallets.
Advantages of Bitcoin Exchanges
If you don’t trust yourself to keep track of your bitcoin, a bitcoin exchange is a good option. You can use an exchange to buy and sell bitcoin, and it will hold your bitcoin balance like a bank holds your dollars. Some exchanges and account services have worked hard to be secure and transparent.
Disadvantages of Bitcoin Exchanges
There's one big disadvantage to hosting your bitcoin on an exchange or account service: you have to trust them to protect your bitcoin’s private keys (which are like the keys to your gold vault) against hackers and data disasters. Bitcoin exchanges continue to improve their security, but your bitcoin is in their hands.
In case of loss, many of these "bitcoin banks" can only offer partial insurance for your bitcoin. The first major bitcoin exchange Mt Gox lost over 650,000 bitcoin in 2014, and the Blockchain Graveyard documents the significant amount of Bitcoin other major exchanges and companies have lost over the years.
Also, because exchanges batch payments instead of broadcasting them immediately, your bitcoin transactions can often take longer than usual. This can lead to big payment problems if you want to buy something from a business.
Advantages of Bitcoin Wallets
Because true bitcoin software wallets work directly with the open Bitcoin network, they are quicker, easier, and more reliable for bitcoin transactions. These wallets are an excellent option for payments. Any bitcoin you plan to spend should always be in a true bitcoin software wallet.
Bitcoin wallets are also great for safe bitcoin storage. Unlike exchanges, bitcoin wallets give you full and exclusive ownership of your own bitcoin funds. You and only you have your bitcoin private key(s).
Secure Storage on Bitcoin Wallets
If you trust yourself to securely store your bitcoin, take precautions. Common sense is king. Assume things will go wrong, your phone will break and that you’ll get a concussion and forget your wallet backup phrase. So, write your wallet backup phrase down and keep it secret.
Not everyone will want to invest a large amount of time and money to secure a small amount of bitcoin. But if you have a lot of bitcoin, spend the time and money to keep it safe. For more advanced security options, look into hardware and paper wallets.
Even for the bitcoin you keep on hand, make use of every security feature bitcoin wallets offer. The BitPay wallet lets you set up multisignature wallets that require signatures from multiple devices or people before sending bitcoin. If someone hacks one of the smartphones with your private key, the other cosigners will be able to make sure the bitcoin remains safe and secure. The BitPay wallet also provides an optional PIN to access the app and a spending password to prevent unauthorized transactions.
Disadvantages of Bitcoin Wallets
With true bitcoin wallets, you will be completely responsible for what happens to your funds. True bitcoin wallet providers – like BitPay – don't own your private keys. We'll never see them. The software wallet randomly generates them for you. This is also true for hardware and paper wallets.
So if you lose your BitPay or Copay wallet backup phrase, we have no way to find it or recover your funds for you. That's by design. Think about it: if we had your backup phrase (which generates your private key), you wouldn’t truly own your bitcoin.
So, What Should You Do?
Be honest with yourself, do your research, and make the bitcoin storage decision that is best for you. Weigh the pros and cons of your choice against your own values around risk, security, privacy, and control.