The information in this article is mostly focused on bitcoin, as it is the most well-known cryptocurrency asset. However, securing other cryptocurrencies is very similar.
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.
Before securing your funds, 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 funds?
Device-based software wallets are 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. However, if you lose your private key, you will 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.
One of the most powerful ways to prevent theft is to store your funds in a multisignature wallet. This kind of wallet requires at least 2 different keys 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. Exchanges usually work with multiple cryptocurrencies.
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. For example, instead of broadcasting transactions to the Bitcoin network in real time, exchanges usually send transactions once every few hours. They may also 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.
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, disconnected from the internet.
Hardware Wallets are like that hard drive. They store your private key offline, so online hackers never have a chance to steal it.