One of the biggest benefits of Bitcoin is security. To date no one has been ever ‘hacked’ Bitcoin, but this hasn’t prevented bitcoins from being stolen. With around 1 million bitcoins being reported as stolen so far, there seems to be a discrepancy between the security of bitcoin the protocol, and the security of bitcoin storage.
The main reason why people lose their bitcoins has to do with the difference between push and pull payment systems. People are generally not used to being resposible for the security of their money.
Credit cards operate as a pull payment system, where your personal details are available to anyone who obtains your credit card numbers and the ability to ‘pull’ money from your account, e.g. When you place an order online using your credit card, what happens is the merchant uses your details to ‘pull’ money from your account, they also obtain your personal details and the ability to take as much money as they desire. This system is not robust, it is estimated that over $190 billion in losses in the United States Annually from credit card fraud.
Bitcoin operates using a ‘push’ payment system, instead of a company ‘pulling’ funds from your account; you send or ‘push’ funds to the merchant.
This minor detail may seem trivial, but it changes the whole system of security, fraud and responsibility. With Bitcoin, when you make a payment there is no fraud, but similarly, there is no payment provider to offer you a refund when things goes bad. In Bitcoin, you act as your bank, so you have to act accordingly!
The benefit is a much cheaper, faster and more secure system. The negative, you are entirely responsible for your own security, if you lose, fail to securely store, or send your bitcoins to the wrong address you are the one that is entirely responsible, there are no charge-backs in Bitcoin.
Alarmingly a large number of people who own bitcoin are not aware of this. This misconception is responsible for most bitcoin losses.
There are two guidelines for storing bitcoins
- If you do not hold the private keys, someone else does. They (technically) hold and own your bitcoins. If you are using a wallet provider like blockchain, btc-e, coinjar, circle, etc. They are operating as your bank. Unsurprisingly due to the lack of security standards this method of storage has been victim to large losses.
- If you store your bitcoins on a computer that has ever been connected to the internet in any way shape or form, they are vulnerable to being stolen.
Accept these two points as facts and you are 95% of the way to securely storing your bitcoins and never being a victim of a hacking!
To store bitcoins securely there are convenient solutions
- Hardware wallets
- Paper wallets
The only secure way to store bitcoins is cold storage, private keys are stored in a physical medium that has never been online. This is a process which requires a lot of technical know-how to set up yourself (generating private keys securely can only be done with a computer which has NEVER been online and an Ubuntu bootable cd and a few procedural measures) but there are better, more convenient options that simplify this process.
The Trezor is one of the first convenient and secure ways to store bitcoin’s. Trezor operates as a small computer which has never been online, it connects to your computer and allows you to send and retrieve bitcoins from the device. It remains entirely separate from your PC and it’s internet connection. This is one of the best products available for storing bitcoin easily and securely, I highly recommended it.
Although the Trezor is a hardware cold storage wallet, it has a private key manifestation which comes in the form of a ‘24-word seed’ (24 random words which represent your private key) which must be kept very secure (The Trezor device acts as your bank account and the ‘24-word seed’ acts as your only way to identify ownership of your account). This ‘24-word seed’ is the only thing you need to ensure access your bitcoins, you can lose your Trezor device, but you will always be able to retrieve your bitcoins if you have this 24-word seed.
Paper wallets operate very similarly to a Trezor; they provide a similar level of security but don’t have a handy hardware device for easy withdrawal. Anyone can print a paper wallet; you can do it right now at bitaddress but they are not secure.
To create a paper wallet that is secure requires you to create one from a computer that has NEVER been online. Therefore, if you create a paper wallet from the computer you’re reading this on right now, there is a possibility that your computer has already been compromised from a hacker and they will have access to your private keys, this applies to ANY wallet created on a computer which has been online.
There are many guides on how to generate your own secure wallet, Here’s an example.
If your bitcoins are stored in a computer, or the wallet key-pairs were created on a computer which has been online prior to the keys being generated, they are susceptible to being stolen. The ONLY way to store bitcoins securely is to generate a wallet in a system which has never been online and store the private keys in physical form ONLY, then your only have to worry about physical theft!
If you don’t want to be a victim of bitcoin losses, there have been plenty of them, you have to assume responsibility for the security of your bitcoins, you have to act like a bank. If you do not have the majority of your bitcoins stored in cold storage (Like Trezor or paper wallets) with the private keys in a fire and waterproof safe, then you are liable to losses and theft of your bitcoins and will not receive compensation for your losses. You are your own back, so act accordingly!
How to store bitcoin securely
- Generate a wallet offline using a hardware device like a Trezor or generate your own paper wallet using a secure method.
- Do not make digital copies of your private keys, only store them physically.
- Buy a safe that is fire and water proof, put your private keys in that safe.
Congratulations, by following these three simple steps you have securely stored your bitcoins and will not be susceptible to bitcoin theifs! This is crucially important for people to do as 1 in every 16-17 bitcoins belong to someone who stole them.