Keeping Your Bitcoins Safe – Bitcoin Wallets

Keeping Your Bitcoins Safe – Bitcoin Wallets

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Bitcoins are an extremely convenient way to save and spend money. They have a lot in common with credit cards, but in a lot of ways, they are actually more like cash — or gold. With credit cards, if someone steals your wallet, then you call the credit card company and cancel the card. If the card gets used before it’s cancelled, you can get the charges reversed. The cash in your wallet, though, is gone. Unless the robber, for some reason, decides to give the money back to you, you just have no recourse.

Bitcoins are digital like credit cards, but also like cash because if they are stolen, they are gone. And just like with cash, or your credit cards, knowing how to keep them safe is an important part of being a Bitcoin user.

If you research Bitcoin thefts, you’ll see that there is a lot of talk about how difficult it is to keep bitcoins safe. For example, some people will say that you need to have a special, separate computer that has never been hooked up to the internet to store your Bitcoin keys. Good advice, to an extent. Also, not very practical for most people. The fact of the matter is that you should be aware of how keep your assets safe, but usually you don’t need to worry about taking the ultra-intensive steps that large or institutional investors need. Just like with cash, there are people who are interested in stealing your assets, but the people who put in the most work are not going to target the little player, but go after the big investors, businesses, or exchanges.

Before I get into some of the challenges of securing bitcoins, it is also important to mention that we are still relatively early in the development of the Bitcoin economy. In just a couple of years, Bitcoin has become easier and more secure. In the next few, you can expect that developments will bring it to level where most people will be able to earn, keep, and spend them without too much worry. There will always be thefts, but that is no different than with credit cards or cash.

The basics:

The bitcoins themselves are simply code in the blockchain. They are never on your computer, thumb drive, or paper wallet. What you have is the private key, a string of letters and numbers that you can use to unlock access to the bitcoins and transfer them to someone else. Security is all about keeping that key safe, no matter how you a store it. As with any asset, security needs to balanced by convenience. Choose a level of security that is right for the amount of bitcoins you hold and the use that you want to put them too.

Web Based Wallets

Most people begin using bitcoin by signing up with a web wallet. These tend to be convenient, but less secure. The advantage of online wallets is that you don’t need to have any software on your computer, you simply log into your wallet from any computer or mobile device. This makes online wallets great for using bitcoins to buy a beer at your local bar (after you get them to start accepting Bitcoin). The disadvantage is that you don’t really have control of the private key — the online-wallet service does.

The risks of online-wallet services include:

  • Your login details could be discovered.
  • The wallet service itself could be hacked. It’s a bigger target than just you.
  • The wallet service could be frozen by regulators.
  • The wallet service could just disappear.

The best way to use these services is to keep a small amount of bitcoins on them to use when shopping, but keep larger amounts on computer-based wallets or paper wallets, which I’ll describe below.

Basic security tips:

  • Whenever you visit the site for your wallet, check the URL in your address bar. If there is anything funny about it, don’t enter your information. Phishing and fake websites are an old scam and not at all new to Bitcoin.
  • Use a long password that uses both upper and lower-case letters, numbers, and symbols. There are lots of reports about just how weak most people’s passwords are. Then, make sure you don’t forget it.
  • While you’re at it, use a different user name than you’re used to using. This will make it more difficult for hackers to guess your details.
  • Many of these services use 2-factor authentication with Authy or Google Authenticator. With this set up, in addition to your user name and password, you will be issued a special, short-term code that you will need to put in before you can access your account. You get the code by SMS, email, or through an app on your phone. This will make hacking your account from your side much harder and is highly recommended for any site that has it set up, not just Bitcoin.
  • Only keep limited funds on these types of wallets.

Here are some of the more prominent online-wallet services:

BitcoinWarrior.net

Coinbase

For people in the US, one of the best ways to buy bitcoins is Coinbase. They also host a wallet for anyone using their service.Click here to sign up with Coinbase and get $5 free in Bitcoin.
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Blockchain

One of the best and most used online wallets. Blockchain.info provides many services for the Bitcoin community and is a trusted name.
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StrongCoin

This is a ‘hybrid’ wallet service that may be more secure than purely online wallets. The difference is that StrongCoin does not store your private keys, but instead stores them in the browser of computer. If StrongCoin were to disappear, you would still be able to get your coins. They also do offsite, encrypted backups of your wallets so you can retrieve them if something happens to your computer.

 

Computer Based Wallets

Many people choose to keep the bulk of their bitcoins in wallets on their computers. This is safer than web wallets in that you always have control of your private keys. But just like a safe in your house, they are not 100% safe, and there are things you can do to make them more secure.

Computer Based Wallets Security Tips:

  • Just like for the web wallets, make sure that your password is as difficult to guess as possible. Also, be very sure that you don’t forget it! There are many stories from the early bitcoiners of fortunes they can’t get to because they forgot their password. The good news is that if you give that wallet to a professional, they frequently enough can crack the password for a finders fee.
  • Back up your wallet and keep the back up on a thumb drive. It’s a good idea to move the back up from whatever the default location is for the wallet. Hackers know that default and can look for your backup there. One big exchange had its wallets hacked despite having lots of security because they left a backup unencrypted with a simple password on one of their servers. Put it on a thumb drive and put that in a regular safe. Now, no one can get to it but you.
  • Encrypt your backup. Most of the wallet programs will have this as an option and it’s a good idea to take advantage of it.
  • Just like with all of your financial data, keep it safe by keeping your computer and all its programs updated. A lot of those updates from Adobe have to do with security – make sure you don’t leave a back door open on your computer. Also, have a firewall, antivirus program, anti spyware program, anti malware program. These are all things you should have anyway, so why not?
  • Never show anyone your private keys, either as a string of numbers or letters or as a QR code. Most people have heard the story of a reporter who showed a QR code on the news for a few seconds and had his bitcoins stolen. Fortunately for him, the thief was actually a good samaritan who acted before someone with less-than-noble intentions had the chance. The bitcoins eventually were donated to charity. All turned out well there, but it demonstrates the need to keep this data as safe as you would your credit card number and security code.

Here are some of the more prominent online-wallet services:

Note: I considered making these downloadable here, but security is always a concern with this type of software. It is better to get it directly from the provider. If you click through to their sites, please check the URL and confirm that you are at the right site.

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Electrum

This is a lightweight, relatively easy to use wallet. It is one of the most used wallets and recommended. Some of its key features include the ability to set a password that will be required before you send bitcoins and a ‘seed’ option which will produce a list of 16 words. If something happens to your computer, you can use that seed to recover your wallet. This useful feature means that you don’t have to back up your wallet.
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Multibit

Another simple, lightweight wallet. This wallet can be switched between many different languages. It will encrypt and backup your keys to your computer or to a removable drive for greater security.
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Bitcoin Qt

This is the original wallet. At its core is the heart of Bitcoin, a program to check transactions on the network and confirm that they are valid. By running this wallet, you not only get a fully functional wallet, but also help support the whole Bitcoin system. The downside? This wallet will download the entire blockchain – every transaction from when the first Bitcoin was mined to the present – and store it on your computer. This is currently more than 100GB and getting bigger every day. It can take Bitcoin Qt more than a day to sync the entire blockchain and it won’t be useable until it does.
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Armory

This wallet is the most secure of the bunch, but also a bit more difficult to use. First, Armory runs on top of Bitcoin Qt, which means you have to download and sync that program first and keep it up to date. For that trouble you get a very versatile and secure wallet. You can create a seed to recover a lost wallet (here they call it a root), make paper wallets by clicking box, create watch only addresses so hackers can’t guess your keys by watching your activity, use it on an offline computer to store your bitcoins extra safely, and sign messages on the blockchain to prove that you are the sender of that message.

 

Offline Wallets

When reading about Bitcoin, you will sometimes see people talking about physical bitcoins. It’s important to remember that there is no such thing. Bitcoins are simply notations made in the public ledger, the blockchain. Who owns them is simply a matter of who has the private keys that allows that person to transfer those bitcoins to someone else. If that key is stolen or lost, the owner is out of luck, there will be no way to recover those bitcoins. What people call physical bitcoins are little more than fancy ways to store the private keys that control the bitcoins on the blockchain. Why go to the trouble of making physical bitcoins? Because by keeping the private keys off of computers, you are keeping the safe from being hacked. That isn’t to say that they still couldn’t be stolen – as that reporter who showed off his private keys on national television proved, but that it is much harder to hack them. Before venturing into paper wallets, make sure you read up on them and know how to use them. Armory makes it fairly straight forward to both create and retrieve paper wallets. There are also a number of websites that will help you make them. It’s recommended that you take the security of paper wallets very seriously. People tend to put more of their savings on these, and they can keep adding to them safely with the public key as long as they never use the private key. This means that you may end up with a paper wallet with a lot of money on it. In that case, if you were careless in creating it, you assets could be at risk.

Tips for paper wallets:

  • Try sending .0001 bitcoins to and then getting them off a paper wallet before committing any real funds to a paper wallet.
  • Once you have used a paper wallet for any transaction, no matter how small, move the rest of the bitcoins to a fresh wallet. Once you have broken the seal and used a paper wallet, it might be possible for someone to hack the private key.
  • Disconnect your computer from the internet and make sure it is clean of any viruses and malware before making a paper wallet. If you use an online service, they will take you through the process up to a certain point and then usually prompt you to take your computer offline before generating the wallets. This will ensure that no hacker is mirroring your computer to steal your keys.
  • Many people do put a lot of money on one wallet, but there is no real need to do so. Create a lot of wallets and put just a few bitcoins on each. This will make it harder and less profitable for any hacker to try to crack them.
  • Once you have paper wallets, keep them safe and make sure that no one will be able to see the private keys. It is possible to purchase hologram seals to put over the private keys, but simply locking them up should do the trick.
  • Don’t lose them!

Again, when reading over this list of warnings, it’s easy to think that your bitcoins are likely to get hacked. But it’s no different than visiting the downtown of any large city. You are going to take precautions to make sure you are safe, even though the likelihood is that nothing is going to happen to you. The same is true here. The likelihood is that no hacker will know about or care about your small savings. But if you make yourself a target, …

Here are some websites that will help you make paper wallets:

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