How Do I Securely Store Bitcoin?

After buying bitcoin or any other cryptocurrency, the crucial next step is figuring out how to protect your crypto funds. This is particularly important, since Bitcoin addresses are essentially anonymous, and transactions generally cannot be reversed. This means that if your bitcoin is stolen, lost, or accidentally transferred, it will be extremely difficult if not impossible to recover.

Luckily, there are many options for securely storing bitcoin, ranging from regulated exchanges to your smartphone, to a piece of paper. Before you choose a bitcoin storage method, it’s important to clearly understand the pros and cons of each approach, as well as what “storing” a virtual currency actually entails.

What Exactly is Bitcoin Storage?

Bitcoin and other cryptocurrencies are digital assets that are created and stored electronically on a blockchain network. Since cryptocurrencies solely exist as virtual data, this means they are not physically stored anywhere. Rather, every crypto storage solution stores the very specific information that is needed to access and transfer cryptocurrencies that are stored on a blockchain.

As a result, while the term “cryptocurrency wallet” is typically used to describe the “place” that you store your bitcoin and other crypto assets, in reality a crypto wallet is simply a system designed to safeguard certain information that grants access to your intangible digital assets, and ensures that only authorized users can access these funds. You can learn more about how crypto wallets work here.

Bitcoin Storage Options

Although there are many bitcoin storage options, for the most part they fall into two main categories: third-party custodians and local storage. Wallets can also be bifurcated into hot wallets, which are connected to the internet and thus easier to access, and cold wallets, which are not connected to the internet and are held offline. 

Bitcoin Storage Using a Third-Party Custodian

Entrusting a third-party custodian with your bitcoin is similar to holding your cash, stocks, or other financial assets at a licensed financial institution such as a bank or brokerage. Once a customer entrusts a custodian with their assets, the custodian is responsible for holding and managing those funds in accordance with the customer’s instructions. Many custody solution providers, such as cryptocurrency exchanges, also provide other functions, such as cryptocurrency trading, crypto staking, and exchanging bitcoin for fiat currencies (and vice versa).

In general, third-party solutions are best suited to individual investors who do not want to be solely responsible for safeguarding their digital assets, as well as institutions such as asset managers, hedge funds, and/or high-net-worth individuals who seek, or require, bank-level protection for crypto security and safety. Reputable third party custodians detail their operational scope in service level agreements (SLAs), which dictate the terms and conditions regarding storing, accessing, and moving customer funds.

Furthermore, some crypto custodians also offer multi-signature wallet capabilities, in which multiple signatures are needed in order to facilitate bitcoin transactions and move funds. This model can provide an extra layer of security or be designed to accommodate complex enterprise-level fund management/governance requirements.

Here are some of the key qualities to consider when choosing a financial institution.

• Safety & Security: Most major crypto custodians support both institutional and individual investors, meaning retail consumers can benefit from similar protections that corporate customers enjoy. However, not all crypto custody solutions are made equal, and when evaluating a crypto custody provider it’s important to understand the safety mechanisms it deploys from both a technical and organizational perspective and the custodian’s security track record. Before choosing a custodian, it is crucial to have a full understanding of its operational success and responsiveness to any past security or technical incidents. Third party audits of crypto custody providers are a helpful resource to gaining this knowledge.

• Regulatory Compliance: Since cryptocurrencies are a relatively recent innovation, bitcoin custodianship regulations are constantly evolving and inconsistent across geographical regions. As a result, there is a vast spectrum of custodians with varying degrees of regulatory compliance and oversight, and it’s important that you select a credible organization that is licensed to operate in your area.

• Usability: Every crypto custodian has different user terms and conditions, fee structures, and transaction workflows. Before sending your funds to any third-party service provider you should be confident that the custodian’s user requirements are aligned with your needs. Factors such as minimal and maximal withdrawal amounts, fund settlement times, and the ability to provide useful documentation such as tax reports are all important differentiators to consider.

Self-Storage Options

The main alternative to storing your bitcoin at a financial institution is storing it yourself. This option is particularly popular for individuals who want full control of their own cryptocurrency. Within self-custody, there are three main types of crypto wallets: software wallets, hardware wallets, and paper wallets.

• Bitcoin Software Wallets: A software wallet is a web-based, desktop, or mobile crypto wallet. Web-based wallets can be accessed via a browser from any phone or computer. While these wallets are convenient and don’t require you to download any software, they are generally considered the least secure form of crypto wallet, given their continuous connection to the internet. Desktop and mobile wallets are based on software that is downloaded to your phone or computer, and are generally more secure than web-hosted wallets, particularly when your device is not connected to the internet.

• Bitcoin Hardware Wallets: Crypto hardware wallets are specialized devices that are offline when not transacting. In order to access the funds within a hardware wallet, users need to physically connect the device to the internet and initiate the cryptocurrency transaction in-device, making it impossible to hack remotely. Hardware wallets are the most secure, but least convenient type of crypto wallet, which makes them a good choice for investors who have a high(er) degree of technological savvy and self-trust.

• Bitcoin Paper Wallets: A paper wallet is an analog crypto wallet that is created using a public and private key pair created from a key generator program and printed onto a piece of paper as two strings of characters and two QR codes. While paper wallets are technically “unhackable,” due to the rudimentary nature of paper as a technology, they can be easily misplaced or stolen. Many believe that these wallets are thus generally unsafe, time-consuming, and not worth the risk.

While overseeing your own storage may sound appealing, there are inherent risks to this option, since there is no third party such as a bank or cryptocurrency exchange that can intervene if you lose access to your private key. As a result, the risks involved in crypto self-storage are in some ways similar to the risks you incur when keeping fiat cash in your physical wallet, or hidden in some secret location only known to you. Since there is no third-party involved in the management and storage of these funds, your funds may be lost forever if your wallet is stolen or lost, you forget where you hid your money, or you are unfortunately incapacitated or pass away unexpectedly.

In sum, crypto self-storage is arguably the most secure and independent way to safeguard your crypto assets — but only if you are willing to take on a great deal of responsibility. Investors who opt for this storage option will need to regularly update their relevant software and find ways to mitigate the risk of human error and theft without outside support. Furthermore, these investors should also have a contingency plan for how family members or intended beneficiaries would recover their crypto funds in emergency situations.

Choosing the Right Bitcoin Storage Solution

As the cryptocurrency industry continues to grow, there will likely be an increasing number of custody solutions that cater to a wide range of user requirements. If you are comfortable storing your assets in a financial institution like a bank, then a regulated financial institution may be the best fit for storing your crypto. And, if you prefer to have complete control over your assets without relying on anyone else — and don’t mind shouldering the added personal responsibility and risk that comes with it — then you may prefer a self-storage wallet.

However, bitcoin custody doesn’t need to be a binary choice and investors are free to distribute their crypto assets however they like. For instance, self-storage wallets could be used to keep small amounts of bitcoin handy for trading and everyday use, and third-party custodians could be entrusted to safeguard larger amounts of crypto or handle digital asset inheritance.

Furthermore, there are an increasing number of partial custody solutions that combine the benefits of third-party and self-storage custody. This type of solution offers self-managed wallets that provide some level of third-party assistance and related institutional controls or protections. This option may align with the needs of certain retail or high-net-worth investors who want to control their holdings, but also desire some level of assurance and institutional protections shy of full third-party management.

In short, while third-party custody and self-storage represent the two main pillars of crypto custody, you have a vast range of bitcoin storage options to choose from and can distribute your assets in accordance with your evolving needs. Blockchain technology was created in order to empower people to take control of their own lives without the need for third-party authorities or intermediaries, but the advantages of blockchain do not necessarily invalidate the need for trusted institutions across all use cases and circumstances. As a result, it is ultimately up to you to decide the optimal balance of self-sovereignty and third-party management for your crypto.