Best ways to store bitcoin
You bought some bitcoin – congratulations! Now it’s time to think about how to keep your Bitcoin safe and handy for your needs. The best option for your bitcoin storage is directly related to what you are planning to do with your coins, so it’s important to approach this question strategically. In this article, we will break down different Bitcoin storage methods and explain their advantages and tradeoffs, from easy to the most complex solutions.
Centralized crypto exchange account
The most basic one for newbies and day traders – the fact that you use HodlHodl is already a sign that you’re not the part of that typical crowd, but hold on, we'll explain. Centralized exchanges are the easiest way for crypto neophytes to buy their first bitcoin – and the fastest way to sell.
What is a centralized exchange? Centralized exchanges (think Binance, HTX, Kraken, etc.) put your bitcoin in a so-called omnibus wallet where your funds will be mixed with other users’ coins. Once you send your bitcoin there, your exchange is in charge of it – basically, it will sell it for you or let you withdraw it when you request it.
The obvious upside is convenience: exchanges normally have multiple payment methods available, as well as multiple smart trading tools and order types, so it's a handy instrument for users who trade a lot.
The biggest downside – not your keys, not your bitcoin! While your coins are in the custody of an exchange, it’s up to the exchange whether to let you use it or not. And if your exchange gets hacked and the crypto gets stolen – your bitcoin might be gone with the rest of the loot. And of course, any centralized exchange at this point will require a KYC check to register and account – you’ll have to provide plenty of personal information like your address, banking info, and even biometric face data. All that data can be stolen if your exchange is compromised, too.
Software wallets
Software wallets on your phone or desktop are the easiest way to make sure no one but you is in charge of your coins. There are multi-coin wallets that allow you to store various cryptos and ones that support only bitcoin.
Keeping your bitcoin on your own device means the cryptographic keys to your money only exist on that device. This way, nobody else has access to your keys unless you share them – or share your seed phrase, which is a set of 12 or 24 words that wallets recognize as a representation for your keys when you’re recovering your wallet. And of course, that’s the biggest advantage of this method: you can use your crypto without a middleman.
However, this autonomy can also be a downside: if you lose your device and fail to make a backup, you lose access to your bitcoin and nobody can help you retrieve it. You must have heard the horror stories of people who forgot they had bitcoin on their old devices, threw those devices away and only later realized they lost millions of dollars in bitcoin!
There are hackers who might be able to recover your keys for a reward, but no guaranteed way to do it has been found so far – otherwise, everyone would be cracking each other’s software wallets open! Takeaway: power means responsibility – you need to develop a certain discipline and a set of security habits to keep your bitcoin secure on your device.
There is another thing to keep in mind: software wallets can be compromised. In 2023, users of Atomic Wallet lost up to $100 million altogether due to a hack, with trace leading to North Korean hackers.
Now, let’s take a look at some of the best software crypto wallets out there.
Mobile multi-coin wallets: Trust, Trustee, Exodus, Zengo, Aqua (only for BTC and USDT).
Mobile bitcoin-only wallets: BlueWallet, Muun, Blockstream Green, Electrum (only for Android).
Desktop bitcoin-only wallets: Bitcoin Core, Electrum, Blockstream Green, Sparrow.
Bitcoin-only wallets with mixer (coinjoin) features: Wasabi, JoinMarket (Windows only). Samourai wallet used to be one of the most popular anonymity wallets but the project got shut down after the U.S. authorities seized the website and convicted founders of operating an unlicensed money-transmitting business.
To find a wallet that fits your needs best, check this Bitcoin.org guide.
Hardware wallets
Hardware crypto wallets are a more sophisticated and expensive option for people who don’t feel safe keeping their crypto on the same device they use for email and messenger apps. What are hardware wallets? Hardware wallets are dedicated devices created exclusively for storing bitcoin keys. Looking like a USB stick or a tiny calculator, hardware wallets typically have minimalistic design, small screens and one or the other way of connecting to other electronic devices.
The main trade-off is the same as for software wallets: if you lose your device and your backup, you lose your bitcoin. But as long as you have them, nobody can touch your coins.
What are the differences between hardware and software wallets?
The key advantage compared to software wallets is that hardware wallets normally are not connected to the internet, so it’s impossible to compromise them with software exploits. A desktop or a phone can catch a virus from a shady website or app, but a hardware wallet is mostly (or always) offline. Plus, hardware wallets’ technical design is pretty basic, so it can’t run any kind of software other than the one it was designed for: signing bitcoin transactions.
Hardware crypto wallets have their own specific attack vectors, for example, someone can steal and physically meddle with the device. It’s also possible to imagine a supply chain attack in which someone physically compromises a batch of hardware wallets – or manufactures compromised devices by design, making it possible to steal from the future owners.
To date, there hasn’t been a known supply chain attack on the hardware wallets as such, however, in 2023, Ledger suffered a software supply chain breach when a threat actor compromised an employee and published malicious code that infected popular dApps and drained funds from users that connected to those dApps.
To use a hardware crypto wallet to spend your bitcoin, you need to temporarily connect it to your computer or phone using one or several of the available methods:
- usb port or USB cable,
- Bluetooth,
- microSD card,
- QR codes if a wallet has a camera,
- NFC (Near Field Communication) – the same technology that allows contactless payments via credit cards and phones.
Like software wallets, there are multi-coin and bitcoin-only options. Here are some popular ones:
Multi-coin hardware wallets: Ledger, Trezor, SecuX, BitBox, Tangem.
Bitcoin-only hardware wallets: Blockstream Jade, Coldcard.
Again, to find an option most fitting your needs, check the Bitcoin.org guide for hardware bitcoin wallets.
If you want to take a step further down this rabbit hole, check fire-proof metal solutions for seed phrase storage.
And if you want to go full hardcore open-source DIY mode, you can… make your hardware wallet yourself! For that, you would need to buy a cheap development board, for example, LilyGO T-Display. Then, you need to connect it to your desktop and flash it with open-source wallet software, for example, Blockstream Jade.
Check this guide by Freedom Labs if you’d like to try – the whole process requires about an hour of your time (a generous estimate) and a few dollars to spend on hardware. The process may be confusing at times if you don’t deal with computer hardware and open-source code on a regular basis, but it’s pretty fun exercise for anyone who is curious about true, die-hard sorts of self-custody.
Multi-signature solutions
First, let us admit: multisigs are not for beginners! How does multisig work? A multi-signature wallet is a whole setup that allows you to distribute control over your bitcoin between several devices – hardware wallets or phones/computers with software wallets on them – so that if one device is lost, stolen or compromised, you still can use your bitcoin.
This kind of storage is normally used for large amounts of bitcoin or for situations in which several people or entities jointly own and manage a bitcoin treasury. Typically, there are few schemes for multisigs: 2-of-2, 2-of-3, and 3-of-5.
To spend bitcoin in a multi-signature wallet , several wallets need to sign the transaction – only then it will be broadcasted to the network. For example, two people can agree to put bitcoin in a joint wallet and only spend it when they both agree. Or you can set up your own 2-of-3 multisig so that when you want to spend your bitcoin, you’ll need to sign the transactions with two out of three devices you own – for example, your phone, your desktop and your hardware wallet.
HodlHodl smart contracts, for example, rely on 2-of-3 multisigs: when users initiate a trade, a seller locks bitcoin into a multisig. The multisig needs two out of three signatures to release funds: one signature is controlled by the seller, one by the buyer, and the third one by HodlHodl, which can use it to resolve disputes.
For users who are willing to pay for the secure cold storage of their bitcoin, there are institutional solutions offered by companies like Casa, where you can configure your multisig in a way that keys to your joint bitcoin treasury are distributed between you, your family or business partners, and a third party guarantor.
Keeping your bitcoin safe requires consideration and responsibility – make your choices consciously and stay safe!