The most important benefit of Bitcoin (and other cryptocurrencies) is the fact that you and only you have control over them. No one, like a bank or government, for example, can take them from you.
But with great power comes great responsibility. Because only you control your funds, if thing go south, there’s no one to rely upon and no one to help you. If you mess things up, you can only blame yourself.
Therefore, keeping your coins safe is the highest priority of any cryptocurrency owner. Here is the list of main alternatives where to keep one’s coins, from the worst to the best option.
Level of security: Low
Recommended storage value: $0
Recommended wallets: not recommended
Usability: You don’t have full control over your funds
99% of all cryptocurrency hacks happened at exchanges, so it’s by far the most dangerous place to keep your coins. Even transferring a large amount of coins for a short period of time may be risky, because an exchange may have covered up that they have been hacked. Just remember what happened with Mt. Gox. Not to mention that you usually have to go through painful KYC process and the exchange may freeze your funds in case they don’t like something.
Level of security: Medium
Recommended storage value: 1k$-10k$
Recommended wallets: BlockChain
Usability: Best for everyday use for both PC and mobile
Online wallets have better security than exchanges, since most of them keep customers coins separately from each other and thus each account has to be hacker individually. However, since they are accessible online anyone can try to hack them. There is a huge difference between online wallets. Some may offer decent security with two-phase-authentication, while others are as risky as exchanges.
Level of security: High
Recommended storage value: 10k$-100k$
Recommended wallets: Bitcoin Core
Usability: For more advanced users
Desktop wallets have generally high security and the only real risk is your computer being hacker remotely or a trojan virus stealing your information. Having your desktop wallet on an offline computer will make it almost unhackable and vulnerable only to physical theft.
Hardware wallets are very safe. Realistically there’s no chance of someone hacking them. However, there’s one weakness: the recovery seed. 100% of all theft from hardware wallets happen because the recovery seed gets stolen. It’s advised to keep the recovery seed in your home safe or at security deposit box in the bank.
Level of security: Highest possible
Recommended storage value: +1M$
Recommended wallets: bitaddress.org
Usability: Only for long term holding
An old school method of keeping your Bitcoins safe that still works. With a paper wallet you simply write down the private key of your Bitcoin wallet, which has the strongest possible security. The only risk of this is that someone will steal the paper where you wrote down your private key, therefore it should be kept at your home safe or at security deposit box in the bank.
BONUS: How to keep your recovery seed and paper wallet safe?
- Make at least 2 copies and keep them in a different place (home and bank), so that if one copy gets destroyed or stolen you will still have the other one.
- Get a fireproof safe. Fire is by far most probable cause of the destruction of your paper wallet than theft.
- Be aware that the bank deposit box is not 100% secured. In some cases, for example with a court order, the bank is obligated to give the content of your deposit box to authorities. Therefore, it’s safer to keep them as an encrypted file, rather than piece of paper.
- When encrypting your recovery seed or paper wallet disconnect your PC from the Internet (or use offline PC) and only after that create the file. Then move the file to a USB stick and erase it from your PC (and from the recycle bin). You may also use trusted software to erase any trace of the file from your PC before connecting back to the Internet.
And most important! Don’t tell anyone how much money you have and where you keep your Bitcoins. Don’t become a target.