Ways to store Bitcoins
The following is a list of different ways to store Bitcoins.
On your computer with the Bitcoin software
- Pro: Simple to understand, and the coins are easy to spend.
- Con: The Bitcoin software is not user friendly, takes a long time (hours to days) to download the block chain, and occasionally has issues that are difficult for non-advanced users to recover from.
- Con: Maximum vulnerability to malware and hackers. Your coins can be stolen if your computer is compromised.
If you store Bitcoins on a computer, make sure you take regular backups of the wallet.dat file. This is the file that contains your private keys. Loss of this file will result in the permanent loss of your balance.
On removable media
You can store Bitcoins on removable media, including USB flash drives and CD-R's. These can then be kept in drawers, safes, safety deposit boxes, etc.
Storing Bitcoins on removable media is done by saving a copy of the wallet.dat file, and then removing it from the computer. This should be done with the Bitcoin software completely shut down. Because removable media can fail, it is advisable to keep any significant balance on two different pieces of media (e.g. two different USB flash drives).
- Pro: When Bitcoins are saved on removable media and completely removed from online computers, and no one has a copy of the file, the risk that they can be stolen is eliminated.
- Pro: Relatively simple for majority of computer users.
- Con: Requires use of the Bitcoin client, with its associated drawbacks (hours/days to download block chain, etc.)
- Con: Not user friendly for average non-technical computer users. The location of the wallet.dat file is in a folder that is normally hidden to Windows users, and restoring it requires a command line option that is difficult for novices to figure out.
Important: If a wallet is restored from removable media and then is partially spent, it is important to take a new backup. This is because some of the unspent portion is sent to a newly generated "change" address, whose private key under some rare circumstances might be a newly generated one, not present in the original backup. If a new backup is not taken and the wallet.dat containing that new key is later lost, part or all of the unspent balance can be lost with it.
On a third party website
Bitcoins can be stored on exchanges and other websites that allow deposits and withdrawals of balances. Even if not designed for this, websites that allow withdrawals to any Bitcoin address can be used to make payments, because you can always do a withdrawal to somebody else's address, which is functionally identical to making a payment to that address yourself.
- Pro: Simple to understand and use.
- Pro: No software needed, no blockchain to download.
- Pro: Bitcoins can be accessed from mobile devices.
- Con: Coins can be stolen by the website operator with little to no effective recourse.
- Con: Coins can be stolen or irreversibly destroyed if the website operator gets hacked or fails to take appropriate precautions (such as regular backups)
- Con: Coins can be stolen if your account password is compromised (such as via keyloggers or "phishing" attacks).
In summary, third party websites are generally good for storing small amounts of bitcoins that you want to access quickly. But because of the multiple ways they can be stolen, they are not a good way to store significant balances you cannot afford to lose.
On a paper wallet
Bitcoins can be stored on paper wallets. A paper wallet is a sheet of paper upon which private keys and Bitcoin addresses have been printed. You give out the Bitcoin addresses and receive bitcoins. In order to spend the bitcoins, the private key must be imported into a Bitcoin client or entered into a website that accepts deposits via private keys.
You can create your own paper wallets with open-source software.
- Pro: Very secure. If a paper wallet is created securely, the bitcoins cannot be remotely stolen or hacked.
- Con: No easy way yet for novices or average computer users to import the keys. Users must manipulate their wallet file with pywallet or use a copy of the Bitcoin software with a special patch applied. No web sites are known to accept Bitcoin private keys yet.
On a bearer item
Bitcoins can be stored on bearer items, which include BitBills and physical bitcoins. Bearer items are functionally identical to paper wallets, their only difference being that the private key is embedded in some object that must be torn open in order to gain access to it.
- Pro: If manufactured with appropriate controls, they are completely immune to hackers and remote theft.
- Pro: They can be understood by people completely unfamiliar with the virtual currency or how it works, including non-technical people and senior citizens. In physical form, they function much like cash or gold.
- Pro: They are often appealing as collectibles.
- Con: They are not very portable. They have to be broken to spend the Bitcoins in any transaction that's not face-to-face.
- Con: They almost always cost a premium that exceeds their face value.
- Con: The manufacturer of the bearer item had access to the private key to produce the item, and therefore could steal the balance. The keys could also be stolen from the manufacturer if all copies other than the one placed in the item weren't properly destroyed. Ensure you trust or have recourse against the manufacturer.
- Con: Depending on their complexity, they could be counterfeited. Counterfeits would have zero Bitcoin value, or would be made with multiple copies of the same private key, all of which would appear to have value when checked online but only one of which could be spent.