Where to store your bitcoin

Last updated: March 2024 / 833933 o'block

What is a Bitcoin wallet?

A Bitcoin wallet is a software/app or hardware device that helps you receive, keep, and spend bitcoin. It keeps your private keys and public addresses and serves as an interface between you and the Bitcoin network.

The right choice of storage options should allow you to handle your bitcoin securely but in a reasonably practical and easy way. Where accessibility is key, you may choose an exchange or a software wallet; and for bigger amounts that you won't be moving often and need to keep very secure, you may go with a hardware wallet.

Main aspects of wallets to help you chose the right wallet for your needs:

Custodial vs. self-custodial(non-custodial)

A custodial wallet involves a trusted custodian managing your private keys for you. Self-custody means you own your private keys.

If you decide to have a custodian take care of your private keys, keep in mind that they can spend, steal or fumble your bitcoin, and to keep it safe, you should choose a party you can trust or else manage the risk (for instance, not keep too much funds with them).

Self-custody means your bitcoin is safer, but it requires you understand how Bitcoin works and how to keep your seed secure at all times.

Hot vs. cold wallets

A hot/software/mobile/app wallet keeps your bitcoin on a device that's often connected to the Internet and can be accessed with ease, putting it at more risk from computer malware. A cold wallet keeps bitcoin on a device that is always offline, and so is more secure.

Closed vs. open source wallets

With a closed source wallet, the code is not publicly available and auditable by third parties. These wallets should be considered inherently less secure than open source wallets as you are trusting the vendor they don't have any exploits or backdoors.

Open source wallets publish the source code to be independently audited, peer-reviewed, and maintained even if the original developer stops work on it. They have better transparency and security. Even if you are not a developer, you have the added layer of security from anyone being able to review the code and raise alarm if they notice anything wrong with the wallet.

In addition, when choosing an app/software that you'll run on your own device, choose one that can run on your operating system (Android, iPhone, Windows, etc.).

Where you can store your bitcoin

Centralised exchanges

If you buy your bitcoin on an exchange, you can just leave it right in the exchange app.

Note: with this setup, it's not you who truly has the bitcoin. The exchange has on-chain bitcoin and the keys to it; you have a number in their database promising that if you decide to move or spend the bitcoin, they will give it to you. You are effectively giving up some of the biggest advantages of the Bitcoin network (self-custody and decentralisation) and only using "bitcoin" within a centralised entity.

Pros: Convenient - little to no technical expertise or setup required.

Cons:
- No control over your private keys.
- Risk of hacks and exchange failures. Examples of failed exchanges: Mt. Gox, QuadrigaCX, FTX.
- You will need an account with the exchange and to satisfy their know-your-customer (KYC) requirements. Your personal information, along with your transaction history, is stored in their database and vulnerable to possible cyber attacks and database leaks.
Examples: Kraken, Coinbase, Cex.io
Custodial and/or closed-source software wallets

Custodial and closed-source wallets, browser extensions and web apps, are offered by a centralised business such as an exchange.

Pros and cons are very similar to keeping your money on an exchange, as you are trusting a centralised entity with your private keys or code that keeps your private keys, in exchange for ease of use - if any. Best avoided.

Examples: Coinbase wallet, Exodus, Trust wallet.
Self-custodial open-source software wallets

This is a hot wallet on your phone or computer. It is usually less secure than a cold wallet and is not advised for storing large balances, but its ease of use means it can be great for quick small transactions.

Pros: Quick and easy setup and use, reasonably secure for smaller balances.

Cons: Less secure than using a hardware wallet. Requires a basic understanding of how Bitcoin works and how to keep your Bitcoin seed safe.

Examples: Electrum, BlueWallet.
Hardware wallet (also sometimes referred to as cold storage)

Hardware wallets are small physical devices that create your seed phrase and private keys and sign transactions. They keep your seed safe by operating completely offline. When you are spending/moving your bitcoin, the transaction is signed with the private key on the hardware wallet and then sent to your computer so that your private keys never touch your computer, making them much safer from hacks and malware.

Pros: The highest degree of security.

Cons:
- Cost of the device and availability in your area.
- If your level of technical expertise is very low, it can be confusing using a hardware wallet. It is not very difficult once you get the hang of it, but you do need to understand the basics.
- Insecure if bought from an untrusted vendor or distributer who could have tampered with it.
Examples: Bitbox, Coldcard, Jade, Trezor.

A Bitcoin hardware wallet is used together with a software wallet. Your software wallet provides most of the wallet function and the hardware wallet holds your recovery seed.

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FAQ

What is the safest way to store bitcoin?
A self-custody cold/hardware wallet used with an open-source software wallet.

What is the easiest way to store and use small amounts of bitcoin?
A self-custody open-source software/mobile wallet app on your smartphone.

Is using a paper wallet a good idea?
Paper wallets (the kind with a single private key) are obsolete and no longer recommended as using them involves a high risk of fraud, wallet damage or user error.