What options does one have to manage Bitcoins? Bitcoin Stack Exchange
I began trading and buying Bitcoins for a while now, and realised: I have numerous wallets and numerous websites where I have bitcoins/litecoins.
I think most of the people, including me, want use Bitcoin in there day to day life, and also invest in Bitcoin and Litecoin.
For this, which setup is recommended?
- Is it safe yet to store, lets say, fifty to one hundred Bitcoins at some online service, or should I, after purchasing, transferring it to a hardware wallet?
- Are there any sites which are buying Bitcoins or is it always from person to person (therefore, Volume might be a problem when investing)
- All recommended services and wallets also have as many open “recently got hacked” reddit threads. Which ones have to be in a basic setup?
In my ideal world, I have
- A hardware wallet with my Bitcoin investment
- A hardware wallet with Litecoin
- A mobile app for day-to-day bitcoins
- A trusted online service where I go to buy Litecoin/Bitcoin and also sell it
Is my ideal world correct, are the big tradings time over or yet to come? From a tech perspective, Bitcoin is fairly old, but there are still just low-quality apps out there.
I am not a trader, so I don’t have much advice to suggest in terms of which services are best. However, I do have some thoughts and practice with storing bitcoins.
To understand your options for managing private keys (wallets), you have to understand how the security model works. As the name suggests, private keys are meant to remain private. Anyone who has skill of them has access to your bitcoins. Meantime, you also never want to lose your own access to the private keys. If you do, you lose your bitcoins. This creates a problem with solutions that have an indirect relationship inbetween the two issues. If your private keys are well protected, you increase the chance that you will lose your access as well. If your private keys are lightly accessible, you are unlikely to lose them, but far more likely to be robbed. There are some elegant technical solutions for this paradox, but no user-friendly solutions that come to mind.
Let’s explore some of the options.
This is the case where some online service manages your private keys for you, but gives you access to control how the bitcoins they store are used. Personally, I would define the proprietor of the bitcoins to be whomever has access to the private keys. With this viewpoint, you are not the proprietor of the bitcoins held in an online wallet. You are the holder of an account with an organization who possesses the bitcoins on your behalf. The question of whether it is “safe” to store fifty to one hundred bitcoins in an online wallet can only be answered by answering one or both of these questions:
- Do I trust this 3rd party with fifty to one hundred bitcoins (both with honesty and security)?
- Can I afford to lose fifty to one hundred bitcoins?
If your reaction to either question is “no”, then you may want to consider reducing the amount you store in the online wallet to an acceptable amount.
These are single-purpose computers that manage your private keys for you. Because they are usually offline devices, they go a long way towards being hacker-proof, but reminisce that there truly is no such thing. These sound superb, and many people have embarked using them, but I’m personally skeptical. These products were created from a growing request, and rushed to market to strike out competitors. Even if the security is flawless (which it never is), you are now trusting your wealth to the reliability of these machines. I would recommend letting the market lodge down for a duo of years, and let a few more generations come out, before trusting too much of your wealth to these devices. You don’t want the script where the thing won’t power on, but you have your life savings stored on it.
These wallets are by far the most convenient for day to day use, perhaps even more so than online wallets. You can scan QR codes to pay people, generate QR codes to be paid, and have your funds at your fingertips as you go about your day. The drawbacks are also pretty steep. Your funds are now only as secure as your phone. If you get malware, you could lose your money. If your phone gets lost or stolen, you lose your money. If your device violates (ex. dropped in the toilet), you may lose your money. I view a mobile app wallet as I view a physical wallet. You don’t go about your day to day business hauling around your retirement savings. You only leave the house with as much cash as you plan on spending that day, and attempt to keep it to what you can afford to lose.
This is the case of running Bitcoin Core, or Electrum, or some other desktop-based wallet. In principal, these are about the same as a mobile app wallet, with the advantage that you may be participating as a full-node in the Bitcoin network. This permits you to trust transactions and blocks more than with an SPV Wallet, but doesn’t truly suggest anything better in terms of the management of private keys. Desktop wallets can be run on your day to day desktop, or perhaps a desktop that is usually kept offline and used only for bitcoin transactions. Like with mobile app wallets, the security of this wallet is only as secure as the computer it runs on. Also recall that software wallets (both mobile and desktop) have the capability to backup the wallet files, which can add to their reliability, but increase the number of ways your bitcoins can be compromised. Again, there’s always a trade off.
A paper wallet is a physical, paper document that contains a QR code of the the private key to a Bitcoin address. You can store money in the wallet by sending bitcoins to the address, and then redeem them later by importing the private key into some other type of wallet. This document can then be stored in a safe, a safety deposit box, buried in the forest, or anywhere else that you feel is safe from burglary and fire. Think of this as a stack of fiat currency being held in a safe. This is one of the safest ways to store your bitcoins, but is terribly inconvenient. There is also the question about how the address was generated in the very first place. If you don’t trust the software/organization that generated the paper wallet, then you can’t trust the wallet.
A brain wallet is a way of generating a private key from a passphrase that is not stored anywhere, but rather remembered by the holder of the wallet. It is much like a paper wallet, except that the private key is never written down. Again, you must trust the software used to generate this address from your passphrase. You will also most likely want to generate a passphrase, rather than use a passage from literature or a song lyric. With computer speed and storage enhancing along an exponential curve, and all the worlds books being digitized, it is not unthinkable that someone will attempt to steal bitcoins by brute forcing every known phrase from every book and song. With cryptography, randomness is enormously significant.
To conclude, diversification is always a good strategy for wealth management, and bitcoins are no different. If you spread out your bitcoins inbetween different types of wallets on different storage mediums, then you are less likely to lose everything, but more likely to lose something. If you limit exposure to the wallets you use for long-term holding, you increase your security. Just don’t leave behind your password, passphrase, safe combination, place you buried it, or whatever.