Bitcoin has been getting a lot of attention lately, and attracting lots of new investors. Some Bitcoin buyers are fascinated by the blockchain technology that makes the cryptocurrency work. Others are looking for a quick buck and a new day trading platform. Still, others view Bitcoin as a long-term investment, a virtual asset to buy and hold.
No matter how you view Bitcoin, safety is a vital consideration. Buying Bitcoin is not like buying shares of stock or putting money in the bank. With Bitcoin, there is no FDIC insurance to back you up, and no stock broker to give you advice. While some Bitcoin exchanges do carry insurance, the amounts of their coverage are often insufficient, and many Bitcoin investors have lost their virtual cash to hacks and insider heists.
So how do you keep your Bitcoins safe, and how can you protect yourself from the inherent dangers of a currency that exists only in the virtual world? Unfortunately, there is no one answer to that question, and every new Bitcoin investor will need to find their own comfort level and make their own decision.
The simplest way to keep Bitcoin is on an exchange, and there are many such exchanges to choose from. Coinbase is the oldest and largest Bitcoin exchange, but there are plenty of others.
Some Bitcoin exchanges are located in the United States, while others are scattered overseas. If you plan to keep your Bitcoin on an exchange, it is important to research the company, including any insurance they offer, how they protect themselves from hackers and what recourse buyers have if their virtual currency should go missing.
Investors who are not comfortable keeping their currency on an exchange can opt for a so-called hardware wallet. These devices are designed to store the private keys that allow Bitcoins to be redeemed, and they can be a secure way to protect that information.
Since these hardware wallets are not connected to the internet, they do not have the same vulnerability to hackers that comes with online storage. On the other hand, hardware wallets can be lost or stolen, and that puts the burden of safety on the individual investor.
If a hardware wallet is stolen, the person who finds it can cash in the Bitcoins it contains. Just like with a regular wallet, there is nothing the original owner can do to recover that virtual cash. Anyone considering a hardware wallet should weigh the risks of physical loss against the dangers of hacking at the Bitcoin exchange.
It is ironic that the most high-tech payment system ever devised is often stored in the most low-tech manner possible. Many long-time Bitcoin fans choose to store their currency in paper form, using a decidedly low-tech paper wallet to protect their investment and keep their virtual cash safe.
A paper wallet is exactly what it sounds like. The Bitcoin owner uses a special program that generates a paper wallet, printing out the long line of characters that represents the all-important private key. Users of paper wallets face the same security challenges as those who opt for the hardware version.
If the paper wallet is lost or stolen, there is no way for the Bitcoin owner to access the private key, and no way to redeem the money those Bitcoins represent. If someone finds the paper wallet, they can easily cash out the Bitcoin and abscond with the cash, and there is nothing the original owner can do.
Paper wallets can also fade over time, leaving the private key illegible and useless. Plenty of paper Bitcoin wallets have been lost, stolen, defaced and otherwise rendered useless through the years, and some consider this method of storage far riskier than a quality Bitcoin exchange.
The unique challenges of Bitcoin storage reflect the riskiness of the investment. While fortunes have already been made in the virtual currency, the distributed nature of this payment system make it impossible to recover lost, stolen or otherwise compromised Bitcoin investment. Whether you are a long-term investor, a day trader or a shopper, it is important to safeguard your Bitcoins, and that means weighing the pros and cons of each type of storage.