Protecting Your Bitcoins: Part I

Glaucon: Hey, I just bought my first bitcoins! Do you think they’re safe?

Socrates: The short answer: probably not.

If you bought them on an exchange and you still have them there, they’re somewhat safe over the short term, but I wouldn’t trust them there for long.

Keep in mind that if the exchange gets hacked, all your money is gone, and the exchange can’t get it back.

Glaucon: And the same goes for an online wallet like Blockchain.info?

Socrates: Precisely. Online wallets are very risky - quite a few wallet sites have been hacked already, so I wouldn’t store any sizable amount of money in them (probably no more than the cash you keep on your work desk).

G: How about Coinbase? I heard they’re a bit different.

S: That’s true. Coinbase is safer than other online wallets because it only keeps 10% of it’s funds online, with the remaining 90% stored offline. Theoretically, if they were to get hacked, they’d only lose up to 10% of their funds.

This, in addition to the fact that they’re based in the United States and have a strong financial backing, means they’re as safe as online wallets get.

However, if you have a decent percentage of your personal savings in Bitcoin and/or you want a higher level of security and control, I’d seek a more rock solid solution.

G: Well, what would you consider a rock solid solution?

S: Some flavor of offline storage, also called “cold storage,” is almost always the way to go.

However, it can be difficult to get cold storage right.

And it’s important to do things by the book here because you’re dealing with your wealth.

G: Hm, I see your point, but I’m having some trouble grasping how bitcoin storage works. Can you shed some light on this?

S: One of the most beautiful aspects of Bitcoin is the remarkable ease with which you can store and transmit money.

In fact, the only thing you need to do in order to spend your bitcoin (and prevent others from spending it) is to remember and protect a secret number: your private key.

Think of this key as analogous to the PIN number of a bank account with no customer support and no account recovery.

If someone discovers your key, they have the full power to move your money wherever they so choose. And if you lose your key, your money is gone.

Further, if your key is not truly random, then someone could very easily guess it and all your funds will be stolen.

So evidently, the feat of remembering and protecting your private key is much easier said than done.

Don’t be scared though! if you follow all the best practices, if you generate a truly random key and keep it safe, your funds will remain completely secure.

G: Whoa, you’ve got my attention. Now how do I get started?

S: That, Glaucon, is for another discussion. I will assist you with your Bitcoin storage in due time.