Bitcoins are stored in specialized pieces of software or hardware called “wallets”. Bitcoin wallets do not actually store Bitcoins but instead hold private and public keys. Private keys are used to prove the ownership of the funds. Public keys are used as an address of a wallet. For example, if you wanted to send Bitcoins to a friend, you would need to specify the public key of your friend’s wallet when making a transaction similarly to how you would enter somebody’s credit card number to make a bank transfer.
Where to store Bitcoin
Bitcoins can be stored in several different ways, some being more convenient but less secure while others are more complicated but are also malware resistant and safe. Bitcoin wallets come in various forms from pieces of paper to dedicated hardware gadgets designed to store BTC. Each storage method has its pros and cons.
Storing Bitcoin in hardware wallets
This is one of the most secure ways of Bitcoin storage. Hardware wallets are gadgets designed to offer the maximum degree of protection. Bitcoins are stored offline almost all of the time, and a device needs to go online only occasionally to initiate Bitcoin transactions. It should be noted, that hardware wallets can be lost and can suggest to an observer that the owner has cryptocurrency, which can be a con, for example, in a scenario of an international border crossing.
Bitcoin cold storage
Cold storage is essentially a computer that holds Bitcoins in an offline environment. It has a separate watch-only wallet that receives incoming transactions so that the software that actually holds the private key is never connected to the internet. In a nutshell, cold storage simulates the design of a hardware wallet but uses a clean, dedicated computer to store Bitcoins. It shares the same cons and pros, but it is also much bulkier to use.
Storing Bitcoin in Desktop wallets
Desktop wallets are specialized pieces of software that need to be downloaded and are designed to store private keys. Some software wallets require to download the whole Bitcoin blockchain necessary to check the legitimacy of transactions, which makes them quite heavy, while others use third-party services to perform this operation making them more lightweight but less secure. Generally, a good desktop wallet is a suitable solution for Bitcoin storage even if it is not as safe as hardware variants.
Storing Bitcoin in Online wallets
This is undoubtedly the least secure way of Bitcoin storage. Online wallets are web applications that hold private keys essentially in a cloud. They are always connected to the internet which makes them an easy target for hackers. On the flip side they are extremely easy to use and can be a good option to store minimal amounts of Bitcoin or if you are just getting into cryptocurrency.
Since wallets do not actually store Bitcoins but instead only hold private and public keys, it is possible to keep the keys literally in any format, including printed on a piece of paper. Pieces of paper that hold private keys are called paper wallets, they are not vulnerable to hacking but are quite easy to lose and must be stored with extreme caution.