How’re you storing your Bitcoin? Did you buy some on Robinhood? Have some on Coinbase? Do you have a Bitcoin wallet?
Might seem like it’s not a big difference, but it’s actually the difference between owning Bitcoin and, well, not owning Bitcoin. For real.
Here, we’ll go over some of the different ways to buy and store Bitcoin – and the scoop on each.
Bitcoin 101: The Public and Private keys to the kingdom
Before we dive in, we have to establish the nuts and bolts. Don’t worry – we won’t get too technical.
One of Bitcoin’s shining qualities is the blockchain technology on which it is based. The blockchain manages the ledger. The ledger is a record of Bitcoin transactions.
For reference, in current FIAT terms, banks manage ledgers.
In order to make transactions in the Bitcoin blockchain, you’ll need two keys: One public, one private.
The Public key is like your address, and everyone on the blockchain has a Public key.
If John wants to send Bitcoin to Thor through the blockchain, he will need Thor’s Public key to make sure he sends it to the right place.
Once he does, that Bitcoin will sit at the Public address until Thor uses his Private key to access the sent coin and add them to his own wallet.
The Private key is like your Social Security number, except way more important. It will surely be the centerpiece of divorces and inheritance battles of the future.
If someone has access to your Private key, they have access to your Bitcoin. And because Bitcoin is not backed by agencies like the FDIC, is someone has access to your Bitcoin, you’re basically f*cked.
Those Bitcoins are gizone unless whoever stole them returns them to you out of the goodness of their heart.
Bitcoin 102: Hot and cold wallets
Those Keys need something to unlock, and that something is the Bitcoin wallet.
Bitcoin wallets can be ‘hot’ or ‘cold.’
In a nutshell, a hot wallet is connected to the internet. A cold wallet is not.
You can make a bitcoin wallet cold by moving its private key off-line.
This can be done by storing it on a USB drive or a fancier piece of hardware.
Today, there is hardware specifically designed for Bitcoin storage. Some of the more secure models require logins or have backup security features. (Those can be nice considering that as of right now, you’re on your own in the Bitcoin universe).
Without the Private key online to hack, your wallet is for the most part safe (from everyone but yourself).
But you can’t have a cold wallet without first having a hot wallet. That’s because you’ll need a hot wallet to buy Bitcoin on the blockchain. You give the exchanges FIAT, and the exchange sends your Bitcoin to your Public address.
You create a hot wallet by creating an account on an exchange where you can buy Bitcoin.
While many have solid reputations and track records, as the old saying goes: If it’s online, it’s potentially hackable. (We just coined that).
Wallets and keys give us a ruler by which to measure just how much ownership we have over our Bitcoin holdings.
If you own Bitcoin on Robinhood, you don’t own Bitcoin
When you bought your Bitcoin on Robinhood, did you miss the email where they sent you the keys?
No – because they never did.
As much as we love Robinhood for stocks, it is not the GOAT app to buy Bitcoin.
Presumably, Robinhood itself holds the Private key to the Bitcoins sold on its platform. Robinhood crypto buyers are essentially buying a promise – that Robinhood will payout on their gains based on the percent of Robinhood’s Bitcoins they own. It’s an I.O.U.
How much do you trust Robinhood? Does a recent $65 million lawsuit settlement for ‘misleading customers’ make any difference (albeit, not for crypto?) Least we forget the lessons from Mt. Gox.
That means if you own Bitcoin on Robinhood, it’s more of an investment asset than anything. As of right now, there would be no way for you to retrieve your Bitcoin from Robinhood and put it in a wallet.
You would first have to sell your Bitcoin holdings on Robinhood for good ol’ fashioned FIAT money. If you secured a little upside in your Bitcoin holdings on Robinhood, Uncle Sam would get his cut. Cryptoheads everywhere will look at you with disgust – because you obviously don’t get it.
Then you’d have to take that money somewhere else and buy Bitcoin with it.
There’s a saying among crypto diehards: “Not your keys, not your crypto.”
It seems likely that Robinhood will eventually move into real Crypto dealing. But until then, if you want to really own Bitcoin, you’ll have to so somewhere else.
Buying Bitcoin on exchanges like Coinbase, CashApp, or PayPal
So how does one acquire Bitcoin for real real? Exchanges.
Exchanges are brokerages where you can trade dollars or other forms of FIAT for real cryptocurrencies that you own, such as Bitcoin.
By setting up and account on an exchange, you are in effect setting up a hot wallet.
Any Bitcoin in your exchange account is in a hot wallet that’s hosted by the exchange.
Of course, with all that hackable, untraceable money concentrated in one place, exchanges are pretty prime targets for hackers. Your exchange-hosted hot wallets is as good as their cybersecurity engineers. If there’s a hacker out there who’s just a little more cunning…well, you get the idea.
Exchanges can and do get hacked.
Coinbase is currently the leading cryptocurrency exchange. If you set up an account there, they will give you $10 worth of Bitcoin once you make your first purchase.
Newcomers, yet major players like PayPal and Square – already well versed in account security – entered the crypto exchange space, a milestone for Bitcoin and other cryptocurrencies. However, they do not currently offer nearly as many cryptocurrencies as Coinbase.
Still, crafty hackers are a threat to Bitcoin holding on exchanges, even well-established ones. PayPal had a significant security breach earlier this year.
For that reason, most crypto-heads prefer to not keep the honey in the pot (holdings on exchanges). Most use the exchanges to acquire Bitcoin, then transfer it to their own offline wallet for safekeeping.
The ability to move Bitcoin from an exchange to a wallet is the critical differentiation from “buying” Bitcoin on Robinhood.
With exchanges, you get a wallet and keys. It may be a flimsy wallet that your cash is sticking of, but it’s better than the I.O.U. being purchased on Robinhood. You can always move your stuff not a new wallet.
The wonderful world of wallets
There’s a few ways you can have your own wallet, each with its own security considerations.
There are Web wallets, which are by default, hot wallets
- Web wallets are hosted on a website where the user logs in to access their Bitcoin holdings.
- Though they might not have the same target on their backs that exchanges do, Web wallets are higher on the ‘hackability’ scale than other types of wallets.
- They are less susceptible to user error, like losing the USB drive that has a private key on it.
There are Mobile app wallets, also hot wallets
- Stored on your phone in an app
- Make sure you are downloading a trustworthy app on a secure, private connection
There’s also Software wallets, hot
- Install bitcoin wallet software on your computer
- Device specific, which is a pro and con, depending on the lens you’re assessing it through
Hardware wallets are cold wallets, and generally considered more secure.
- Hardware wallets can be on a USB drive or other storage hardware
- More sophisticated storage hardware wallets come with password requirements, two-factor authentication, and backup feature.
Though cold hardware wallets are generally considered the safest way to store Bitcoin, they aren’t bulletproof.
Bitcoin Hardware wallet manufacturer Ledger had a security breach in recent weeks. Granted, the wallets themselves were not hacked. The hack involved the companies internal records, including a list of customers.
Unfortunately, that stolen data was in turn posted to a hacker forum (real pieces of work, these hackers) on the Deep web. That helps the hackers know who has a Bitcoin wallet. But they do not have the keys – yet.
We deeply apologize for the situation.
However, we must now look ahead and take steps towards dealing with the breach to minimize the impact it has.
This article details how you can act from your side: https://t.co/IeJgGfj80Z
— Ledger (@Ledger) December 22, 2020
And for all the technology and innovation that Bitcoin brings to the table, there’s one cold wallet that predates cypto, and maybe even FIAT currency.
Last on this list is good old-fashioned ink-and-paper cold wallets.
- To get a cold paper wallet, one would go to a paper wallet website, generate a private and public key along with a corresponding QR code that can be used to access the wallet. they would then hit Cntrl + P and voila, cold paper wallet secured.
- A cold paper wallet is offline, so unless you accidentally post a selfie with the Private key in plain view, is unlikely to be hacked – or even known about – to the hacker world.
- Perhaps the biggest security threat to a cold paper wallet it is user error. E.g.: Accidently throwing that piece of paper away.
Buy and hodl
For those planning to #hodlbitcoin for the long game, cold wallets might be the right place to stack up, lock up, and throw away the key. Except that last part.
Now who’s ready to go to the recycling processing plant and dig?