Once you have learned to buy bitcoins, you need a way to store your new bitcoins and altcoins.
Managing Bitcoins and Altcoins depends on what the user plans to do with them, similar to storing normal currencies. There are situations where people want to have physical cash in their pocket, but credit or debit cards are accepted almost everywhere, and often provide incentives like a small percentage back on the purchase.
Storing money in a checking account might be necessary to have available for monthly bills, or because it is a business account that writes many checks. Other money might be set aside to put into investments or a retirement fund.
What you need to know about cryptocurrency “wallets”
Cryptocurrencies use the general term “wallet” for where coins can be stored.
The main distinction in wallet types is whether it is “hot” or “cold.”
- Hot means that the wallet is connected to the Internet and the coins can be easily transferred traded or used as payment for goods or services. This would be most similar to having fiat cash in your wallet.
- Cold storage refers to methods that remove the coins from contact with the Internet. This is the safest way to keep coins. This would be most like investing in property or any other asset that could not be physically stolen.
Wallet keys, digital signatures, and cryptography
The problem with grasping these more technical aspects is that very little of the stepping-stones along the way were part of the technology that most people use regularly.
Encrypted emails would be the most common example.
Yet these implementations provide the backbone for turning data exchanged over the Internet into something people can safely transact and hold.
A string of letters and numbers is generated with the creation of a wallet. This is the user’s private key. It is then used to create a public key and digital signature using a one-way function. The result is two strings of letters and numbers that are unique to the association with the original private key.
The public key gives a destination for anyone that wants to send to the wallet. The digital signature is used to authenticate any transactions from the wallet as proof the owner of the wallet initiated the transaction. Neither of the strings could be used to decrypt back to the private key.
Some wallets are not specific to a single coin but can hold several or numerous different coins. When a wallet holds more than one coin, it could use a single private key or generate a unique key for each type of coin stored in the wallet.
Cold Wallets can be Paper Wallets or Hardware Wallets
- A Paper Wallet seems unusual for something that is at the forefront of computer technology, however, it provides the only way to make your coins totally untouchable. A Paper Wallet could simply contain all the information needed to restore the wallet digitally, in this way it is kind of like a treasure map. They are more convenient when made by creating a QR code of the necessary information.
- A Hardware wallet is an encrypted flash drive that keeps that holds the data of your coins. There are several brands of these, and each is compatible with a specific list of coins.
- Cold storage users can still check the date of their wallet by searching their Public Key on the Bitcoin Block Explorer, where any associated transactions remain recorded regardless of where the date of the coins is.
Hot Wallets can be Web Wallets, Desktop Wallets or Mobile Wallets
- A Web Wallet is operated through the user’s Internet browser. There is no need to download anything, but the wallet’s seed and private key(s) must always be recorded somehow.
- A Desktop wallet is a program downloaded to the user’s computer that stores coins on the native memory and the user can choose to keep the program connected to the internet or not.
- A mobile wallet is the mobile device application version of a desktop wallet. Some coins make these wallets interchangeable.
In any case, most wallets are built in with the ability to create a line of 12 to 24 random words that are as unique as key pairs.
This “seed” is used as another layer of security beyond the private key and as a container for all the unique data to the wallet. If a user’s cold or hot wallet was somehow destroyed, this phrase could regenerate the wallet.
Storage for long-term or day trading
For long-term investors, the best way to store coins is likely cold storage unless the user would rather trust a program, app or website than themselves to maintain their private keys.
For people interested in trading coins frequently, the best way is hot.
It is a necessary risk in order to trade the coins, and has resulted in some hacks or attempted hacks. Ironically, these exchanges end up centralizing a massive amount of these decentralized currencies, which provide a single point of attack for hackers. However, a number of decentralized exchanges are being developed and some are already in use.
One of the major benefits is the ability to exchange coins from a hardware wallet plugged into your computer.
For people looking to adopt a cryptocurrency as a payment method, the best way would be to identify what coins are accepted by frequented merchants and then download the mobile app of the coin that was most commonly adopted.