As a child, your parents neatly give you a current and savings account at a bank. In the bitcoin ecosystem, a child could get a (hardware) wallet.
In 2020, the lion's share of payment traffic is still going through banks and other service providers. Bitcoin can - in the Western world - be understood as an asset class, an investment if you like.
A means to arm yourself against the currency depreciation of the euro, with as a direct result less interest on savings in the bank.
But there is the necessary preparation and responsibility to manage your Bitcoin yourself. Especially once the price of this asset continues to increase (or decrease).
On the other hand, it offers freedom and independence, because you have total self-determination over your money. You can send your Bitcoin wherever you want without an intermediary without censorship or verification.
As a beginner, you may still have your Bitcoin at a broker or exchange. This may have arisen from ease of use. Suppose the price falls quickly, you can quickly anticipate it. But for the long-term investor, it is advisable to store your Bitcoin on a hardware wallet. More about that later.
Bitcoin wallet
what is a wallet actually? Because formally, the phrase "storing your bitcoin in a wallet" is not quite correct. That Bitcoin is "stuck in the blockchain". The blockchain is a public ledger that neatly keeps track of all accounts and transactions.
Bitcoin expert Robin Tick rather aptly compared the blockchain as a “row of indestructible post lockers in a public place”. But there is only one person with the key to a particular locker to get the money out. Without a key, no access and no bitcoin.
Unfortunately, it has happened in the past that people were no longer allowed access. As a result, approximately 1 to 2 million Bitcoin is permanently fixed on the blockchain. No one who can access it anymore.
A bitcoin wallet ensures that you can safely store and use your key (the private keys). When creating a new (hardware) wallet, you will be presented with a set of 12 (sometimes 18 or 24) English words.
That is your seed phrase, a simplified but direct translation of your private keys.
Public key: addresses
Within a wallet you can send, receive and store Bitcoin. It is actually a piece of software that "makes contact" with the underlying Bitcoin technology. Namely what is called asymmetric cryptography or public-key cryptography.
Each bit of Bitcoin consists of a public key and a secret key.
A wallet therefore does not generate everything the seeds (secret key), but with the Bitcoin addresses it also generates a derivative of the public key.
The advantage: every Bitcoin can generate new addresses endlessly and for free. For the sake of privacy, it is also advisable to create a new address with every transaction. This can be done quite easily and easily within any interface of a hardware wallet.
Types of wallets
But a wallet is also a container concept, because there are various types of wallets in circulation.
As soon as someone has a significant amount of Bitcoin, which someone has to estimate for himself what he thinks is "significant", then a hardware wallet is recommended.
In the past there were (and are) and other options (paper wallet, brain wallet), but we'll focus on the most common categories:
1. Mobile wallet
A mobile wallet can be useful for quickly making a transaction (via a QR code). But you depend on the developer for security updates. Moreover, someone could steal your smartphone and in theory also gain access to your Bitcoin.
We recommend Bitcoin only wallets. Examples are Blue Wallet, the Electrum wallet or the Green wallet from Blockstream.
2. Desktop wallet
With a desktop wallet you are less mobile, but with a reduced chance of being stolen. There is also the option to connect your hardware wallet to your desktop wallet, for example.
A combination is the Electrum desktop wallet in combination with the Coldcard, for example.
Watch out!
The following applies to all software wallets (mobile, PC): there is a lot of malicious and ransomware in circulation on the internet, which increases the security risk.
Unfortunately, there are weekly previews of users who have lost Bitcoin through malware download and installation and become victims of phishing.
3. Hardware wallet
The big advantages of a hardware wallet (compared to a smartphone or PC) is that it is specially designed to secure your seeds. There is little unnecessary software on it, which reduces the risk of a security breach.
A second advantage is that a hardware wallet does not connect directly to the internet. A ColdCard even works without internet at all.
Examples of well-known hardware wallets are: Trezor, Ledger and ColdCard.
But also for these devices: only download the software from their official site. Keep a close eye on what they advise on their official communication channels such as Twitter.
In addition, do not leave any personal data with these manufacturers, for example have a hardware wallet delivered to an address other than your home address. Indeed, there are known examples that customer data with address data has ended up on the street.
These wallets are well suited for simple transactions. For more complex transactions, such as multi-signatures, improvements are still needed. At least that was the verdict of security expert Jameson Lopp.
Tips for safely storing your bitcoin
Finally, a few more tips for keeping your Bitcoin safe:
Never lose the seed phrase!
Write the seed phrase on paper, do not take a screenshot or photo.
Make more than one copy of your paper seed phrase.
Keep the paper seed phrase in plastic from water damage, or even in a safe from fire hazards.
Do not enter the seed phrase on a computer.
Do not store the seed phrase in the cloud or in a mailbox.
Keep the seed phrase out of the hands of others.