Safety and Private Keys
By now you know that the amount of Bitcoins you have in your account is registered in the Bitcoin blockchain. To access those Bitcoins, you will have to use your Private Key. This blockchain and private key might not be stored in the same location. Hence, it is difficult to say where your Bitcoins are stored precisely.
Since there are millions of identical copies of this blockchain in the computers all over the world, it is almost impossible to destroy every single copy of that blockchain. So you don’t have to worry about where are how it is stored in the blockchain. Instead, you should be concerned about your Private Key. So for an individual Bitcoin holder, where he/she stores their Private Key is where they store their Bitcoins.
In simple terms, storing your Bitcoin means storing your Private Key. A bitcoin wallet helps us in saving these Bitcoin addresses and their corresponding private keys. Storing your Private keys safely and accessing them according to your requirement is no less than you being your own bank.
But being your bank comes with a lot of responsibility, and you should be taking a lot of precautionary measures to keep them securely. There are a lot of third-party service providers who you can rely on, to securely store and organise your Bitcoin addresses and private keys. By using their services, you don’t have to worry about the security of your Bitcoins, as you rely on these service providers to safely secure your Bitcoins.
Hot Storage vs Cold Storage
Bitcoin storage is often differentiated by whether they are in Hot Storage or Cold Storage. This is dependent on whether or not the devices in which you store your private keys are connected to the internet. If your private keys are stored on a computer that is connected to the internet or any online device, then your Bitcoins are said to be in hot storage.
Contrarily, if your private keys are stored in a device that cannot be accessible through the internet, your Bitcoins are said to be in Cold Storage. For instance, if you use a computer which is not connected to the internet to generate Bitcoin address and the corresponding private key, any Bitcoins sent to that address are said to be in cold storage as your private key never got exposed to the internet.
You can send the Bitcoin address that you have generated using an offline computer to others in order to receive Bitcoins and by default they will be safely stored in the cold storage. Since it is impossible to send Bitcoins to other accounts without the internet, hot wallets are very convenient to use as the private keys are stored on a device that is connected to the internet. But cold wallets are way too secured than the hot storage methods if you are will to store your Bitcoins for long-term purposes.
It is essential to understand that hot storage cannot become cold by just going offline. A private key that is never exposed to the internet is way too secure that the one that is exposed at least once. At times you might see companies claiming that they store their client’s Bitcoins in cold storage for security purposes, but will also claim that these funds can be easily moved to their hot wallet automatically.
This is a huge red flag. If these companies state that this movement of funds from hot to cold is an automated process, it is most likely that none of its funds is stored in cold storage. A person should physically access an offline computer and manually authorise a Bitcoin transaction if the funds are in cold storage.
Differences between Personal wallets and Hosted wallets
Many companies provide Bitcoin storage services. Some of them provide personal wallet services, while others manage your Bitcoins.
If you are using a personal wallet, that means you are the only one to know your private key. No one has access to your private key along with the firm that is providing the software services to you when you are using a personal wallet. But if you are using a hosted wallet, a third-party wallet service provider will have access to your private key, and they don’t reveal that to you. The company itself will transact and store Bitcoins on your behalf.
Some companies just provide wallet services. They host only the wallet software on their servers but do not have access to your private keys. Users can transact and store their Bitcoins themselves using their private key on their own. These kinds of services are known as online personal wallets where only software services are provided, but private keys are not hosted.
With both of these wallets, the user experience and interface are almost similar, but the outcomes of using one type of wallet versus others are different. For example, in case of a Bitcoin theft, who is liable for that? The answer is, whoever has access to the private key. In the case of personal wallets, it is you who will be responsible, but if you are using a hosted wallet, it’s the third-party service providers who are responsible.
The significant advantage of using hosted wallets is convenience. They are, and you don’t have to keep worrying about storing your Bitcoins securely. However, it is essential to choose the most credible wallet service provider as they can just run away with your Bitcoins or let hackers steal your funds.
Also, governments or legal authorities can, at times, ask these hosting companies to hand over all the Bitcoins to them. They might have to respect that as well even you refuse to do so. So do not forget to read the term and conditions of the hosted wallet service providers before using their services.
Although many of the users prefer using a hosted wallet because of convenience and user-friendliness, we suggest you choose a personal wallet over the hosted wallet.