2.8 Storing Bitcoin Safely - Video Tutorials & Practice Problems

While I have you here, I wanna talk about the issue of storing your bitcoins safely. As you work with cryptocurrency, you may hear sometimes that people get hacked and some people lose cryptocurrencies. My objective with this lesson is to talk to you about the best ways for you to store your bitcoins and cryptocurrency in general. But let's talk about bitcoin because we've been talking about sending and receiving bitcoins. Now in a previous lesson we talked about how Alice was actually sending bitcoins over to Ben. To do that Alice needed to have a Bitcoin wallet and so did Ben. So you see your Bitcoin wallet actually keeps track of the private keys that you own, those specific transactions that have your bitcoins on the blockchain. So let me explain this. When you have a bitcoin wallet, you don't have bitcoins in your wallet. What you actually have is the keys corresponding to the transactions recorded on the blockchain, which have the Bitcoins. So,whenever you do a transaction by sending Bitcoins to someone else, what you're really doing is transferring bitcoins to a different bitcoin address. And then that person which owns that bitcoin address, has the private keys in their wallet and then they can sign and create a new transaction sending those bitcoins to someone else. The reason why I'm telling you this is that a hacker, could actually hack into a wallet and actually steal those keys. If they steal those keys, they steal all your bitcoins. So I'm gonna give you now some advice on how you can actually protect your bitcoins, so that nobody else can steal them. To do that, I wanna tell you about two key terms you should know about. The first one is known as hot storage. Hot storage is when you keep your cryptocurrency on a device that has access to the internet. It could be a mobile device, it could be a desktop computer, it could be any device that's actually connected to the internet. That's known as hot storage. The alternative to that is cold storage. Cold storage is when you take your bitcoins and you place them on a wallet that's offline. That is it's not connected to the internet. And let me give you some examples of that. When we talk about the hot storage, we're talking about a mobile device for instance. And the challenge with that is if somebody hacks into your mobile device or you lose your mobile device, or somebody gets a hold of the keys that are recorded in that mobile wallet, they can steal your bitcoins. They're gone. So that's hot storage, and there are risks associated with that. In fact, whenever you hear about a cryptocurrency exchange that gets hacked, what has happened is that a hacker has been able to access whatever bitcoins are in hot storage for that cryptocurrency exchange. As a result, many cryptocurrencies exchanges keep the brunt of the cryptocurrency they control, offline in cold storage. So let me tell you about cold storage. Cold storage is when you take your bitcoins, and you put them on a wallet that's offline. Let me give you an example. This right here ,is a paper wallet. What you're seeing right now is a bitcoin wallet. So while this can be a bitcoin wallet, you have a mobile device that has it. You can actually send bitcoins to a paper wallet. And what you really do is this is a public key. This is a bitcoin address. If you send any bitcoins to this specific public key this bitcoin address, you would be storing the bitcoins in this paper wallet. But you also have the private key. The private key is how you're able to spend those bitcoins that are sent to that public key, that bitcoin address. Now this is secret. You can never share this with anybody. You can share this with everybody you want, because this is how you receive Bitcoins. However, this is secret. If anybody gets a hold of this secret key, they would steal the bitcoins that are here. And actually there's a very high profile case of somebody that was actually showing a paper wallet on a TV show. And the person just spontaneously just showed for a second on television the bitcoin paper wallet, and a hacker was able to steal the bitcoins from that paper wallet in a matter of minutes. And the reason is because it's very easy. All you really need is this code. And with this specific key, you can steal whatever Bitcoins are sent here. Now, people who use paper wallets efficiently what they will do is they will place their bitcoins, within the paper wallet they have and keep it hidden away. You can actually put it inside a safe or place it somewhere else. Now there are risks to using paper wallet. Some of the risks involved, you could lose the paper wallet, or it could get wet, it could get burned, or somebody could actually find it and steal it. But you do not run any risks of having anybody being able to just like hack into your mobile device like a SIM swap. If somebody does a SIM swap they can take over your mobile device. And the answer is, if you do not actually have any of those risks by placing it offline in cold storage. Another way that you can do cold storage is actually using what's known as a hardware wallet. A hardware wallet is a type of device, that's a cryptocurrency wallet that is designed specifically for storing your cryptocurrency on it and it's not connected to the internet. So you can put your keys on this hardware wallet and this hardware wallet is a device that's not connected to the internet. You can store it in your pocket, you can store it in a safe, anywhere else. But it is a hardware device that's designed specifically for storing your cryptocurrency. So the key lesson that I want you to take out of this is that if you are actually keeping cryptocurrency, you have to be aware that there may be hackers trying to get a hold of it. The way that you can protect yourself is, only keep whatever amount of cryptocurrency you need to do on a regular basis in hot storage. So I for instance, keep selling Bitcoins on my mobile device, but the brunt of my cryptocurrency is offline in cold storage. So remember, hot storage is very efficient and practical but is vulnerable. Cold storage is far safer.