A beginner’s guide to bitcoin: where to store your bitcoins
Once you've got hold of some bitcoins, you need somewhere secure to keep them. Dominic Frisby outlines some of the best options, from exchanges to cold storage and hardware wallets.
Once you know what you are doing, if you want to buy significant sums of bitcoin, the place to do that is on an exchange. There are all sorts of identity checks you have to go through to open an account with an exchange. The process can be rather frustrating. If you’re struggling, one point I’d make is that in many cases I found it easier doing this on my phone than on my computer.
Even more frustrating is trying to send large sums. Banks sometimes limit the amount you can send. Some exchanges require extra verification, which can take considerable time to process, particularly at the moment with so many platforms swamped with new accounts opening.
(There is a global rush to buy bitcoin – it always happens in bull markets – and the general public is in a speculative frenzy anyway as a result of being locked down and having little else to do – see Gamestop for more details).
Where to keep your bitcoins
Bitcoins might be a digital asset (so you can’t touch them). But they’re also a bearer asset (if you hold them, you own them). So you need to keep them somewhere safe.
You can keep your bitcoins at an exchange – some offer cold storage, which is similar to the way that bullion dealers often offer gold storage. And if you feel you don’t have the time or the ability to learn and apply your own sovereign cold storage systems, then storing your bitcoins in cold storage with one of the more reputable exchanges in one of the more reputable jurisdictions, is a solution.
Exchange security is infinitely superior to what it once was. However, just understand that if the exchange goes bust, is hacked or has its assets frozen, you could well have a problem on your hands. The same government protections that exist in traditional finance do not exist in bitcoin. It is a form of digital cash. Replacement certificates cannot be issued, nor the stolen certificates cancelled. Once it is gone, it is gone. (And unlike your gold, it is unlikely to be insured).
The purists and the old hands all recommend taking custody, and so do I. Be your own sovereign bank, as the saying goes.
The most user-friendly means to store your own bitcoins I found to be keys.casa. Other long-term storage options include Trezor, Ledger, Electrum plus a multisig (multi-signature) hardware wallet. These will all start making sense once you start playing around with the technology. The ultimate guide to bitcoin security can be found here.
Cautionary tales from people who bought bitcoin early and still missed out
Back in 2014 I had my email hacked. The hacker found an archived wallet in my gmail account, which he used to steal my bitcoin. It was a common hack at the time and many of us lost our coins.
Today what was stolen amounts to a seven-figure sum. So angry/stupid was I afterwards that I did not buy back what was stolen and went on to miss out on huge gains. There are many people like me who suffered a similar, or in some cases much worse fate.
Imagine if you were one of the early investors who had his coins at MtGox. Until 2014, MtGox was the world’s biggest crypto exchange, handling over 70% of bitcoin transactions. Many early investors never took delivery of their coins and instead left them on the exchange.
MtGox got hacked. More than 850,000 coins were stolen. Today that amounts to over $34bn. It’s an extraordinary amount of money –it must be the greatest heist in history. How many early bitcoin investors missed out on becoming multi-millionaires or even billionaires as a result?
The incident has left many in a state of near-permanent depression. Never again will an opportunity like that to make so much money come along. I know of at least two suicides as a result. All because we were not as savvy as we should have been with the tech, and did not protect our accounts well enough.
Security standards have improved dramatically since then. But the moral of the story is: take the time to familiarise yourself with the tech. Several days, if needs be. Even crypto whizzes are still learning new tricks. It is worth the effort.
Whatever route you go down to buy and store bitcoin, I would recommend using a password manager. Once you get it set up, you will find it to be a labour-saving device, not just for bitcoin but across the net. Most importantly, it stops you using the same generic password across multiple websites, which puts you at risk of hacking, identity theft and all the other types of online nefariousness which go on.
Another benefit is that you won’t have to remember some complicated password combination of letters, symbols and numbers. The password manager will do it for you. The best password managers are NordPass, RoboForm, 1Password, Dashlane and LastPass.
What if bitcoin is banned?
This is one of the most commonly asked questions. If bitcoin gets too hot and presents a legitimate threat to fiat, then governments will surely close it down – particularly as they’re already working on their own central-bank controlled digital currencies.
So might it happen? Well, it already has. India recently banned bitcoin, so we will have a chance to see what happens there. The evidence from neighbouring Pakistan was that bitcoin use actually increased after it was made illegal, and the practice was driven underground.
In the US, the SEC (the US regulator) recently made a ruling against an altcoin, Ripple, and the price collapsed as a result. Something similar could happen to bitcoin, argue the doubters. There is little doubt in my mind that were the US or the EU to make bitcoin illegal, the currency would take a blow and the price would suffer.
Then again, the US made it illegal to hoard gold in 1934. It did not collapse the price. Many simply bought the gold mining company Homestake instead, and the pierce multiplied many times upward.
In practical terms however, the US would, I suspect, struggle to make bitcoin illegal. It is too well established. After the billions that have been invested, US authorities would face a plethora of lawsuits. The US government itself was selling bitcoins in 2014, when it auctioned those sold from the Silk Road, a “dark net” version of eBay or Amazon (billionaire Tim Draper won the bid).
That’s not to mention the problems it would have with various states. Certain jurisdictions in Florida are moving to hold bitcoin, and accept it as a means of payment. The City of Miami has already bought in. In Ohio, you can already pay taxes in bitcoin. In short, making bitcoin illegal in the US would be, to put it mildly, problematic. It is too well established.
For bitcoin to be made illegal, the dollar would have to be under extreme pressure. The act of making bitcoin illegal could even be the signal that the dollar system is bankrupt. That would prompt a bank run. In other words, for it to be made illegal, things would have to have got very bad.
At that point alternative systems of money would be even more desirable. One analogy might be US dollars being made illegal in the Soviet Union. Everyone then knew Soviet money was useless.
A global ban on bitcoin is unlikely – unless the world descends into some global totalitarianism, at which point illegal bitcoin will be among the least of your problems.
Those jurisdictions, meanwhile, that embrace this new, sound, digital money, rather than ban it, will be the same jurisdictions whose economies thrive in the years ahead – and the nations you will most likely want to move to in the event that your own nation takes the Soviet route.
- 1A beginner’s guide to bitcoin: what is bitcoin?
- 2A beginner’s guide to bitcoin: the technical genius behind bitcoin and the blockchain – and how it all works
- 3A beginner’s guide to bitcoin: how to buy bitcoin
- 4A beginner’s guide to bitcoin: where to store your bitcoins - currently reading
- 5A beginner’s guide to bitcoin: what are “altcoins” and are any worth investing in?