The best way to store your bitcoin depends on many things such as how much value you have, the convenience you desire, your level of technical ability, and how paranoid you are.
Beginners may start with a simple way first (accepting some trade offs) and improve their storage solution as they accumulate more and learn more.
For many people, the easiest way to store bitcoin will be with a custodian — their exchange. Most beginners choose this without realizing what they are choosing, and without realizing that there is in fact a superior alternative.
For example, many people might sign up to an exchange, such as Bitaroo (not an advertisement, it’s just the exchange I use and recommend), transfer money from their bank account to the exchange, purchase bitcoin, and then keep an account with Bitaroo which displays their bitcoin balance. This is the easiest way. To access the bitcoin they simply log-in to their Bitaroo Account. They must keep the login password safe, but if it is lost, it may be retrievable with a lost-password service provided by Bitaroo.
While this is easy and convenient, and the default solution for many, most will not realise that they do not actually hold their bitcoin — Bitaroo does. And to move their bitcoin, they need Bitaroo’s permission. Usually that’s not a problem, but what if Bitaroo is down for maintenance? Or worse, what if they go bust? What if the exchange gets hacked? — bitcoin goes bye-bye. What if the user posts something negative about their government and that government forces Bitaroo to freeze their funds? What if a future government does? What if bitcoin gets banned? Bitcoin is not confiscatable, UNLESS someone else holds your bitcoin. Then it’s VERY confiscatable.
Not everyone worries about these possibilities, but some do. The great thing about Bitcoin is that you have the option to take your storage to the next level, and you don’t need to trust anyone, or ask permission from anyone, to spend or move your bitcoin.
The next level is to hold your bitcoin in your own wallet. This is the minimum I hope one day everyone will achieve. What does holding your own bitcoin even mean though? See Q&A (question 1).
What actually happens behind the scenes when you move bitcoin from one exchange to another exchange? See Q&A (question 2).
To manage your own bitcoin, you need a bitcoin wallet which can be downloaded to your phone or computer. After you buy bitcoin from the exchange, you transfer the bitcoin from the exchange to your wallet. What is a bitcoin wallet exactly? See Q&A (question 3).
Here I will show you how to set up a the Mycelium Bitcoin Wallet for Android phones. The iPhone has this app too and is mostly the same, though MUCH inferior. I have chosen this wallet, because I have tried many and find this one the best for beginners with useful features, and it’s open source. There is no desktop version.
For the iPhone, Bluewallet is excellent, and not a bad choice for Android phones too.
Some might wonder why I haven’t mentioned hardware wallets as a solution. See Q&A (question 4) for the advantages and disadvantages of hardware wallets.
To get started, download “Mycelium Bitcoin Wallet” from the Google Play store.
After you download the program, disconnect your phone from the internet (extra safety for this next step). Then run the wallet; you will be given an option to create a new wallet or restore an old wallet. Select “create new”:
Your unique wallet will be created, containing a unique set of keys, and bitcoin addresses (not all addresses are visible at once, but that’s fine).
There is a warning asking you to back up your wallet, I’ll explain that too. For now, you can see that you have an “account”, and a bitcoin address starting with “3” which can receive bitcoin payments. (Note, iPhone users will only see legacy addresses that start with “1”). There is an option that says “Tap for bech32” — and the address will change to one starting with “bc1”, or a “1”. These are the three types of addresses. The “bc1” addresses are newer and cheaper to use.
I would not recommend putting in a significant amount of bitcoin in this wallet until you back up your wallet. For every wallet that is created from scratch, the software will generate a giant random number in the background which will be your bitcoin SECRET KEY. This degree of randomness or “entropy” is huge, and can not be reproduced by guessing. It is essentially unique, and gives you a unique set of bitcoin addresses that you control. This giant number needs to be backed up. To make it easy to record (and even memorise) the number is encoded into a 12 word “seed” (sometimes 24 words). These 12 words are extremely important and much more important than what people realise at first. These words practically ARE your bitcoin — that’s the importance you should give them.
With these 12 words, you (or a thief) can enter the words in any software wallet, regenerate all your addresses, see your balance, and steal your bitcoin. Keep it hidden.
If you lost your 12 words as well as your phone, then your entire bitcoin balance would be lost for ever. No recovery is possible. This happens to people, so take note!
To prevent being hacked, Don’t even TYPE these words on your computer in case your computer is infected with malware that records your keystrokes. This is why I said “switch off your internet” earlier.
So now, proceed to backing up the 12 words. Be somewhere where no one can look over your shoulder, and there is no possibility of CCTV recording what you are doing. Stay away from webcams. Draw the blinds. The app will display to you one word at at time which you need to write down. Get a clean sheet of paper, and write neatly so you can read it, and later, keep it somewhere safe. Somewhere where it won’t be stolen or found, and where you’ll remember you’ve put it. A safe is good. It’s ideal to keep a second copy somewhere else, just in case the first place is destroyed (eg fire, explosion, flood etc). Remember, a piece of paper in a safe can cook to a crisp in a safe. Some people etch their seeds into metal, then hide it. Some people store their seeds in safety deposit boxes.
The app will ask you to type in the words one at a time, in order, to make sure you have accurately recorded the words, and you can read your own writing. Once that is done, the warning will disappear.
Optionally, memorise your seed – it’s handy and avoids you worrying about damage to all your physical copies. I have an article on – How to memorise your seed; tips and tricks; advantages and disadvantages of memorising. Link
Before you secure your seed, you can send a small portion of bitcoin to your new wallet. Small enough that if both your phone died AND your paper with the seed was lost, you wouldn’t be devastated to lose the bitcoin amount.
You need to log in to your bitcoin exchange account and “send” your bitcoin to your new wallet address. Tap the QR code in the app until the address changes and starts with a “bc1”. Some exchanges won’t send to these types of addresses and you might need to use the old type that starts with a “3” or “1”.
Then press the icon that looks like two overlapping squares next to the address to copy it to the clipboard. Then paste it to the receiving address in your exchange “send” form. Always copy and paste. Never transcribe the address by hand. Never. If you are using a phone and desktop, email the address to yourself from the phone, open it in the desktop, copy, and paste.
Why never transcribe by hand? — If you make a tiny error, your transaction will fail. It’s unlikely you could irreversibly send bitcoin to someone else, because a mistyped address will probably be invalid, but don’t take that chance. And always check what you pasted matches what you copied — to avoid malicious software tampering with your clipboard and changing the address on you. You might end up paying bitcoin to an attacker’s address!
Once you send from the exchange, it has to be processed by the exchange. It might take a few seconds to appear in your wallet as an “unconfirmed transaction” or it might take a day. This is dependent on your exchange. Soon you won’t have this problem any more because you won’t be asking for their permission to use your bitcoin.
When you see the transaction is registered in your new wallet, click on the transactions tab, and you will see the incoming amount, and a little pie graph which tracks confirmations on the blockchain. On average a new block is added to the blockchain every 10 minutes, but at the start, your transaction is in a queue, called “the mempool”, to get onto the blockchain.
If the queue is long, it could take minutes, hours, days, rarely weeks, for the transaction to be confirmed. But once it is confirmed (on the blockchain), it gets deeper and deeper away from the tip of the blockchain, as additional blocks are added on top.
When you see “6 confirmations”, this means your transaction was waiting for a variable amount of time depending on the queue, and then five additional blocks have been added to the blockchain since then.
Let’s now send this tiny amount back to the exchange, just for learning.
On the balance tab, click send:
Enter the address in one of the ways from the options above. I recommend copying the exchange’s receiving bitcoin address to your clipboard, and then when you press “clipboard” in the app, the address gets pasted in.
Then, set the fee by swiping left or right. If you are not in a hurry and can wait ‘till tomorrow, set a low fee, but I suggest doing it fast for this test while you are focused on this task. “Normal priority” is usually enough. Then click the amount and choose the maximum. Then hit send. The exchange will see the transaction from the mempool almost immediately. But they generally wait 1 to 3 confirmations to be sure the transaction is permanent. Once that happens, you’ll be credited bitcoin on your exchange’s private ledger.
Good job if you’ve got this far.
Once you have secured your private key, do this:
Delete the app from your phone.
Then re-install it. Switch off the internet.
Then regenerate your wallet with the 12 words.
Go to the transactions tab, and make sure you can see the two transactions you made earlier — this way you know you have successfully regenerated the exact same wallet.
Now it’s time to move your entire bitcoin balance to this wallet. You know how to do it now.
Once you see your balance in your new wallet, you hold your own bitcoin. Congratulations!
There are now two choices. You can leave the wallet on your phone for easy access and spending, or, to be more secure, delete your wallet from your phone. This puts your bitcoin in “cold storage”, meaning “offline”. It’s more inconvenient, but much safer.
If you delete it, you might want to have a second wallet that you don’t delete and keep small balances on.
For cold storage of balances that won’t be spent for a long time, the deleted phone app is quite secure, but still at risk. You can drastically improve you security and sleep comfortably at night, even if you have millions of dollars worth of bitcoin, by going to the next level (Level 3): Make a multi-signature wallet.
Here is how: Link