Using a Bitcoin wallet, no matter the type is extremely easy. When you first create or launch the wallet, you’re prompted to create a passcode or PIN, which you then enter for all subsequent usage. It goes without saying that you need to choose a strong password (long, complex, and difficult to guess) and then write it down somewhere so that you don’t forget it.
Creating your wallet also creates your own personal Bitcoin address, which you can use to send and receive Bitcoin payments. Your wallet will create additional addresses for additional Bitcoin transactions. That’s right, a Bitcoin wallet stores multiple Bitcoin addresses that identify different Bitcoin transactions.
You can typically see your Bitcoin balance on some sort of dashboard or transactions screen. You’ll probably see a summary of your Bitcoin holdings, as well as detail about all your incoming and outgoing transactions.
It’s important to note that using a wallet negates the need for you to memorize or physically enter individual Bitcoin addresses and keys. The wallet does all the hard work for you, including calculating the value of your holdings and helping you manage all your past and current transactions.
When you want to send Bitcoin to another user—that is, to spend your Bitcoin—follow these general steps:
- Go to the wallet’s send screen or tab.
- Enter the address of the person you’re sending the Bitcoin to.
- Enter exactly how many Bitcoin you’re sending.
- Click the Send button and your transaction takes place.
Be very, very careful when entering all this information. If you make a mistake when entering a Bitcoin transaction, the loss is irreversible. There’s simply no way to undo anything done incorrectly.
This is why most merchants that accept Bitcoin provide a QR code you scan into your wallet when you’re making a transaction. This QR code automatically enters that merchant’s Bitcoin address and other information, while also eliminating the risk of manually entering incorrect information.
If you want to receive Bitcoin from another user, go to the receive screen or tab. This page displays your Bitcoin address, which you can then transmit to the other party. (In some cases the wallet generates a QR code that you can send instead.) The other party uses this address to send you the Bitcoin, which then shows up in your wallet.
Securing Your Bitcoin Wallet
How safe is it to store your Bitcoin in a Bitcoin wallet? Well, Bitcoin wallets are as secure as you want to make them. A lot depends on your usage patterns.
A software wallet is theoretically the most secure type of wallet because it’s stored locally, on your own PC. The most security-conscious Bitcoin users will store their wallets on PCs not connected to the Internet so that no hackers can access them from the outside. Of course, if the PC on which you store your wallet crashes or gets stolen, you can’t access the wallet software and thus can’t access your Bitcoin. But in general, storing your wallet locally is the most secure option.
Whatever type of wallet you use, the last thing you want is some miscreant hacking into your wallet and making off with all your precious Bitcoin. The only thing worse would be physically losing your wallet, typically by having your computer or mobile phone break down.
So, in very general terms, the two things you want to do to increase the security of your Bitcoin holdings are to
- Protect your wallet against theft
- Protect your wallet against loss
Everything you do, security-wise, should be with these two goals in mind. Some suggestions follow.
Password Protect It
The best way to protect against Bitcoin wallet hackers is to protect your wallet with a strong password. Although a determined hacker can break any password, you don’t have to make it any easier on them. A longer, more complex password is always safer.
When you create your password, write it down. (And then keep the written copy in a secure place, of course.) The reason you need to remember your password is that many freestanding Bitcoin wallets don’t let you reset your password if you forget it. If you can’t remember your password, you probably won’t be able to access your Bitcoins. You’d still own them, just not be able to get to them. Ever.
Back It Up
What do you do if your Bitcoin wallet file gets lost, deleted, or corrupted? Well, you’re safe if you’ve made a backup of that wallet file. Back up your entire wallet on a regular basis, or after each transaction. This way if the original file goes missing, you can restore from the backup you’ve made.
While you’re at it, make sure you store your wallet backup on a different computer or backup medium, such as a USB drive or an external hard drive. You want to be able to access the backup file if your entire computer system goes south.
And if you store your backup file with an online backup service, such as Carbonite, choose the option that lets you encrypt your backup. Anyone hacking into an unencrypted backup file will have full access to all the Bitcoins in your wallet.
If you want to protect your wallet from outside intrusion, make it impossible for intruders to get to your wallet. That means disconnecting the computer that stores your wallet from the Internet—and from your home network, as well. Nobody can hack into your wallet file if they can’t connect to your computer. Going offline is the ultimate safeguard.
(You’ll need to reconnect to make any Bitcoin transactions in the future, of course. Just make sure you connect as briefly as possible to minimize the risk.)
Be Cautious About Web Wallets
Web wallets are über convenient, but they’re not the most secure option. Online wallet services (as well as Bitcoin exchanges) have been known to suffer security breaches. Because most of these wallet services offer little to nothing in the way of insurance, if your wallet provider gets hacked and your Bitcoins are stolen, you don’t have any recourse.
Don’t Lose Your Wallet!
If you opt to use a software or mobile wallet, what do you do if you lose it—that is, if you lose the host computer or smartphone? Well, just as it is with the leather wallet you use to carry paper money around with you, when you lose your digital wallet you lose all the money contained within. There’s no way of recovering your Bitcoin if your Bitcoin wallet is lost.
Here’s a very sad example of what happens in that instance. A Brit named James Howells was an early player in the Bitcoin game, and back in 2009 he did some Bitcoin mining and amassed an astounding 7,500 Bitcoins. As is the norm, he had all his Bitcoin stored in a software wallet on his notebook computer. Good so far.
A few years passed, and in 2011 Mr. Howells spilled a drink on his computer. (It happens.) Mr. Howells, who works in IT, dismantled the computer, found it not worth repairing, and salvaged a few bits and pieces for spare parts. He put the hard drive, which contained the Bitcoin wallet, in a drawer in his office.
Three years went by, and Mr. Howells apparently forgot about that hard drive and what was stored on it. Let’s let him tell the rest of the story in his own words:
“I kept the hard drive in a drawer in my office for three years without a second thought—totally forgot about Bitcoin altogether. I had been distracted by family life and moving houses.
“Fast-forward to 2013, which is when I had a clearout of my old IT equipment. I hadn’t used this drive for over three years; I believed I’d taken everything off it…so it got thrown in the bin.”
That’s right, Mr. Howells tossed his old hard drive in the trash, which then got picked up and deposited in the local landfill. It was only later that he heard some stories about the then-recent rise in Bitcoin pricing, which was approaching $1,000/BTC. That made his lost Bitcoin worth close to $7.5 million.
Unfortunately for Mr. Howells, he was unable to retrieve his old hard drive from the landfill. (It’s there somewhere, just unfindable among the rest of the refuse.) Because he can’t find his Bitcoin wallet, it is now impossible for him to get this money back. As Mr. Howells put it, “There was not a lot I could do.”
Moral of the story? Guard your Bitcoin wallet the same way you guard your physical wallet. Don’t hand it (or its password) to strangers, and for heaven’s sake, don’t throw it away!