Personal vs. Hosted Wallets

Many companies offer Bitcoin wallet services and programs to help you store your bitcoins. To the uninitiated, it isn't always clear whether these companies offer a personal wallet or a hosted wallet. With a personal wallet, you and only you know the private keys. The company that created the software does not control your bitcoins. Alternatively, with a hosted wallet, a third party knows your private keys and doesn't reveal them to you, but the company will send, receive, and store bitcoins on your behalf (not unlike a traditional bank, which stores your cash in a vault and won't give you the keys to open it). Some companies also offer software as a service. In this case, they host the wallet software on their servers but not the private keys. Users can log in, send and receive bitcoins, and monitor Bitcoin transactions using their own private keys (which the company never receives). We refer to such services as online personal wallets because the private keys are not hosted.

With both wallet types, the user interfaces may look and function in similar ways, but the ramifications of using one kind of wallet versus the other are quite different. In particular, the question of who is liable if bit-coins are stolen may be determined by who had access to the private keys. If you're in doubt, ask whether you have access to the private keys.

The liability distinction can become blurred if multiple private keys are used to control the same bitcoins. A few online services require two private keys to spend the same bitcoins, one held by the company and the other by the customer. Assigning liability can be trickier in these cases (although as you'll see later in "Fragmented Private Keys and Multi-Signature Addresses" on page 41, using multiple private keys to store bitcoins is typically a good idea).

The benefits of using a hosted wallet are that it is user-friendly and you don't have to worry directly about Bitcoin storage security. However, the hosting company must be both trustworthy and competent in that it will not maliciously run away with your bitcoins or let thieves steal them. Another detail to consider is that government or law enforcement officials can ask a hosting company to hand over your bitcoins. The company might oblige this demand, even if you would have disputed the request.

Although hosted wallets may be a popular choice for many future Bitcoin users due to their user-friendliness, we'll focus on personal wallets. Even if you decide to use a hosted wallet and let someone else manage the safety and security details, this chapter will help you make an informed decision when you're choosing hosted wallet service providers.

Safety, Security, and Convenience

Consider three major factors when you're comparing storage methods:

1. Safety (preventing the accidental loss of bitcoins)

2. Security (preventing the theft of bitcoins)

3. Convenience (ability to easily and quickly spend your bitcoins)

These factors can sometimes conflict with each other. Methods that make it convenient for you to spend your bitcoins are probably inadvertently making it easier for a thief to spend them as well. Similarly, making many copies of your private key and giving them to friends and family for safekeeping is a good strategy to prevent accidental loss; however, this strategy also makes it more likely that your private key will fall into the wrong hands. Combining safety, security, and convenience into one storage method is an area of constant innovation, and some newer methods have demonstrated an excellent balance of all three (see "Special Mention: The Bitcoin Hardware Wallet" on page 42).

Most people use two storage methods: one for storing small amounts of bitcoins conveniently but less securely and another for storing large amounts less conveniently but very securely. As Crowley the Crocodile illustrates in the comic at the start of this chapter, this is similar to having a small amount of cash in your pocket but keeping most of your money in a traditional bank account.

In the following sections, we've grouped storage approaches into two categories:

• Methods for small amounts of bitcoins that are convenient, easy to use, and reasonably safe

• Methods for long-term storage of large amounts of bitcoins that are extremely safe and secure (but not as convenient)

 
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