Understanding the tradeoffs in each type of digital wallet
Part 1 of 4: Standalone Wallets
I’ve been getting a lot of inquiries lately from people who either just bought their first bitcoin or just realized that their bitcoin is suddenly worth 5 times what they paid for it. The common question is, “Where should I be storing my bitcoin?” That’s a question that doesn’t have a single answer and entirely depends on everyone’s individual investment, usage pattern of their bitcoin, technical understanding and capabilities, and most of all, the impact on their financial well-being that the loss of their coins would cause.
I figure this post was overdue and could shed some light on the various types of wallets and their pros and cons, and hopefully help people come to a decision on the type of storage they feel most comfortable with.
To start off, I like to categorize various wallets into several technology classes. The primary difference between each of these is where the private keys of the wallet are held. If you don’t already understand what a private key is, it is somewhat akin to the PIN code of your ATM card or the written check signature that theoretically only you can duplicate with perfect accuracy. It is a long string of letters and numbers which enables the owner to spend bitcoin from their wallet. Theft of bitcoin is simply theft of your private keys. Keep them safe and your bitcoin are safe.
I decided to break up this series into a four part series giving myself a chance to really focus on each type of wallet. In this series, I’ll be covering standalone wallets, web wallets, hybrid wallets, and offline/cold storage wallets.
This post will focus on standalone wallets.
Standalone Desktop Wallets
The first wallet to ever exist is the reference desktop bitcoin client, now called Bitcoin-QT. Bulky and slow, Bitcoin-QT requires the user to download the entire blockchain (currently 14 GB as of 12/2013). I generally don’t recommend any casual users run Bitcoin-QT as their primary bitcoin storage. The advantage of such a wallet however, is that when receiving funds, you can have far more confidence that money is received and less trust is required on other “full-node” wallets on the internet.
Other stand-alone desktop wallets include Multibit, Armory (requires bitcoin-qt), Hive, and Electrum. The primary flaw of most of these wallets is the need to backup private keys which are stored only on the computer which the software is running on. In addition, these wallets cannot be easily shared between devices adding a level of inconvenience. Security of standalone wallets depends greatly on the level of encryption, if any, that the wallet provides to secure your private key and the complexity of your password used to encrypt the private key on your hard drive. In addition, keeping your computer entirely free of viruses and other malware is critical in keeping your bitcoin safe. The desktop environment has been traditionally a breeding ground for viruses, and it’s always a challenge to keep your computer clean. Without getting into an OS slugfest, I would put my vote in for UNIX style operating systems (Mac/Linux) as being generally more virus free than their Windows counterpart.
Standalone Mobile Wallets
Similar to standalone desktop wallets, stand-alone mobile wallets also have similar issues of backing up private keys and the ability to share wallets between several devices. Their obvious advantage is portability. They provide a more convenient wallet which you can take on the go. In addition, mobile devices generally stay virus free so long as users refrain from rooting or jailbreaking their phones. Try to think of the last time an iOS virus made headlines? Mobile is currently the most secure online device you can use to store your bitcoin, with iOS providing slightly more security than the Android platform.
The current list of mobile stand-alone wallets include:
Bitcoin Wallet (android)
Note that there are other mobile wallets available such as Coinbase, Coinjar, and Blockchain.info, but these will be covered in my future posts on other types of wallets.
The general advantage of these standalone wallets is that your keys are entirely in your own possession and live on the device you run the wallet on. As bitcoin represents the freedom of money, it behooves us to actually be in possession of our bitcoin. Funds stored in a standalone wallet cannot be seized by government or lost by a third party. Bitcoin transactions are created by the wallet app itself vs being a transaction request sent to a third party (somewhat like a bank transfer) which may be prone to downtime.
But with great power comes great responsibility. Keeping your keys secure and backed up in case of hard drive or device failure falls in the individuals’ hands. Be sure to utilize any paper backup features of your wallet as well as encryption with a complex password that you must not forget. If you need a primer on why complex passwords are a must with bitcoin, read my previous blog post: Bitcoin, Passwords, and Digital Responsibility.
Most wallets do NOT make the backup and encryption process straight forward and bury these as options in their settings. Seek help with a local meetup if needed. I help host the local Bitcoin in San Diego meetup group which is a great resource for those needing help and information:
Should you happen to forget your password, there are some password recovery services that can help if you happen to remember small snippets of the password. Check out www.walletrecoveryservices.com if you run into such a snafu.
In my next post, I’ll cover web wallets, such as Coinbase, which are gaining huge popularity but have issues that are not readily apparent to most users. Blog with you then.