Bitcoin Wallets, Secure Storage And Insured Protection

Digital currencies such as Bitcoin empower people to store and manage their own wealth without having to rely on financial institutions and intermediaries. It isn’t necessary to use a bank to store your bitcoins and you don’t need Visa, PayPal or Western Union to spend or transfer them. However, just because you can, it doesn’t necessarily mean you should.

Software such as Armory allows individuals to implement industrial-strength cryptography to secure their bitcoins. If used properly, extremely high levels of security can be achieved. However, this solution is not for novices and risks remain - you are not protected if you forget your encryption password or lose the encrypted data. James Howells learned this the hard way.

A host of web wallet services offer to store your bitcoins on your behalf, promising security and convenience. These range from standalone services such as Coinbase and Blockchain.info, to those provided as part of exchanges such as Bitstamp. It should be noted that although these companies are effectively Bitcoin “banks”, they are usually unregulated entities.

These wallet services also store your bitcoins in very different ways. A minority store an encrypted form of your bitcoins, which only the user can decrypt and spend using a password. This brings added security, however if the user forgets their password, the bitcoins are lost forever.

However, most web wallets effectively take control of your funds, transferring your bitcoins to their own wallet. This “pooling” of bitcoins is much like how a traditional bank operates, and works fine when everything is going well. The problem arises when somebody starts misusing the pooled funds, as may have happened at Mt. Gox.

One of the huge benefits of Bitcoin and other digital currencies is that all transactions are recorded in a public ledger, the “blockchain”. This transparency empowers users to track their own funds, and to verify their balances, without being reliant on an account balance reported by a third party. However, if wallet providers pool their customers’ funds together, this power is lost, making it much easier to misuse them.

At Elliptic Vault we do not pool our customers’ bitcoins - they are always segregated and stored in separate Bitcoin wallets. This means that if our customers want to check that their funds are still in the Vault, they don’t have to take our word for it - they can audit us using the blockchain. There are several information services out there (e.g. blockchain.info) that allow you to view the balance of a Bitcoin address independently, so you have peace of mind that the bitcoins stored with Elliptic are really there.

In short, if you decide to store your bitcoins with anybody, ensure that you understand exactly how they are doing it and ideally, make sure you can independently verify your balance. If you have to take their word for it, then you’ve lost one of the great advantages that Bitcoin brings - transparency.

Tom Robinson is Chief Operating Officer of Elliptic, a digital currency services company. Elliptic Vault is the world’s first secure Bitcoin storage service to provide insured protection - www.elliptic.co/vault.