With the value of Bitcoin rising so sharply recently, it continues to be essential that users take precautions to keep their investments away from the hand of thieves. Bitcoin burglars have always been around and unfortunately, they have had quite a bit of success, especially against new and uninformed Bitcoin users. With so many ways to keep track of your Bitcoin addresses and private keys, it is important to know about the strengths and weaknesses of the different methods so you can protect your money as much as possible.
The most natural way to store your Bitcoins is by using a downloadable wallet like Bitcoin-Qt or MultiBit. When I say natural, I mean that this was the method that was created when Bitcoin was founded. Bitcoin-Qt was actually the first ever wallet application. This is a relatively safe way too keep your Bitcoins, provided you only download the software from a trusted source. If you are not careful, you might download a fake program that will actually steal your private keys and all of your funds.
Using a software wallet also means that you must connect to the Internet at least occasionally. You will need to synchronize with the network to keep track of your wallet balance and to make transactions. This can be a bit risky because the Internet is the most convenient avenue for attackers to use. If they can get access to your computer through the web, they could easily take everything you have. If you decide to use a software wallet, you should also be sure to make regular backups of your wallet data in case your computer or hard drive crashes.
Another very common way to store Bitcoins is with an online wallet like Blockchain.info or at an exchange like Coinbase. These wallets offer tons of convenience because you can access your money anytime, anywhere, but this does not come without a cost. Online wallets are much less secure because there are several ways that your funds could be stolen. The easiest way would be for a thief to guess or steal your password, so you should always use secure passwords and do not store them in any way that they could be stolen.
It is also possible and unfortunately somewhat common for exchanges to crash or be hacked. If this happens, the best case scenario is that you lose access to your funds for a time while the problem is worked out, which can be quite annoying. The worst case scenario would be for the attackers or maybe even the exchange itself, if it turns malicious, to steal all of your Bitcoins. Another problem is that occasionally online services can become overburdened or simply malfunction so that transactions do not complete very quickly. Storing your Bitcoins online is often a good option simply because of convenience, but never give a service more than you would be willing to pay for that convenience, because you are putting your money into someone else's hands and you never know what might happen to it.
Offline Paper Wallet
When it comes to Bitcoin storage, there are some extremely secure solutions involving safety deposit boxes, encrypted USB drives, and even offline transactions for those who want top notch security. However, for the average investor, an offline paper wallet would probably be much simpler and still offers significant protection. With this method, you generate a Bitcoin key pair and write or print it on paper so that it is inaccessible from the Internet. You can also encrypt the addresses with a passphrase to make it even more secure.
Bitcoin has been growing and changing since it was created. New Bitcoin features and companies are developing constantly. A few of these projects aim to make Bitcoin storage safer and easier. TREZOR is an interesting new product being called "The Bitcoin Safe." The hardware, currently available for pre-order, stores Bitcoin keys on a small USB device that fits in your pocket. To make transactions, you can connect the device to a computer running a compatible wallet application, but the private keys never leave the device. The transaction is formed and signed strictly on the device so your keys are never accessible from the Internet. The device is encrypted too, so it would be difficult for anyone to take your money even if they gained physical access to it.
Another device, Piper, has a similar purpose. It uses a Raspberry Pi and a printer to generate addresses and paper wallets entirely offline. You can leave the keys backed up on the device or save them to a USB drive as well, all without ever opening an Internet connection.
Every Bitcoin storage method has unique strengths and weaknesses. Some, like online wallets, are extremely easy to use, but require you to trust others with your finances and are subject to several other threats. Others, like paper wallets, offer much more security but are a little more complicated to set up and use. In the end, it is probably best to use a combination of these options. You could store a few Bitcoins with an online exchange for daily use and keep your savings on paper so thieves will have a much harder time making you a victim.