The Bitcoin community started around a core group of very technical, and security conscious, individuals. As the community has grown it has stayed centered around relatively technical people. Maybe not as familiar with the details of public/key encryption or the differences between hashing algorithms as the initial group was, but generally savvy enough to know how to keep their computers secure.
In the next wave of Bitcoin adopters will have people who aren’t so technically inclined. People who’s computer are more at risk. And while Bitcoin has many security mechanisms baked in, none of them can protect you if a hacker gets access to your wallet.
Two of the best ways to keep your bitcoins safe are based on the idea of sending them to a bitcoin address that is not in your wallet. The idea being that if you can’t access the bitcoins in your wallet, neither can a hacker.
A Bitcoin paper wallet is a printout of a new Bitcoin address and the corresponding private key that can be used to access that address. Because the private key is not stored on your computer, it’s not accessible to even the most determined hackers.
The easiest way to create a Paper Wallet is to visit Bit Address and click on the Paper Wallet tab.
Print out the page with your paper wallets before you send any bitcoins to the addresses on them, just to be safe. Do not save the paper wallets on your computer, or any computer with internet access. Keeping the wallets on a computer would defeat the purpose of a paper wallet.
Make copies of your paper wallet and keep them in separate, safe locations, such as separate bank vaults. Remember that your paper wallet now is, essentially, a giant bundle of money, and treat it accordingly.
When you want to spend the bitcoins in the address, you’ll have to retrieve the paper wallets from their storage location and import the private keys into your wallet. You can use Block Chain to do this if your desktop client doesn’t have an easy way to import a private key.
A Brain Wallet is a Bitcoin address and private key that can be generated from a pass phrase (which is like a password, but longer). The benefit of a brain wallet, compared to a paper wallet, is that you don’t have to keep a printout of the address anywhere. The downside, of course, is that if you forget your pass phrase, the bitcoins in the address will be unrecoverable.
You can use Bit Address to generate a brain wallet. Be sure to use a long and unique pass phrase, and remember that pass phrases are case sensitive.
After you generate the address, you can transfer your bitcoins to it for safe keeping. When you want to use the bitcoins in your brain wallet, use Bit Address to regenerate it, and import the private key into a Block Chain wallet.
Because you only need to remember a pass phrase to use them, brain wallets are easier to use than Paper Wallets. But be very careful about the pass phrase you use. Hackers can generate wallets using lists of known, common passwords, and then check to see if that address has been used on the Bitcoin network. If they get lucky, and find the private key to a real Bitcoin address, they can remove the bitcoins in that wallet without any warning.