If you don’t have the keys, you don’t own the bitcoins.
What does it mean to have control of your bitcoins? You want to make sure that you’re the only one with access to your private key.
Historically, one of the great advancements of Bitcoin over fiat currency is the ability to transfer and exchange value without a third party bank or payment processor. Using a third party bitcoin exchange undermines the value innate to Bitcoin.
Example: As in the cases of Bitstamp and Bitfinex, it’s possible an exchange get hacked and for the users, holding “hot” wallets on them, to potentially lose their bitcoins. In the case of Mt. Gox, the exchange itself stole the users’ bitcoins. Anytime your bitcoins are in an online exchange, or “hot” wallet they’re at risk.
Solution: Withdraw the bitcoins you are not intending to use in the near term and keep them in a cold wallet.
What is the difference between a hot wallet and a cold wallet? The simplest answer is that a hot wallet stores your bitcoins online, and a cold wallet stores your bitcoin offline.
Hot wallets connected to the internet are significantly more risky. You should not keep any significant sum of bitcoins online. If used correctly a cold wallet protects against online threats, because it exists in an “air gap” and never exposes itself to the internet.
More on securing your wallet here.
Part of the value in bitcoin is that you can “be your own bank” (to a degree). If you manage your private keys properly you can be reasonably certain your bitcoins stay yours. But with great power comes great responsibility. If you lose your private keys, there is little hope in recovering them, unless you’ve stored a backup.
To protect yourself losing your wallet and your bitcoins, make sure to use a mnemonic recovery. You’re going to want to write this down before you actually lose your wallet, since there is no way to recover it after the fact.
Attention: Did you catch that? If you don’t write this down and anything happens, all your bitcoins will be completely and irrevocably lost.
Mnemonic: the process or technique of improving or developing the memory.
In the same way that it’s easier to remember list if you turn it into a song, it’s easier to remember a bitcoin private key if you turn it into human readable words.
HD Root Key:
Mnemonic Recovery Words:
squeeze assume insane boring inhale fold tourist toward cart turn physical marriage wise hidden flame
Most wallets will prompt you with your recovery mnemonic and password. But make sure your write it down (offline) and test it, to guarantee it works. Mnemonic recovery is generally used for cold wallets, but if you’re using a hot wallet instead be sure to enable 2-factor authentication for all of your online accounts.
2FA is extremely important, not just for Bitcoin, but for all apps that deal with sensitive data. 2FA can protect you from hackers trying to gain access in to your account. Still, it’s important to remember this does not protect you from the exchange itself.