It is absolutely essential to routinely backup your wallet.dat file. This file holds the cryptographical information that allows you to spend your Bitcoins. If you lose access to this file and it’s data, you will lose the ability spend your Bitcoins.
It is important to make your backup frequently due to the way Bitcoin transactions are documented. Over time, new addresses (and cryptographic keys) will be generated as new transactions occur. If you try to restore and old wallet after some type of data loss, you may find that the old wallet does not have the keys necessary to sign off some amount of your Bitcoins. Backup your wallet.dat file often!
The wallet.dat file can be found is your profile/home directory under a folder called “.bitcoin”.
Encrypting your wallet can protect your money on systems where you do not maintain physical control. To access your wallet, a password must be entered or the cryptographic keys are simply not available.
There are several ways to do this. Just recently, the official Bitcoin client has integrated the ability to encrypt the wallet, making it necessary to enter a password before any Bitcoins can be spent.
Alternatively, and for the time being, We suggest that you use a more proven encryption technology to protect your wallet such as TrueCrypt or PGP. Once the official client encryption feature has been proven stable and reliable, we may change our recommendation.
TrueCrypt is relatively easy to use and freely available. It has been around many years and has a good security record.
Keeping your Bitcoin Wallet/cryptographic keys off the Internet (safely away from malware and remote theives is the only guaranteed way to make sure your Bitcoins are not stolen or seized. Unfortunately, this also means that you cannot access or spend your Bitcoins. So you will have to determine a policy that is comfortable for you and only keep “online” what you can afford to lose given a particular threat (physical access, malware, value, password strength, etc).
To create an off-line wallet, simply build a new OS on a computer (or boot a “live CD” Operating System) that has no network connectivity, install and run the client, and make note of the Bitcoin addresses generated. Backup the wallet.dat file, encrypt it, and store it safely in several geographically separate locations. Even though this wallet has never “seen” the Internet, you will be able to send Bitcoins to these addresses. Recover/use of the Bitcoins is as simple as copying the wallet.dat file to a network connected Bitcoin client and send away.
During the time that your encrypted wallet is safely stored off-line, your Bitcoins will remain absolutely untouchable by any Government or thief as long as you are using strong encryption. By storing multiple copies of the encrypted wallet across several places, you’re ensuring you’ll be able to recover the keys if some copies are seized.
Eventually, the official Bitcoin Client will have a key import/export/delete feature integrated into the application but until then, this is the easiest way to protect your Bitcoins. A note of caution: You must take care to securely delete the original wallet.dat file after it has been taken off-line. If someone can forensically recover this file, they will be able to spend/move those Bitcoins at any time outside of your knowledge or control.