I can see that in my account for a pool (say BTCGuild for instance) that it says I have 2.5***** bitcoins. And I know I can "move" these to a "wallet account" like at MyBitCoin. But, I hear its best to keep these coins in a more secure "wallet" like on a thumb drive. And I have even gone as far as to follow a guide to create such a drive. But my question is...when I put cash in my real life wallet, its cash or paper if you will. When I put a credit card in my wallet its not cash but its linked to a company that has my cash (and is keeping it secure)....so what ON EARTH an i putting in a Bit-Coin-USB-Thumb-Drive-Wallet? Why is it more secure THAT way?
There are two senses in which you can have bitcoins, just like there are two senses in which you can have, say, gold. You can have the actual gold or bitcoins themselves. Or you can have an account with some entity you trust and they say you have that much gold or that many bitcoins.
When you have an account with MyBitCoin, they take the bitcoins you put in the account. You are trusting that when you want to withdraw those bitcoins, they will actually have them. If their total deposits are 50,000 bitcoins, they may or may not actually have 50,000 bitcoins. Just like when you put money in a bank.
This arrangement has some advantages and disadvantages for you. Just as a similar arrangement with gold means you don't have to store a bunch of gold which could get lost or stolen, so MyBitCoin manages your bitcoins for you and protects them. But, of course, if MyBitCoin goes away somehow, you may never see your bitcoins again, just like a bank with your safety deposit box.
When you have real bitcoins, they are stored in a data structure that is kept on tens of thousands of computers. When I send you bitcoins, I add a record to that data structure, and that puts the bitcoins where you can claim them. You need a private key to claim those bitcoins, typically stored in a 'wallet.dat' file. These are real bitcoins, they cannot be stolen from you unless the private key (which only you should know) is stolen.
However, if anyone gets your private key, they can clean you out. So you have to guard it with elaborate procedures and you face a problem -- if you store your private key in only one place, you might lose it. If you store it in 50 places, it can get stolen from any of them.
