What is a Bitcoin wallet?

Now it’s easier than ever to buy, sell and trade Bitcoin (BTC). The next step after acquiring BTC is to ensure that the BTC is stored in a safe place. Maybe you are wondering how to store Bitcoin?

BTC is a digital currency stored in an electronic wallet that can be accessed using a private key. However, you do not need to do this directly. A wallet app automatically uses a private key to sign outgoing transactions and generate wallet addresses for you.

A Bitcoin wallet is a digital wallet that allows you to send and receive Bitcoin. This is similar to owning a physical wallet. So what is the purpose of a Bitcoin wallet? Instead of holding physical money, the wallet stores the cryptographic information needed to access Bitcoin addresses and send transactions. Other cryptocurrencies may be stored in some Bitcoin wallets.

The device containing your Bitcoin wallet stores the private key, not the coins themselves. Your coins are stored on the Bitcoin blockchain and you need your private key to allow these coins to be transferred to someone else’s wallet.

Several different Bitcoin wallet formats meet different requirements and differ in security, convenience, accessibility, and more. So, how to choose a Bitcoin wallet?

There are two important steps in choosing the best Bitcoin wallet for you. You should first decide what type of crypto wallet you need and consider individual wallets to discover the ideal one for you.

For example, full-node wallets serve decentralization and support the BTC network, and there are Bitcoin mobile wallets that offer built-in cryptocurrency exchanges and convenient quick response (QR) code scanners, among other types of functionality, depending on the wallet you use. to use.

It’s important to make sure that the wallet you choose is compatible with the currencies you store and meets your specific security and usability needs. This article aims to guide its readers in obtaining and using Bitcoin wallets as well as securely storing Bitcoin.

How does a Bitcoin wallet work?

Cryptographic key pairs are used to send and receive Bitcoin. A key pair consists of a private key and a corresponding public key. Sending bitcoin requires the use of private keys that must be kept secret. Buying bitcoin requires public keys that can be shared with anyone. Public keys are created by deriving a private key from them.

A seed is created when you create your Bitcoin wallet. Mnemonic phrases are used to denote seeds in the form of a set of words. This seed will be used to generate every Bitcoin key you will need to transmit and receive Bitcoin.

This design is called the Hierarchical Deterministic (HD) framework and is an industry standard for Bitcoin key generation and management. Most wallets automatically generate new public keys when you want to accept Bitcoin.

The issue of public key or address reuse is no longer an issue. If you use the same public key every time you buy Bitcoin, anyone can easily track your entire payment history. Treating keys as disposable tokens significantly improves user privacy. A user can always restore their wallet as long as they know the recovery seeds, which are usually a list of 12 or 24 words that start with their wallet.

So, how much does a Bitcoin wallet cost? If you only store Bitcoin in the wallet, there is no cost to use a Bitcoin wallet. However, if you’re trying to complete a transaction, the exchange or device hosting your wallet will charge you different fees depending on what you’re trying to do.

A wallet can cost anywhere from zero to $200 or more. If you use a wallet as part of an exchange, you’ll likely pay a flat fee of a few dollars or a percentage of the total transaction value.

Bitcoin wallet types

mobile wallets

For those who actively use Bitcoin to pay for goods in stores or to trade face-to-face on a daily basis, a mobile crypto wallet is an essential tool. It works as an app on your smartphone, stores private keys and allows you to pay, trade and store crypto over the phone.

Also, some apps use the smartphone’s near field communication feature or NFC; this means that users can touch their phone to the terminal without having to provide any information.

Mobile wallets take advantage of simplified payment verification technology as they only work with small subsets of the blockchain, which relies on trusted nodes on the Bitcoin network to ensure they have the right information.

The downside is that these trusted nodes have control over coins and transactions, which goes against Bitcoin’s unreliable philosophy. However, these wallets are necessary for mobile phones due to limited system resources, but this is a possible drawback of easy access to funds.

Also, as another by-product of being a convenient on-the-go solution for Bitcoin storage, mobile wallets are prone to malware and hacking. You could lose control of your wallet if someone gains access to your mobile device, especially if two-factor authentication is not enabled.

Two-factor authentication (2FA) is the second layer of protection where you enter a code in addition to your username and password to log in. The main difference between a 2FA code and a password is that the 2FA code is sent to your email. or phone via SMS to confirm that you’re the one trying to log in. A safer 2FA method is to use an authentication app like Google Authenticator, FreeOTP or Authy because it is vulnerable to SIM swap attacks or email attacks.

It is recommended to deposit only as much Bitcoin as you need into the mobile wallet and store larger Bitcoin assets on separate hardware or in a paper wallet.

There is a wide variety of Bitcoin wallet apps for devices running on Android and iOS. They are lightweight wallets that do not download the entire blockchain to your phone or tablet but can scan the blockchain to calculate your balance. Beware of scams and fake wallet apps as there are many things that will steal your private keys.

Web wallets (exchange wallets)

Web wallets (a type of Bitcoin hot wallet) store your private keys on a server that is always online and controlled by a third party. Different services offer different features, some of which can connect to mobile and desktop wallets and copy your addresses between devices you have.

Like mobile wallets, e-wallets allow their users to access their funds on the go from any internet-connected device. Organizations running the website can access your private keys so they can have full control over your funds.

Most e-wallets operate on exchanges and there have been cases where exchanges have shut down and their users’ funds have been corrupted. Exchange wallets are also often targeted by hackers as they can be accessed using only your email address and password.

In some cases, currency wallets offer some degree of protection against loss of funds. For example, insurance or reserve funds to reimburse users when the exchange is hacked.

The prevalence of leaked passwords and emails makes this a particularly serious security risk because people often use the same email addresses and passwords across many different services. Remember that your email address is half of your login credentials.

Desktop wallets

Desktop wallets are downloaded and installed on your computer, private keys are stored on your hard drive or solid state drives (SSD). By definition, they are more secure than online and mobile wallets as they do not rely on third parties for their data and are harder to steal.

They are still connected to the internet, which naturally makes them less secure. However, desktop wallets are a great solution for those who trade small amounts of Bitcoin from their computer.

There are a variety of desktop wallets that cater to different needs. Some focus on security, others on anonymity, convenience, decentralization and other things. Wallets running as full nodes download the entire blockchain to your computer. This requires hundreds of gigabytes of disk space and a fast internet connection. However, they offer granular control over your transactions that you won’t find in most wallets. A few benefits of running such a wallet include, but are not limited to:

• Replace with fee checkbox: This allows you to increase the transaction fee later if you want to speed up your transaction.

• Intuitive combo box with transaction fee and speed control.

• Performance: Transactions are broadcast directly to the memory pool through a third-party node provider.

• API and CLI: The command line interface (CLI) offered by full node wallets provides a wide range of controls not found in lightweight wallet applications. The application user interface (API) provides application developers the ability to integrate Bitcoin-related functionality into their applications. This can also be used to build your wallet app.

hardware wallets

A Bitcoin hardware wallet is a rather unique type of BTC wallet that stores private keys on a secure physical device. It is believed to be the safest way to store any amount of Bitcoin. Unlike paper-based wallets that have to be imported into software at some point, hardware wallets can be used securely and interactively. They are immune to computer viruses as the stored funds cannot be transferred from the device in plain text and in most cases their software is open source.

Most hardware wallets have screens that add another layer of security as they can be used to verify and view important wallet details. For example, a screen might generate a recovery statement and confirm the amount and address of the payment you want to make. Therefore, as long as you invest in an original device made by a reliable and competent manufacturer, your money will be safe and secure.

Never buy a hardware wallet from any used goods market. There are fake hardware wallets in circulation that will steal money from your Bitcoin account. Always buy hardware wallets from the manufacturer and check if you are on the official website. Check the URL in your browser’s address bar to make sure it’s correct.

paper wallets

A paper wallet is a physical document that contains a public address to receive Bitcoin and a private key that allows you to spend or transfer the Bitcoin stored at that address. Paper wallets are often printed in the form of QR codes so you can quickly scan them and add the keys to a software wallet or a wallet app to transact.

A paper wallet can be created using services that allow users to generate a random Bitcoin wallet address with their private key. The generated keys can then be printed with some services that offer the option to order a tamper proof design or even a holographic sticker.

The main advantage of the paper wallet is that the keys are stored offline; this makes it highly resistant and completely immune to hacking attacks, including keystrokes logging malware such as keyloggers. However, some precautions still need to be taken when creating a wallet. When creating your wallet, you must make sure that no one is watching you or seeing where you have stored it.

To eliminate any risk of spyware monitoring your activities, it is recommended to use a clean operating system such as Ubuntu running from a USB flash drive or DVD. Once the paper wallet is set up, the website code should be able to work offline, allowing the user to disconnect from the internet before actually generating the keys. Finally, use a printer that is not connected to a network.

It is also important to understand that you are printing valuable private information on a piece of paper. Some precautions should be taken to protect that paper. For example, it is recommended to store in a sealed plastic bag and store in a dry, safe place to avoid water damage and general wear and tear. Some people prefer to laminate it and store it in a safe.

How to set up a Bitcoin wallet?

To set up a software wallet for Bitcoin, install a free software wallet client or app. For example, download desktop software wallets from websites and follow the onscreen instructions to install them.

Additionally, you can sign up for a Coinbase account to set up your Bitcoin web wallet. Conversely, if you don’t want to give your BTC wallet to a third party, buy a hardware wallet from its manufacturer. Because every wallet is unique, you need to follow the manufacturer’s instructions to set them up.

Physical Bitcoin vs banks

Physical Bitcoin

Physical Bitcoin coins tend to be preloaded with a fixed amount of BTC so that its value cannot be spent as long as the private key remains private. This is usually achieved by using a tamper evident seal.

The first of its kind, the Bitbill was shaped like a credit card, but most of the alternatives that followed it were shaped like round medals. Mike Cadwell, a cryptocurrency enthusiast nicknamed “Casascius”, created the first of the popular Casascius physical Bitcoin in 2011.

Private keys were hidden under a peelable hologram, leaving a tamper-evident mark when removed. Once used, the coin lost its digital value. Since then, there have been several new coin generators, and some companies offer preloaded cards with a certain amount of crypto.

Physical Bitcoin is now primarily used as collector’s items due to the inherent limitations of the physical currency. One of Bitcoin’s core value propositions is to enable seamless transfers anywhere in the world – physical currencies make this impractical.

Bank

Many banks block Bitcoin-related activities, including but not limited to wire transfers to cryptocurrency exchanges. Banks often cite money laundering as a reason why they choose not to offer this service, even though they have an incentive to suppress it to protect their business model. This is because Bitcoin was designed to reduce or eliminate the need for custodians such as banks.

In recent years, traditional financial institutions such as banks have taken an interest in not only developing cryptocurrencies but also offering custody services for existing cryptocurrencies such as Bitcoin. Regulators are also taking action to enable banks to offer cryptocurrency custody services.

Banking for cryptocurrency can be considered unnecessary, as Bitcoin securely stores cryptocurrencies and wallet information on the blockchain. Bitcoin also provides the ability to transact internationally without the need for bank approval or minimum balance fees. That said, banks are trying to stay relevant as the cryptocurrency grows.

There are also regulated cryptocurrency banks that can store Bitcoin. They offer bank-like protections like account monitoring and can kick in when suspicious activity is detected. These services also offer the ability to sell your cryptocurrency and withdraw funds to a traditional bank account.

These services are especially useful if you don’t hold cryptocurrency for a long time. The similarities with banks don’t end there, but your account can be frozen or your money confiscated. Also, while the overall experience of crypto local banks is more decentralized than the traditional banking system, you are subject to withdrawal limits, Know Your Customer (KYC) requirements and oversight. In addition, there are only a fraction of such banks that operate in a fully regulated manner.