The first bitcoins appeared in the year 2009. It is still unclear who exactly is behind the idea. It might have been one person or a group of people under the name Satoshi Nakamoto. Today, bitcoin is the most popular cryptocurrency. Every day, huge numbers of transactions are being made with this digital currency. However, to store it, you need a bitcoin wallet.
What is a bitcoin wallet?
First we should establish what is a bitcoin wallet, exactly. Digital currencies do not exist physically. You cannot withdraw them from an ATM and put them in your pocket or inside a traditional wallet. The way to store bitcoins and other cryptocurrencies was a problem which needed immediate solving.
Eventually, the idea for a bitcoin wallet arose – which later extended to other digital currencies. It is not a material wallet which you can take into your hand (although there are hardware and paper wallets). A bitcoin wallet is usually digital. It’s a special application which enables you to store and manage your bitcoins, to perform transactions and transfers. A bitcoin wallet can be compared to a bank account, where traditional money is kept but has a virtual balance record form.
How do bitcoin wallets work?
Despite what you might think, you won’t find any bitcoins in a digital wallet. A wallet essentially mediates between the bitcoin owner and blockchains. A bitcoin wallet stores information about the currency you own and indicates the blockchain in which your cryptocurrency is located.
Every bitcoin wallet is comprised of these elements:
- wallet address – are you wondering what is a bitcoin address? It’s quite simply the address of the blockchain to which you can transfer bitcoins;
- private key – a type of password or signature which is used for the authorisation of all the operations you perform on your bitcoins. This key is generated automatically and consists of letters and numbers;
- public key – it is generated based on your private key and is also made up of letters and numbers. It is something of an account number which can be shared with others. This key allows the verification of bitcoin resources.
How to set up a bitcoin wallet
Getting a bitcoin wallet isn’t particularly difficult. You can do it quickly and easily. Of course, it all depends on what kind of wallet you wish to have. There are many different types, but more on that later. For example, in the case of browser wallets, you only need to enter your e-mail and set up a password. Such platforms usually give you the options to Create your wallet or Register. No matter the type of wallet you are using, safety matters are extremely important – which we will also cover in this article. You have to remember that with any kind of wallet you chose, you will always have to use your public and private key.
Types of bitcoin wallets
There are many types of bitcoin wallets to choose from. That means that you can pick the one which is the best for you and fits your own needs. Bitcoin wallets can be:
- cold wallets (hardware, paper) – they’re very safe. You can store huge amounts of data inside them, but you can also easily lose them (e.g., theft or physical damage);
- hot wallets (mobile, browser, computer) – they’re extremely convenient but less safe because you need to connect to the Internet in order to use them. The source codes of some hot wallets can be shared, which on the one hand helps to find bugs, but on the other – increases the risk of hacker attacks.
Let’s discuss the types of bitcoin wallets in more detail.
Desktop bitcoin wallet
Desktop bitcoin wallets can be installed on any computer as an application. It doesn’t matter what operating system you are using because such wallets can work on any platform. These wallets need constant Internet access which means that you have to ensure maximum security for your private code. It’s best to encrypt the whole disk partition on which the bitcoin wallet is installed.
There are two types of desktop wallets to choose from:
- full applications – full versions which require downloading the whole blockchain. Such applications take up a lot of space (even up to a couple hundred gigabytes). They synchronize periodically and take up most of the computer’s resources;
- lite applications – the block is stored on an external server which means that it does not take up any hard drive space. This kind of application works quite smoothly and quickly.
Desktop bitcoin wallets are e.g., Exodus, Wasabi, Jaxx, Electrum.
Browser bitcoin wallet
Bitcoins can also be stored in many different online platforms. Those are called browser wallets. They are a type of hot wallets. Browser wallets are certainly very comfortable to use, but you have to be careful where you keep your digital money. It’s a similar situation as with banks – better to use the renowned and trustworthy ones.
In order to use a browser bitcoin wallet, all you need is Internet access. You just have to log in to your wallet and you’re free to make any bitcoin operations you wish! But this kind of comfort comes with a price. In reality, your wallet is actually in the hands of another party – the platform operator, who stores your private key. That is why you should always look for reliable browser wallets.
One such example is Blockchain.com.
Stock exchange bitcoin wallet
Many people use cryptocurrency exchanges to buy and sell their bitcoins. So, your digital currency can also be stored on exchanges. Your account on the exchange can also be called a wallet because it allows you to perform the same operations as any other bitcoin wallet. The only difference is that you don’t have to install anything new or set up any accounts to be able to manage your digital currency. The account you’re using to trade bitcoins on the exchange is enough.
However, you should remember the security aspects, so that you don’t end up losing your digital assets. Exchanges usually offer additional safety measures when logging in, such as two-step verification with an SMS code, necessary confirmation when logging in from a new IP address, etc. Also, remember that in the event of a stock market collapse, you lose all your bitcoins. This kind of wallet definitely comes with a risk.
Any cryptocurrency exchange is a good example – BitBay, Binance, Kriptomat.
Mobile bitcoin wallet
Hot wallets also include mobile wallets which can be installed on smartphones or tablets. You can get them for both – Android and iOS systems. They come in the form of a very handy app. It’s the perfect solution if you’re often making payments using bitcoins. In the case of mobile wallets, it’s a very fast and easy operation – you just have to scan a QR code. You have full control of your funds, unlike in the case of the stock exchange bitcoin wallet. What’s more, mobile wallets often also work with traditional currencies (FIAT).
Some of the most popular smartphone bitcoin wallets are:
- Bitcoin Wallet;
Hardware bitcoin wallet
One of the best types of wallets are definitely hardware (cold) wallets. They come in the form of an external device (similar to a USB flash drive) which has to be connected to the computer or other equipment which can read data through USB. You can use your hardware wallet anywhere you can plug it in. You don’t even have to worry that another computer has a virus. In the case of hardware wallets, it doesn’t matter.
All the information is stored within the hardware wallet which is where the transactions are signed. Everything happens within a closed environment, to which no one else has access. Only the owner of the device has access to the private key. Any and all operations may be confirmed with an additional PIN number. Hardware wallets are highly specialised devices. Their huge asset is that they work without the need for an Internet connection. What’s more, they are very easy to use. Unfortunately, hardware wallets aren’t free – and some of them can really cost you.
Some examples of hardware bitcoin wallets are: Ledger NANO X, Trezor One, BitBox.
Paper bitcoin wallet
Paper wallets are in the same category as hardware bitcoin wallets. You can make them yourself. They are considered to be very safe. How do paper bitcoin wallets work? You just have to write down your private key on a piece of paper. Contrary to what it may seem like, this paper version of a wallet is very safe. Sure, it can get lost or destroyed – which is why you need a few copies of your wallet and store them in a safe place. It’s also not particularly comfortable to use, because the key must be written down by hand.
How to use a paper bitcoin wallet? Software can be helpful here. Follow these easy steps:
- download a special script from GitHub which generates a paper wallet;
- unpack the script on your computer;
- disconnect your computer from WiFi for safety;
- after running the script, you have to move your mouse around until you reach the 100% value;
- chose the paper wallet option;
- a pair of keys should be generated. You can write it down or print it out.
How to use bitcoin wallet
The exact way of using your bitcoin wallet depends on the type of wallet you have. For example, if it’s a browser wallet, you simply have to log in. Next, choose the option Send or Transfer. If you wish to pay with bitcoin or make a different transaction, you have to give your public key (wallet address) to the receiver. Then you establish the number of bitcoins you wish to send. Make sure you check everything thoroughly because the transaction cannot be cancelled or reversed. If everything is correct, confirm the operation. If you wish to receive bitcoins, click on the Request option. Then copy your wallet address and send it to the person who is supposed to transfer their bitcoins to you. As you can see, using your bitcoin wallet isn’t particularly difficult.
Securing your bitcoin wallet balance
Security is a very important aspect in the world of bitcoin wallets. You cannot ignore the fact that bitcoin theft happens. However, more often than not, wallet owners themselves are to blame. Many of them don’t give much thought into the type of wallet they chose. Amongst safe wallets, there are also some scams – false wallets set up only to later get stolen. What’s more, private key theft is also a recurring problem. It’s particularly important to protect it. It’s best to create it without being connected to the Internet. You should also always create backups in safe places and encrypt your bitcoin wallet.
A bitcoin wallet is necessary if you wish to store your cryptocurrency in a comfortable way and be able to easily perform transactions. However, you should be very careful when choosing your wallet. Your bitcoin wallet balance security should be your biggest priority. Choose your bitcoin wallet type according to your needs, preferences, but most of all – the available security measures.