Bitcoin Wallet – What Is It?
Although Bitcoin exists only digitally, you still have to have a place where you store it, whether you want to use it today to buy goods or to invest it for the future.
You’ll also need a secure Bitcoin wallet when starting to purchase Bitcoins. Fortunately, crypto wallets generally function just like real wallets-they keep track of your cryptocurrencies and store proofs of ownership.
Bitcoin Wallets – What Are They?
Bitcoin wallets are digital wallets used to hold cryptocurrencies such as Bitcoin and Ethereum along with other cryptocurrencies like XRP or Ripple.
Essentially, a Bitcoin wallet (and any digital wallet for that matter) is a software application designed to store encryption key data for accessing a Bitcoin public address, as well as to make transactions possible, according to Alexandre Kech, CEO of Onchain Custodian, which provides custody services for digital assets. The Bitcoin wallet not only stores bitcoins but also protects them with a private key. This means that only you, and anyone you give the code to, can access your bitcoins. It’s sort of like a password on an online bank account.
Different coins and tokens can be stored, sent, and received with a crypto wallet. There are wallets that support only basic transactions, while others offer additional features, such as support for blockchain-based decentralized applications. One of these may enable you to earn interest on your cryptocurrency holdings by loaning your cryptocurrency out.
The Bitcoin Wallet: How Does It Work?
Using a Bitcoin wallet is much more complicated than opening a leather wallet because Bitcoin operates on a secure digital ledger called a blockchain. Sarah Shtylman, fintech and blockchain counsel at Perkins Coie, says Bitcoin wallets can be viewed similarly to email.
Similarly, to send Bitcoin, you need your coded key to access your cryptocurrency, or your password, to log into your account. You use your password to log into your account, input the recipient’s address, and then hit send. Your intended recipient will then need their Bitcoin wallet address, similar to an email address, to receive the cryptocurrency.
Public addresses in the Bitcoin network refer to ledger entries, while private keys indicate which entries can be altered on the blockchain,” says Shtylman.
When it comes to Bitcoin, you need to keep track of your wallet’s key. If someone gets their hands on it, they can hack into your wallet and steal your cryptocurrency. If you lose your key, you will lose all access to your digital assets. Wallets for cryptocurrencies are frequently decentralized and cryptographically secured, meaning there is no one-stop-shop where you can call to fix your password or prove your ownership. Bitcoin worth billions of dollars, about 20% of all Bitcoin in circulation today, is locked up in digital wallets users cannot access.
Bitcoin Wallet Types
With Bitcoin wallets, you can find them in a variety of styles, each offering the tradeoff between convenience and security.
As apps for phones, tablets, and other mobile devices, mobile wallets such as Mycelium and Edge can be used. In Independent Reserve, a crypto exchange based in Asia and the Pacific, Adrian Przelozny, CEO, says that funds can be transferred easily to other wallet addresses represented by QR codes. In addition to being convenient and portable, they are also the least secure. Not only can the crypto wallet itself be compromised, but in case of theft, your coins can also be taken.
Coinbase and Blockchain.com are web-based wallets that allow you to access your coins through online third parties. They allow you to transact with your coins from any device with an internet connection. In many cases, these web-based wallets are combined with crypto exchanges, making it possible for you to trade and store crypto in one place.
Web wallets may be convenient, but they still present many of the same risks as mobile wallets, including the possibility of being hacked since they connect to the internet. Despite being rare and the funds that are stolen are generally replenished through insurance, many people are not willing to risk losing their money in this way. And exchanges have shut down, which means that people have lost coins in their web wallets.
These wallets store coins on your hard drive and can be downloaded onto your computer, like Atomic Wallet, Electrum, and Exodus. It is more secure than web or mobile apps because the coins are not being held by third parties. However, hackers can get to your coins because your computer is connected to the internet.
To perform transactions, hardware wallets must be connected to the internet, either through the wallet itself or through another device with internet access. Hardware wallets are less secure than software wallets because they are physical devices, like USB drives, that are not connected to the web. To make the connection, a second password typically needs to be entered. This creates a higher level of security, but also produces the possibility that you could lose your encryption if you lose your password. Cryptocurrency wallets that are built on hardware are also called cold storage or cold wallets (hot wallets, by contrast, connect to the internet.)
Hardware wallets make transacting more cumbersome by requiring users to connect their devices to the internet, says Przelozny. “I, therefore, recommend them for investors who want to act long term and don’t want to leave their coins on exchanges.”
Choosing a Bitcoin wallet: Things to consider
There are many crypto wallets to choose from, and choosing the right one for you can be a challenging task. Here are some things you should keep in mind when evaluating your options.
The best aspects of each wallet can be combined, such as keeping a small amount in a mobile wallet for transactions but investing the bulk of your holdings in a hardware wallet that is more secure.
1. Think About How You Are Going to Use Crypto
“Generally, safety versus speed becomes the trade-off. In other words, security versus convenience,” says Przelozny. For traders and spenders who frequently exchange tokens, a convenient mobile or web wallet connected directly to exchange might be a better option while for long-term investors who are interested in keeping their crypto in cold storage, a mobile wallet might be best.
However, if you choose to move your crypto from the exchange and wallet you purchased it on, you will probably need to pay a withdrawal fee for it to be transferred to your chosen wallet.
2. The Reputation of the wallet
Cryptocurrency is a decentralized currency, so it’s not tethered to any one wallet or brand. Read reviews to find out how the user experience is, whether extra features are available, and, of course, how secure it is. Keep an eye out for wallets that have previously been hacked and avoid those that have been severely compromised.
3. Backup options for your wallet
In some wallets, you have the option to store your keys on a different device, such as a hard drive, so that if your computer or mobile device crashes, you can retrieve your coins again. It makes sense to choose a wallet that gives you the ability to back up your data thoroughly if you plan to own a lot of cryptos.
4. Take note of key management
Some wallets let the wallet’s service provider manage the wallet keys, but others have their own setup for who is responsible for maintaining private keys, explains Shtylman. By contacting them if you lose your key, you may be able to regain access.
It may be impossible for you to regain access to a wallet whose key you have lost if you use one of the wallets that rely on the user. Your wallet may not even be known to the manufacturer.
It may be worth focusing on providers who retain custody of your key if you’re concerned about getting locked out of your Bitcoin wallet. To preserve your control of your keys and your coins-you may, however, choose a crypto wallet where you retain complete control of your keys.