June 19, 2024

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What is a Bitcoin Wallet

What Is a Bitcoin Wallet?

Bitcoin wallets are software applications or hardware devices used to store Bitcoin. Instead of storing hard currency, Bitcoin wallets store the private keys needed to send or receive cryptocurrency.

Anyone with access to a wallet’s private keys has access to all the cryptocurrency stored in that wallet. Bitcoin wallets can be hardware devices similar to USB sticks, or they can be digital apps accessed on a smartphone or other device. Bitcoin wallets are considered “hot” if they are connected to the internet or “cold” if they are not.

How Does a Bitcoin Wallet Work?

Bitcoin was the first cryptocurrency to run on a blockchain network. It is a decentralized digital currency secured by a network of users that verify and record every transaction in a public ledger. The Bitcoin network allows users to make global financial transactions without relying on a government, bank or other central authority.

Bitcoin is like a digital version of fiat currencies that are backed by governments or central banks. Bitcoins do not exist physically, they are merely digital balances kept on the public ledger. Bitcoin is secured via cryptography, which is why it is called a cryptocurrency.

A bitcoin wallet is similar to a keychain in that it contains pairs of a user’s public and private keys. These keys are like passwords and serve as proof that the person holds the Bitcoin needed to complete each transaction.

When you create a Bitcoin wallet, the wallet software will typically generate a seed phrase that can be used to recover your Bitcoin from the blockchain if your computer breaks or its hard drive becomes corrupted.

There are different types and classes of Bitcoin wallets that vary based on security, convenience, storage type, accessibility and other factors. The wallets themselves are very basic pieces of software relative to the entire Bitcoin blockchain, and most wallets don’t actually store the full blockchain. Instead, the wallets query the blockchain to access a user’s balances and inform them of transaction status.

It’s typically free to store Bitcoin in a wallet, but users may be charged a transaction fee for sending or receiving Bitcoin.

Mobile wallets that run as an app on your smartphone are a popular choice among users who regularly make Bitcoin transactions on a daily basis. Web wallets, also known as exchange wallets or e-wallets, store private keys in an online server controlled by a third party. Users can also download and install desktop wallets on their computers.

Private and Public Keys

Private keys are used to send Bitcoin and should be kept confidential. Your private keys are stored in your Bitcoin wallet, and your Bitcoin balance is stored on the blockchain. Private keys are like passwords used to access your Bitcoin on the blockchain. Public keys are used to receive Bitcoin from others and must be shared publicly with anyone sending you Bitcoin. Most cryptocurrency wallets will automatically create a new public key each time you want to receive Bitcoin. Both public and private keys are a necessary part of completing a secure Bitcoin transaction without relying on third-party verification.

Bitcoin Wallet Safety

To ensure that you will always have access to keys stored in a Bitcoin wallet, write down and safely store your seed phrase in a place you will remember. Your seed phrase is typically a list of 12 or 24 words automatically generated by your wallet. Your wallet can use your seed phrase to derive your private keys. If someone steals your seed phrase, they can potentially steal all the Bitcoin associated with the private keys stored in your wallet. If you lose or forget your seed phrase, there will likely be no way to recover your Bitcoin if your wallet is lost or destroyed.

Bitcoin Wallet Security Tips

In theory, the Bitcoin blockchain network is completely secure and all the transactions on the network cannot be compromised by a third party. However, an individual’s Bitcoin is only as secure as the private key required to access and send the cryptocurrency.

To help protect against your seed phrase getting lost or stolen, you can memorize your seed phrase and store it in a safe deposit box. Cold, or offline, storage is typically considered to be more secure than hot, or online, storage. It’s also safer to store your Bitcoin in multiple wallets rather than putting all of it in one wallet. Finally, beware of phishing scams or criminals using fake credentials in emails, advertisements, social media posts and elsewhere to try to gain access to your private keys or seed phrase. There are even reports of some phishing apps that are simply fake, look-alike versions of popular Bitcoin wallets.

Why You Need to Know About Bitcoin Wallets

Some cryptocurrency investors see crypto as the universal global online currency of the future, and Bitcoin is currently best-positioned for that role. Others see Bitcoin as an increasingly important asset class and necessary part of any diversified investment portfolio. However, to either use or invest in Bitcoin, you must protect your holdings using some form of Bitcoin wallet. Understanding what a Bitcoin wallet is, how it’s used and how it works plays an important role in keeping your Bitcoin safe.

Popular Bitcoin Wallets

There are dozens of popular Bitcoin wallets that each have their own advantages and disadvantages. Some examples:

  • Coinbase Global Inc. (COIN).
  • Trezor.
  • Ledger. 
  • Exodus. 
  • Mycelium.

Coinbase, a cryptocurrency exchange platform, offers a Bitcoin wallet that has a user-friendly interface that makes it easy for new investors. Trezor sells hardware Bitcoin wallets that are known for their high level of security. Ledger also makes hardware Bitcoin wallets that have stainless steel covers, making them extremely durable for users expecting a bumpy ride. Exodus is a Bitcoin wallet that is optimized for desktop usage. For more advanced cryptocurrency users, Mycelium offers a mobile Bitcoin wallet that provides free cold storage.

Hot Wallets vs. Cold Wallets

Hot wallets, or Bitcoin wallets connected to the internet, typically make it faster and easier for users to trade and spend their Bitcoin. However, any wallet connected to the internet is less secure than one that is not. Much like a traditional wallet that stores dollar bills, it’s typically not a good idea to keep a large amount of money stored in a hot Bitcoin wallet. If your hot wallet balance gets low, you can always send more money from a secure cold wallet into your hot wallet for daily use, much like how someone might withdraw cash from an ATM to refill their physical wallet.

Cold wallets are relatively secure compared to hot wallets. Stealing Bitcoin from a cold wallet would typically involve physical possession of or access to the wallet. The thief would also need any passwords or PINs associated with that wallet. Cold hardware wallets are considered extremely secure, but they are also the least convenient storage method. To access Bitcoin stored via a hardware wallet, the wallet must be turned on and then connected to the internet. Finally, hot wallets are often free, but most cold, hardware wallets cost between $50 and $200.

FAQs

No. No matter how secure the Bitcoin blockchain is, there has been a long history of cryptocurrency exchanges and wallets being hacked. To minimize this potential, only trust wallets with proven track records that are well-reviewed by reputable sources.

Interfaces differ from wallet to wallet, but most wallets have some form of “send” or “receive” button or icon. Once you’ve chosen to send, you will typically need to paste the other party’s address in your wallet or scan a QR code directly from the screen of the receiver’s wallet.

Many software Bitcoin wallets are free to download and use. Hardware Bitcoin wallets typically cost in the $50 to $200 range.

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