Although bitcoin only exists digitally, you still need to store it somewhere, whether you hope to use it to buy goods or services today or to invest it for the long term.
That’s why when you start buying bitcoin, you’ll also need to start using a bitcoin wallet. Fortunately, crypto wallets generally work like physical wallets: they keep track of your cryptocurrencies and store the information that proves ownership of the tokens you hold in them.
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what is a bitcoin wallet?
a bitcoin wallet is a digital wallet that can hold bitcoin and other cryptocurrencies, such as ethereum or xrp.
“A bitcoin wallet (and any crypto wallet, for that matter) is a digital wallet that stores the crypto material that gives access to a public bitcoin address and enables transactions,” says alexandre kech, executive director of onchain custodian , a custody service for digital resources. Bitcoin wallets not only contain your digital coins, they also protect them with a unique private key that ensures that only you and anyone you give the code to can open your bitcoin wallet. think of it like a password to an online bank account.
With a crypto wallet, you can store, send and receive different coins and tokens. some only support basic transactions, while others include additional features, such as built-in access to decentralized blockchain-based applications, commonly known as dapps. Among other things, these may allow you to lend your cryptocurrency to earn interest on your holdings.
how does a bitcoin wallet work?
Because bitcoin operates on a secure digital ledger called a blockchain, using a bitcoin wallet isn’t as simple as opening a leather flap. For that reason, it can be helpful to think of a bitcoin wallet like email, says sarah shtylman, fintech and blockchain advisor with perkins coie.
To send an email, you must use your password to log in to your account, enter the recipient’s address, and then press send. To send bitcoins, you also need your encrypted key, essentially your password, to access your cryptocurrency. then you need your intended recipient’s bitcoin wallet address, similar to an email address, to send them the cryptocurrency.
“In the bitcoin network, the public address is an identifier that points to a particular ledger entry (i.e., a bitcoin balance) on the blockchain, and the private key is what allows your holder to make changes to the associated ledger entry (i.e. to transfer the bitcoin to a different address),” says shtylman.
It is important that you keep track of your bitcoin wallet key. if someone else has it, they can hack your wallet and send it to their own wallet. And if you lose your key, you could lose access to your cryptocurrency. That’s because many cryptocurrency wallets are decentralized and cryptographically protected, meaning there’s no central customer support number you can call to prove your ownership and identity and reset your password. an estimated 20% of all bitcoins currently in circulation, worth billions of dollars, are lost in digital wallets that users cannot access.
types of bitcoin wallets
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As with physical wallets, bitcoin wallets come in a variety of styles, each offering a balance between convenient access and security against theft.
mobile
Mobile wallets, like mycelium and edge, are those that run as apps on phones, tablets, and other mobile devices. “Transactions are easy as funds can be sent to other wallet addresses represented by QR codes,” says Adrian Przelozny, CEO of Independent Reserve, an Asia-Pacific cryptocurrency exchange. “While they are great for portability and convenience, they are also the least secure.” Not only can the crypto wallet itself be hacked, but if someone steals your device, they could also take your coins.
website
Web-based wallets such as coinbase and blockchain.com store their coins through an online third party. You can access your coins and make transactions through any device that allows you to connect to the internet. These web-based wallets are often associated with crypto exchanges that allow you to trade and store crypto in one place.
While convenient, web-based wallets still present many of the same risks as mobile wallets, namely that because they are connected to the internet, they can be hacked. Although this is a rare occurrence and stolen funds are usually replaced through insurance, you may not want to take this risk with your money. Also, there were times when exchanges were closed and people lost the coins in their web wallets.
desktop
Desktop wallets, such as Atomic Wallet, Electrum, and Exodus, are programs you download to a computer to store coins on your hard drive. this adds an extra layer of security compared to web and mobile apps because you don’t rely on third-party services to store your coins. still, hacks are possible because your computer is connected to the internet.
hardware
hardware wallets are physical devices, like a usb drive, that are not connected to the web. To make transactions, you must first connect the hardware wallet to the internet, either through the wallet itself or through another device with internet connectivity. there is usually another password involved to make the connection, which increases security but also increases the risk that you could lock your crypto if you lose the password.
Hardware-based crypto wallets are also known as cold storage or cold wallets. (Internet-connected wallets, by contrast, are called “active wallets”).
“By design, hardware wallets make transactions more cumbersome, as users must connect their device to the internet to sign an outgoing transaction,” says przelozny. “As such, they are useful for long-term investors who are wary of leaving their coins on an exchange.”
paper wallets
In a paper wallet, you print your key, usually a qr code, on a paper document. this makes it impossible for a hacker to access and steal the password online, but then you need to protect the physical document. “Paper wallets are rarely used anymore, as they probably represent the biggest risk in terms of private key destruction, loss, or theft,” Kech notes.
what to consider when choosing a bitcoin wallet
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Selecting the best crypto wallet for you can be an arduous process, so here’s what to consider when evaluating your options.
You’re not tied to any particular type forever; you can have multiple bitcoin wallets. combines the best features of each, like keeping a small amount in a mobile wallet for transactions, but keeping most of your holdings in a more secure hardware wallet.
1. think about how you plan to use crypto
“Usually the trade-off will come down to safety versus speed. In other words, security versus convenience,” says Przelozny. For someone who trades and spends tokens frequently, the best crypto wallet might be a more convenient mobile or web option connected directly to an exchange, while someone who has a large amount of crypto as a long-term investment may be better off using a more convenient storage. cold wallet.
However, keep in mind that any time you withdraw cryptocurrency from the exchange and the wallet you bought it on, you may be required to pay a withdrawal fee to move it to the wallet of your choice.
2. investigate the reputation of a wallet
When you buy cryptocurrency, you are usually not tied to any one brand or type of wallet. Please take the time to read reviews about the user experience, additional features, and of course, security. pay attention if a wallet has ever been hacked and avoid those that have faced serious breaches in the past.
3. investigate wallet backup options
Some wallets allow you to back up your data using another method, either online or to a physical device. That way, if your computer or mobile device crashes, you can regain access to your coins. if you plan to own a large amount of cryptocurrencies, you can prioritize wallets that allow you to fully back up your data.
4. pay attention to key management
Different wallets have different settings for who is in charge of holding the private keys, which has big implications for you, says shtylman. with some wallets, the wallet keys are managed by the wallet service provider. this means you can regain access if you lose your key by contacting them.
Other wallets, however, are entirely up to the user. even the manufacturer may not know the private key that protects the wallet. in these cases, it may be impossible for you to regain access to a wallet whose key you have lost.
If you’re worried about being locked out of your bitcoin wallet, you can focus on providers that retain custody of your key. however, if the non-centrality of cryptocurrencies appeals to you, you can opt for a crypto wallet where you retain full control of your key and, by extension, your coins.
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