July 6, 2020
Bitcoin wallets enable the sending and receiving of BTC by adhering to the underlying Bitcoin protocol. These wallets are software programmes that allow individuals with little to no technical knowledge to simply interact with Bitcoin’s blockchain to transact value globally without the barriers you would find in the traditional banking system.
Contrary to popular belief, Bitcoin is not stored in a wallet in the same sense that your cash is stored in your real, physical wallet. All Bitcoin exists on the blockchain, so you do not technically own the specific Bitcoin that you hold in your wallet. Rather, you own a combination of keys that enables you to access the Bitcoin and send it or move it around. Wallets generally hold one private key and a single public key.
In summary, it is the combination of both the private key and public key that creates the Bitcoin wallet.
A Bitcoin address is similar to a traditional bank account number that you would give to your friends to send and receive money. However, unlike a bank account, one wallet can create multiple receiving addresses generated by its public key.
You can create and provide these new addresses to whoever wishes to send you Bitcoin, which will allow you to conceal your original public key - remaining private. Bitcoin addresses will either begin with a 1 or 3 and look something like this 1spoowQP4JiEgP98i1AWwl9HQf33Fa.
If you have forgotten or lost your wallet password or private key, you can use the backup key or seed phrase to recover your precious Bitcoin.
Some wallets will generate an extra key on top of the public and private key it generates, which is generally referred to as a backup key. A seed phrase will consist of a set of up to 24 words that are randomly generated from the private key. It is important that your sed phrase is written down on paper and stored with the highest degree of security. These phrases are not visible to anyone so nobody can help you retrieve them if lost.
The idea of what a Bitcoin wallet really is may still be confusing. So in this section, we will breakdown the various types of wallets available to clear up some of this confusion. Before reading on, it is important to consider the various factors on which kind of Bitcoin wallet to use based on your individual circumstances.
Key considerations to help you make this decision are the amount of Bitcoin you plan to hold, how often you are planning to spend or send the Bitcoin and finally your personal trade-off between security and convenience.
A cold storage wallet refers to a certain methodology (i.e cold storage) where your Bitcoin is secured in the form of hardware wallets, paper wallets or on a USB. These wallet types are completely offline and are the gold standard in terms of security. That is because they’re created offline and remain offline until you need to connect to the internet to send your Bitcoin. This completely cancels out a chance of hacking attacks because they are not hosted on online servers.
A hardware wallet involves the physical storage of your private keys on a device like a USB stick. These devices will never reveal your private key, even when you decide to connect them to the internet to spend or send your Bitcoin.
You can move your Bitcoin on hardware wallets by connecting to the manufacturers website, but your keys and information will always remain offline. You will need the device to confirm your transactions. The device and its pin act as authentication layers before your Bitcoin can be successfully transferred to another Bitcoin wallet. When looking for Bitcoin hardware wallets, stick to well-known brands like Ledger, Trezor or Keepykey.
So we discussed cold storage, or cold wallets, but what about hot wallets? Hot wallets are always connected to the internet - so people will generally choose hot wallets for convenience as opposed to security. They’re useful for holding smaller sums of Bitcoin to send and receive regularly, or if you are an avid trader. The different types of hot wallets include web, desktop and mobile wallets.
Web wallets are wallets that are connected or hosted by exchanges, markets or other online service providers that enable instant BTC transactions. This is largely considered to be the least secure of all wallet options and should never be used to hold large sums of Bitcoin. Always remember: Your keys, your Bitcoin. Not your keys, not your Bitcoin.