Just like a wallet holding physical bills and coins, a Bitcoin wallet has the very important job of holding and storing the digital currency. Think of it as a secure virtual storage space. There are different types of cryptocurrency wallets, so before you get started with your own, we’ll get you familiar with the various types available.
What is a Bitcoin wallet?
A Bitcoin wallet is a digital place where you store your bitcoin. The wallet destination is often referred to as a “Bitcoin address”, which has a unique personal address used to receive bitcoin. Anyone who knows the address (a code that looks like a long serial number) can send bitcoin to this wallet.
Your bitcoin wallet is where your keys, both public and private, are held. For you to transfer, buy or sell bitcoin, you require a special passphrase that only you have access to. This passphrase is referred to as a private key.
Example of a Private Key
Example of a Public Key
To use a Bitcoin wallet, you would need a ‘bitcoin client’, which is most comparable to the browser and the internet. For example, you need Google Chrome to browse the internet just as you would need a Bitcoin client to use the blockchain. There are lots of different types of clients to enable a secure, easy, or regular use and storage of a wallet. A client can be an app, website, or device that enables you to use your bitcoin.
Before we delve deeper into the different types of wallets, always remember that if you own your keys, you own your Bitcoin. So, if you don’t own your keys, you do not own your Bitcoin.
Therefore, if you lose your keys, you, unfortunately, lose your Bitcoin - that’s why it’s important to always secure a backup. We’ll explain further below to avoid this from happening!
If you’re looking for a comprehensive guide on the functionality of Bitcoin wallets, check out our academy article, “What is a Bitcoin Wallet?’ here.
What do these wallets all have in common?
Firstly, they can all send BTC by scanning a QR-code and receive BTC by copy-pasting the address and sharing it with any contact who wants to transfer on the blockchain. Bitcoin wallets can also display the transaction history and an option to adjust the network fees.
Some wallets are enhanced by features such as linking to the blockchain block explorer, creating new receiving addresses, adding contacts, and changing the units of display i.e. mBTC for millibit instead of BTC.
Four Different Types of Wallets
There are four types of wallets and two major ways to differentiate between them. The first differentiation is whether it is a hot or a cold wallet, and the second, whether it is a light wallet or a full node wallet. Full node wallets have access to an entire copy of the blockchain, whereas light wallets do not.
The current size of the Bitcoin blockchain is more than 200 GB of storage. Now imagine downloading that amount of data to your smartphone - it would be a pretty hefty download! For that reason, light wallets generally connect to full nodes to access the blockchain history.
The difference between hot and cold wallets is the connection to the internet. Hot wallets are online wallets and cold wallets are offline.
1. Cold Wallets
Since cold wallets are not connected consistently to the internet, they are safer than hot wallets. The highest level of security is accomplished if a wallet is created offline in a cold wallet. The major advantage of cold wallets is their high level of security. However, they lack usability, for example, it is not easy to transfer between wallets. This is why cold wallets are generally used to store Bitcoin for long time periods of time.
An example of a commonly used cold wallet is the paper wallet. A paper wallet is a piece of paper that has the private key written on it.
2. Hardware Wallets
Perhaps the most common type of Bitcoin wallet is called a hardware wallet. Hardware wallets are cold wallets that need to be online to be able to transact. These wallets are special devices to which their purpose is to securely store bitcoin. The most popular hardware wallets are the Ledger Nano and the Trezor Model T.
Top tip: for security purposes, always order new hardware wallets directly from the manufacturer and not second-hand stores or third-party sales platforms.
3. Hot Wallets
A hot wallet is a Bitcoin wallet that is connected to the internet and often offered by crypto exchanges. The main advantage is an easy setup process (using just an email and password), however, the wallet keys are associated with the website provider and not you. Hot wallets are generally used for small amounts i.e if you want to store for a short time and plan to spend or transfer after.
Remember: not your keys, not your bitcoin!
Alternatively, there are other hot wallets like web wallets, which easily create, access, and use bitcoin through a browser. We’ll run you through what a web wallet does.
4. Web Wallet
Web wallets are usually managed by third parties. They’re simple to use, easily set up and can’t be physically stolen. However, they are only as secure as the provider who is hosting the web wallet. This means if anything goes wrong with the provider. i.e a security breach, your bitcoins may be compromised.
One of the most secure solutions to keep your bitcoin safe is to have a back up on a piece of paper, as a paper wallet and to use the wallet through a secure web wallet provider. Such service is offered by Bitwala. Creating a Bitcoin wallet in your Bitwala account goes with the highest security standards in the industry.
No third party can access your coins since the keys are displayed only to you during the creation of the wallet. As described during the wallet creation process, you can back up your wallet on a piece of paper.