Bitwala Academy

What is a Bitcoin wallet

After understanding how Bitcoin works, naturally, the next questions revolve around cryptocurrency ownership. So, what is a Bitcoin wallet and which one is the best for you? This article takes you on a journey to find the answers.

You definitely won’t have a leather wallet holding your bitcoin. You won’t have a signed contract declaring the purchase of your bitcoin. And, a Bitcoin wallet also won’t hold bitcoin in the typical sense of storage either.

So, how do Bitcoin wallets work and where should you store your bitcoin?

How do Bitcoin wallets work?

Bitcoin wallets enable the sending and receiving of the cryptocurrency by adhering to the Bitcoin protocol. These wallets are intricate software programmes that enable individuals with little to no technical knowledge to interact with the Bitcoin blockchain to transact value globally, without barriers.

Bitcoin is not stored in a wallet in the same sense that cash is held in your physical wallet. All bitcoin exists on the blockchain and to get rather technical, you don’t actually own the specific bitcoin that you hold. Instead, you own the combination of the keys that allows you to access the bitcoin and move it around. The bitcoin you buy is safe once you store your keys safely. Wallets hold at least one associated private key and a single public key. In a nutshell, it is the combination of the private key(s) and public key that create the concept of a Bitcoin wallet.

Example keys generated through bitaddress.org

Example keys generated through bitaddress.org

A Bitcoin address is like a traditional bank account number. However, unlike a bank account, one wallet can have multiple receiving addresses generated by its public key.

You can provide those new addresses to whoever wishes to send you bitcoin in order to conceal your original public key. The creation of new receiving addresses is availed of for privacy reasons, however, the coins are still sent to the same wallet. Thus, only your combination of keys can access and move the newly received bitcoin.

Learn more about how Bitcoin works here…

Bitcoin addresses either begin with 1 or 3 and look something like this: 1snowqQP5VmZgU47i5AWwz9fsgHQg94Fa. The Bitcoin blockchain is essentially a very long list of addresses comprising transactions mapped from address to address.

Example of the Official Snowden Defense Fund wallet on blockchain.info

Example of the Official Snowden Defense Fund wallet on blockchain.info

Backup Keys

If you forget or lose your wallet password/private key, you can use your backup key/seed phrase to recover your bitcoin.

Some wallets generate an extra key, on top of the private and public key. It's called a backup key and can sometimes come in the form of a mnemonic/seed phrase. A seed phrase can consist of a set of up to twenty-four words randomly generated from the private key. In some cases, your backup may contain two twelve word mnemonic phrases.

Seed phrases must be written down on paper and stored with the highest degree of security. The phrases are never visible to the wallet client operator and therefore, they cannot help you retrieve them.

Seed phrase with the words slim, sugar, lizard, predict, state, cute, awkward, asset, inform, blood, civil, sugar

Example of a seed phrase by Electrum

One way to perform a wallet recovery is to go to a GitHub.io hosted page (specified by your wallet client) and enter your backup key/seed phrase. You can choose to enter the values into the page specified by your wallet operator or you can download and run the recovery tool. Alternatively, wallet recoveries can be performed via any Bitcoin wallet client that offers the possibility to import wallets by entering your seed phrase.

Different types of wallets

What is a Bitcoin wallet may still be a question troubling your mind. So in this section, we explore distinct types of wallets to help clear up the confusion. There are various factors to consider while deciding on which Bitcoin wallet to use. Key considerations include the amount of bitcoin you plan to hold, the frequency with which you plan to spend and last but not least, the trade-off between heightened security and convenience.

Cold storage

Cold storage wallets refer to a method of “cold storage” for your bitcoin and come in the form of paper wallets, hardware wallets or on a USB. They’re completely offline. Accordingly, many also refer to them as offline wallets. In terms of security, offline wallets are more sophisticated than hot, or online, wallets. That's because they’re created offline and only need to be connected to the Internet when sending bitcoin. They’re not hosted on servers and as a result, they’re not commonly the target of hacking attacks.

Paper wallets

A paper wallet is the combination of the private key(s) and a public key printed out (most often, including QR format), on whatever material you decide to print on. You can either use a paper wallet generator to print your wallet or simply copy/paste your private keys into a document and hit print. In the example, we’re not recommending either option or the use of a specific paper wallet generator, but we’re simply giving an overview. Printed version of a Bitcoin paper wallet, public address and private keys on one side and tips and note section on the other

Click here to watch a video tutorial on paper wallets

Whatever you decide to do, it's crucial to remember to clear any information about the wallet from your computer and to store it safely. As an additional precaution, it could be worth it to laminate the paper to avoid issues with durability. Be innovative with ways to protect your paper wallet from natural disasters and find ways to conceal the private key.

Above all, paper wallets must stay on paper (or the material you printed on), so avoid any digital storage or digital photographs of the contents if you want to avail of the security offered by this method of bitcoin storage.

Cold storage is only secure if you take all the necessary precautions while generating your wallet. Moreover, single Bitcoin addresses should not be reused after sending or receiving bitcoin with them. If you’d like to use a paper wallet to store your bitcoin, we recommend that you dig even deeper to find the best setup for increased security and privacy.

Hardware wallets

Hardware wallets involve the physical storage of private keys on a hardware device. These devices never reveal your private key, even while connected to the Internet.

keepkey hardware wallet

Via Keepkey website

Hardware wallets can be connected to the manufacturer’s website, allowing you to move your coins, but they still remain offline. You always need the device to confirm your transactions. The device itself and its pin act as layers of authentication before your bitcoin can be sent to another wallet. Steer clear from third-parties to avoid potential hacking and only buy hardware devices from well-known manufacturers like Ledger, Trezor or Keepkey.

If you’re planning to get more techy, some popular hardware wallet devices can also be linked to an Electrum wallet. The beauty of hardware wallets lies in their advanced security, however users must not become complacent because attacks are not impossible.

Hot wallets

In contrast to cold wallets, hot wallets are always connected to the Internet. Hence, people choose hot wallets for convenience rather than security. They're useful for holding smaller sums of bitcoin to transact regularly. Different types include web, desktop and mobile wallets.

Web wallets

Web wallets are connected to exchanges, markets or other online service providers and enable instant Bitcoin transactions through a web browser. If you use a web wallet, you deposit your coins into the service providers' online wallet. They are considered one of the least secure wallet options and should not be used to store large sums of bitcoin.

Nonetheless, they deliver easy-to-use, convenient solutions for sending, receiving and storing small sums of bitcoin and are accessible anywhere with an Internet connection. Sometimes, web wallet clients hold the private key for you. As a result, it’s up to them to ensure your coins’ safety. In that instance, if the provider suffers an attack, it’s very probable that you will lose your bitcoin.

However, some web wallet clients implement multi-signature solutions allowing you to retain total control over your coins and bringing with them heightened security. With the extra security in place, you can let go of the fear of potentially deleting your desktop wallet and thus, losing your bitcoin.

Multi-signature wallets

Multi-signature (often referred to as multisig) wallets hold more than two keys. The keys are divided amongst the relevant parties to ensure the safety of one's coins. Multi-signature solutions are often used by web wallet providers or amongst persons who share wallets.

For example, BitGo hosts multi-signature wallets that have three keys (the private key, the backup key and another encrypted key held by BitGo). When a wallet is created, a private key is generated on the client-side, another key is created on BitGo’s side and a final backup key is created for the user based on the private key.

Two out of three keys are required for Bitcoin transactions to be authorised and for a wallet recovery to be performed. Transactions are signed with a user’s private key and are verified with the key held by the wallet client. In the case of a wallet recovery the backup key and the key held by the wallet client are sufficient to regain access to your coins.

Wallet clients such as BitGo, that offer multi-signature solutions, will never be able to access your coins because they only hold one out of the three keys. That means that if your wallet client is compromised, the hackers will not be able to steal your coins since you are the holder of the second and third (magic) keys. Finally, if your wallet client suffers insolvency, you will also be able to still access your coins, since only you hold the relevant keys to move the bitcoin.

Anyways, it’s harder for a hacker to crack two keys than one and that’s why multi-signature solutions are better to ensure enhanced security. It’s also harder to lose two keys than just one. That’s if you store them separately (of course, both in highly secure locations/multiple highly secure locations). That way, if you lose one, you still have access to your coins.

“Your keys, your bitcoin. Not your keys, not your bitcoin.” Andreas Antonopoulos

Desktop wallets

Desktop wallets (also called software wallets) are a type of crypto wallets that you download and store on your computer. With a desktop wallet, you are in total control of your coins and their security since your private key is stored on your hardware.

You can either download a desktop wallet as a “full node” or a “light client”. A full node wallet such as the Bitcoin core protocol (the original desktop wallet) downloads the entire Bitcoin blockchain to your computer. So, you should only download that wallet if you have ample space on your computer (an excess of 145 GB to be precise).

You can opt to contribute to the network as a full node, however, you can also use the wallet without your computer acting as a full node. The vast majority of desktop wallets come in the form of “light clients” - Simplified Payment Verification (SPV) wallets. Instead of downloading the whole Bitcoin blockchain, they simply synchronise themselves to it.

Desktop wallets are considered to be one of the more secure options since they are not dependent on third parties like web or mobile wallets. However, they are still connected to the Internet and there are some potential risks associated with their use.

For example, if your computer is hacked or infected with a virus, your coins could be stolen. Or, if you lose your computer, you may also lose your coins along with it. The latter case, alongside the possibility of accidentally deleting your desktop wallet are reasons why it’s so important to properly backup your wallet and store the backup information with great care.

Mobile wallets

The name says it all. This type of wallet is active on your mobile and that's where it stores the private key. These wallets are useful for quickly transacting small amounts of bitcoin on-the-go, especially with the comfort of scanning QR codes. Although, they’re not recommended for large-scale bitcoin storage for reasons of both mobile safety and their connection to the Internet. You can employ various methods to protect your mobile wallet such as setting a strong password, multi-factor login, and backing up your private key securely. Nonetheless, these wallets don’t offer great security, nor privacy since we all know that it’s easy to break or lose your phone or worse, for it to be stolen.

Brain wallets

If you’re feeling risky, then you might consider using a brain wallet. Disclaimer: we wouldn’t if we were you.

The use of cryptocurrency wallets is set to become even more widespread as we move into the blockchain era. Bitcoin wallets are a gateway to the crypto economy, which is much more developed than some might expect. There are many ways to use bitcoin, including spending it with merchants.

If you’re interested in finding out more about bitcoin’s use-cases, check out our academy article on How to Use Bitcoin.