A Bitcoin wallet is a collection of private keys but can also refer to client software used to manage those keys and make transactions on the Bitcoin network. In simpler terms, a Bitcoin wallet is like a physical wallet. It allows you to receive bitcoins, store them, then send them to others. A wallet could either exist in the form of software or hardware. Here are some of the prominent Bitcoin wallets:
A mobile bitcoin wallet is simply an app for your smartphone (Android, iOS, or Windows Phone) that allows you to send and receive bitcoins. The first step of receiving Bitcoins with a mobile wallet is to set up the device properly to send and receive Bitcoin payments. Once configured, you will use the app to scan QR codes containing sending/receiving addresses.
Another standard method is copying/pasting by manually typing in each character of the address. While these are unnecessary steps, they are important ones, so please follow them carefully if you want an uninterrupted experience.
Mycelium is one of the most popular Android wallets around today. It’s like a cross between the official bitcoin wallet and Bread wallet. That means that its interface is extremely user-friendly; it will feel familiar if you’ve ever used any smartphone wallet before now. Mycelium also includes unique features that you will not find with many other wallets. For example, an inbuilt feature will let you buy and sell bitcoin directly from your wallet app.
Hardware wallets are physical devices where you can store your Bitcoins. These are generally regarded as the most secure form of Bitcoin storage, and you can carry them around for this very reason. You connect it to your computer (or phone) via USB so that you can send or receive bitcoins through it, but at no stage is any information about your private keys sent over the Internet, making hardware wallets challenging to hack.
The only real downside is that you cannot access your wallet if someone wipes your hard drive or steals/loses it, which means you should always backup your wallet using a separate device like an SD card or pen drive.
Software wallets differ from hardware wallets in that they are not physical devices; they exist only as software files on your computer or mobile device. You can access the wallet online from any computer (in fact, most cryptocurrency traders use a combination of hardware and software wallets as their primary storage method).
But as with all things cloud-based, you need to be very careful – just because you are using high-tech cryptography does not mean the companies storing your data are not susceptible to hackers and other cybercriminals. So if you do go down this route, then make sure you research who the company is and how secure their servers are.
These are software wallets that you could download & install on your PC or laptop. These provide easy access to one’s Bitcoins. All the data is stored on your computer, so there is no need for any internet connection after installation unless you want to perform some transaction online (online mode).
While using this kind of wallet, one also can encrypt it with a password to protect their account from getting hacked. However, this makes it harder for users to withdraw their coins whenever they want. They still need an internet connection (unless you enable ‘disconnect mode’ but not advisable) to enter their password.
One should always use 2-factor authentication while using this kind of wallet to be on the safer side. There are many desktop wallets; you should always research their options before installing any wallet. Most of them require some initial confirmations to activate and may take up to 10 minutes.
A paper wallet is a “physical” bitcoin storage solution. It typically consists of one or more private keys printed on paper. The corresponding public key can be deduced from the private key by mathematical calculation but cannot (practically) be reverse engineered to gain access to the private key.
Paper wallets are popular for many reasons: they do not generate any immediate concern about having your digital coins stolen; in fact, you might say that when using cold storage methods like paper wallets. It becomes much harder for someone else to get your coins at all – even if they have your wallet words or a picture of you with them.
Using Public and Private Keys, you can create a paper wallet by generating a public and private ECDSA keypair using any Bitcoin wallet software (such as Armory, Electrum, etc.). The public key will be the address shared with others from which to send bitcoin to you.
How Does a Bitcoin Wallet Work?
A Bitcoin wallet is a collection of private keys and corresponding public addresses. The general concept is that you “sign” transactions with the corresponding private key, and anyone who has access to your wallet can verify the signature using the public address. For this reason, Bitcoin wallets are secure from hackers – they do not store Bitcoins, which is why you need to backup them periodically. They only keep the private keys that allow you to prove ownership of coins, transferring them between addresses.
Do I need a cryptocurrency wallet to hold bitcoin long-term?
If you are holding onto your bitcoin as an investment for short-term or long-term profits, then the answer would be no. You do not need to have a wallet if you want to buy and sell bitcoins regularly. All you need is a good exchange platform like Coinbase and some funds in your bank account. However, if you are going to store your coins for the mid/long term, it is better that you take proper security steps.
The criterion of Selecting a Bitcoin Wallet
There are lots of wallets out there. Some are very complex and difficult to set up, some are easy but only work for desktop computers, others require syncing the blockchain with your laptop (which is quite a hassle). Here are criteria you can use to decide on which wallet to go with:
1. How many platforms does it support?
Many wallets only support one platform, or they may be web-based which means you cannot take complete control of your private keys. You must have access to all your data no matter what happens.
2. Does it involve any third parties?
Third-party wallets are where you do not possess your private keys, so if they decide to go rogue or steal your info, you may never get it back.
3. What are the fees associated with using this wallet?
Does it cost money to send coins? If so, is there a fee for incoming transactions as well? Some wallets do both, which can be very annoying if you move your coins around frequently.
4. Can I hold multiple currencies within one wallet?
You may develop an interest in this ability. ShapeShift allows users to use both bitcoin and bitcoin through their API; more people are storing all of their funds in one place rather than moving everything every time they invest in something new (this saves them from paying withdrawal fees). Also, consider storing other cryptocurrencies aside from just BTC and LTC.
5. Can I access my wallet from anywhere in the world?
Ideally, you want to have access to your coins no matter where you are. If you are traveling, on vacation, or just out of town for a week, it should not be difficult for you to log into your wallets without needing a US IP address or similar.
6. What’s the backup process like?
Some wallets do not have significant backup processes, which can put you in a pretty bad spot if something goes wrong with your computer. Ensure that there is a way for you to back up everything (including password-protected files too) easily; otherwise, you might be unable to get at your funds later on down the road.
7. What’s the general look and feel of the wallet?
There are technical things to consider here, but it should also have an interface you are comfortable using. If you do not like how it looks or cannot tell what half of the options do, chances are you will not stick with it for very long.
8. Does it allow me to encrypt my wallet file?
Again, this is more about personal preference since there is no single correct answer for security. Some people think encryption is a good idea, while others prefer not to. For beginners who are not familiar with encryption, it may be best you do not use it until you learn more about how it works.
The best bitcoin wallet for you will depend on what you want to do with your bitcoin. Do you want to make everyday purchases? If so, a mobile wallet like Mycelium might be best. Do you want to store large amounts of bitcoin safely? If that is the case, then a hardware wallet would probably be best for you. There are plenty of options available today when it comes to bitcoin wallets. Choosing one can be difficult because dozens of different wallets are available for multiple platforms.
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