Even though Bitcoin is a digital currency, it still has to be stored somewhere like your regular fiat currencies. This is why when you start buying or trading Bitcoin, you will have to start using a wallet.
Luckily, crypto wallets generally work just like physical billfolds—they keep up with your cryptocurrencies and store the information proving ownership of any tokens you hold in it.
What is A Bitcoin Wallet?
A Bitcoin wallet is simply a digital wallet that can be used to hold bitcoin and other cryptocurrencies like Ethereum, Ripple, Dogecoin and others.
Bitcoin wallets don’t just hold the coin, they also come with a unique private key for security and it ensures that only you, or any other person you give the code can have access to the wallet, something like a password on an online bank account.
A crypto wallet enables you to store and receive different coins. Wallets comes in different types, some just supports basic transactions, while others contains some additional features like built-in access to blockchain-based decentralized applications commonly known as dapps.
How Does it Work?
Bitcoin operates on the blockchain technology, so using a bitcoin wallet isn’t that simple. It may be helpful to think of a Bitcoin wallet like email.
The processes are somewhat similar, to send an email, you need to log into your account with your password, input a recipient email address and then click send. To send bitcoin, you need your coded key to be able to access your wallet and the cryptocurrency saved in it, and then you need the recipients wallet address, similar to the email address to send the cryptocurrency to them.
“On 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 enables its holder to make changes to the associated ledger entry (i.e., to transfer the Bitcoin to a different address),” says Shtylman.
It is important to keep your bitcoin wallet key safe, as anyone can hack into your wallet if they have your key and send your crypto to their own wallet. This happens because cryptocurrency wallets are decentralized, which means there is no central customer care support line to call to prove your ownership or reset your password. An estimated 20% of all Bitcoin currently in circulation, worth billions of dollars, is lost in digital wallets that users can’t access.
Types of Bitcoin Wallets
Bitcoin wallets comes in various styles with each of them having different functions between convenient access and security against theft.
There are basically 5 types of bitcoin wallets:
These ones run as apps on phones, tablets and other mobile devices. “Transacting is easy as funds can be sent to other wallet addresses represented by QR codes,” notes Adrian Przelozny, CEO of Independent Reserve, a crypto exchange in Asia and the Pacific. “While they are great for portability and convenience, they are also the least secure.” Not only can the crypto wallet itself get hacked, but if someone steals your device they could also take your coins. Example of mobile wallets include Mycelium and Edge.
These ones store your coins through an online third party. You can gain access to your coins and make transactions through any device that lets you connect to the internet. These web-based wallets are frequently associated with crypto exchanges that allow you to trade and store crypto all in one place.
While convenient, web-based wallets still hold many of the same risks as mobile wallets, namely that because they’re connected to the internet, they can be hacked. Though this is a rare occurrence and stolen funds have generally been replenished through insurance, you may not want to take this risk with your money. In addition, there have been times when exchanges have shut down, and people lost the coins in their web wallets.
Example of Web wallets includes Coinbase and Blockchain.com.
These are programs you can download onto a computer to store coins on your hard drive. This adds an extra layer of security versus web and mobile apps because you aren’t relying on third-party services to hold your coins. Still, hacks are possible because your computer is connected to the internet.
Example of Desktop wallets includes Atomic Wallet, Electrum and Exodus.
Hardware wallets are physical devices, like a USB drive, that are not connected to the web. To make transactions, you first need to connect the hardware wallet to the internet, either through the wallet itself or through another device with internet connectivity. There is typically another password involved to make the connection, which increases security but also raises the risk you may lock yourself out of your crypto if you lose the password.
Hardware-based crypto wallets are also known as cold storage or cold wallets. (Wallets connected to the internet, in contrast, are called “hot wallets.”)
“By design, hardware wallets make transacting more cumbersome as users must connect their device to the internet to sign an outgoing transaction,” says Przelozny. “As such, they are useful for those who are investing long-term and wary about leaving their coins on an exchange.”
In a paper wallet, you print off your key, typically 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 pose the highest risk in terms of destruction, loss or theft of private key,” notes Kech.
What to Consider When Picking a Bitcoin Wallet
Picking the best crypto wallet could be stressful for you, but here are some few things you should note as you are trying to weigh your options.
You aren’t tied to any particular type forever; you can have multiple Bitcoin wallets. You combine the best features of each, such as keeping a small amount in a mobile wallet for transactions but maintaining the bulk of your holdings in a more secure, hardware wallet.
That being said, here is a list of things to consider before picking a bitcoin wallet:
Think About How You Plan on Using Crypto
- Research a Wallet’s Reputation
- Research wallets backup options
- Pay attention to key management
1. Think About How You Plan on Using Crypto
“Usually, the tradeoff will come down to safety versus speed. In other words, security versus convenience,” says Przelozny. For someone who frequently trades and spends tokens, the best crypto wallet might be a more convenient mobile or web option connected directly to an exchange, whereas someone who holds a lot of crypto as a long-term investment may be better off using a cold storage wallet.
However, keep in mind that any time you move crypto off of the exchange and wallet you purchased it on, you may have to pay a withdrawal fee to move it into your wallet of choice.
2. Research a Wallet’s Reputation
When you buy cryptocurrency, you generally aren’t tethered to any one wallet brand or type. Take time to read reviews about user experience, extra 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. Research Wallet Backup Options
Some wallets allow you to back up your data using another method, either online or on a physical device. That way if your computer or mobile device crashes, you can regain access to your coins. If you plan on owning a lot of crypto, you may prioritize wallets that allow you to thoroughly back up your data.
4. Pay Attention to Key Management
Different wallets have different setups for who is in charge of maintaining private keys, which has big implications for you, notes Shtylman. With some wallets, the wallet’s service provider manages the wallet keys. This means you may be able to regain access if you lose your key by contacting them.
Other wallets, however, are fully reliant on the user. Even the manufacturer may not know the private key securing the wallet. In these cases, it may be impossible for you to regain access to a wallet whose key you lose.
If you’re concerned about getting locked out of your Bitcoin wallet, you may focus on those providers who retain custody of your key. However, if the lack of centrality of crypto is what appeals to you, you may opt for a crypto wallet where you retain complete control of your key—and, by extension, your coins.