What Are Bitcoin Wallets?

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Bitcoin is a well-known type of cryptocurrency that was developed in 2009 by  Satoshi Nakamoto and has been around for over a decade. It is a digital medium of exchange that uses encryption techniques to verify the transfer of money and to control the creation of monetary units. Unlike physical currencies, it is not backed by any country’s government or bank. Bitcoin uses unique wallets to store bitcoins and to do such transactions as sending and receiving bitcoins electronically.

What Is A Bitcoin Wallet?

The idea of a bitcoin wallet is similar to a traditional one: it is used to store money. However, the difference is that instead of storing cards and bills, a Bitcoin wallet is used for storing a collection of bitcoin private keys. Simply put, a Bitcoin wallet is a software program used for storing cryptocurrency that provides an owner with access to a unique Bitcoin address. By accessing this address, a wallet owner can transfer, withdraw, or store bitcoins. Cryptocurrency wallets are like bank accounts of the decentralized web.  There are several types of bitcoin wallets, including desktop, hardware, mobile, and web.

Desktop Wallets

As the name indicates, a desktop wallet is a program that you need to download and install on your computer. Unlike some other versions of cryptocurrency wallets, a desktop wallet provides you with full control over your digital money and keys. It is a perfect option for those who are concerned about privacy because this type of wallet does not rely on third parties. You can use your digital wallet while you are connected to the Internet, or to view and manage your funds offline as well. Since a digital wallet is accessed on the devices with a larger screen, it provides better readability of addresses and is less prone to user mistakes. In general, desktop bitcoin wallets are safe, but it is essential to make sure that your PC or laptop is free of malware and any viruses before installing and using it.

Mobile Wallets

A mobile wallet is similar to the digital one. The difference is that it is explicitly designed as smartphone applications. Mobile wallets are appreciated for their convenience because you can transfer and receive bitcoins through the use of QR codes. They are also convenient for smaller daily transactions, such as buying something in a store or paying for coffee at a local coffee shop. All you need to do to start using a wallet on your smartphone is to download an app – this will take you a few minutes. However, by using this type of bitcoin wallet, it is crucial to know and remember about some of the risks. For example, if your phone gets stolen and you have not backed up your wallet, you will face the risk of losing all your Bitcoin balance as well. Therefore, by accessing your digital wallet on the smartphone, you should always remember that it is as secure as your phone. The harder it is for someone to access your phone, the more secure your cryptocurrency funds are.

Web Wallets

A web (or online) wallet is another convenient way to store and transfer your bitcoins. Web wallets are based on the use of a third-party wallet to keep all the digital funds on the cloud. Many people prefer this type of wallet because they can access blockchains fast without downloading and installing any apps or programs. One important thing to know about web wallets is some service providers hold and manage your private keys on your behalf. This means they have full control over the wallet. Though it might be convenient, it is a dangerous practice as well. By using a web wallet, you are trusting your funds to someone else. Therefore, such risks as theft, hacking, and cyber-attacks are higher among wed wallet users.

Hardware Wallets

A hardware wallet is an electronic, physical device using a random number generator (RNG) to create private and public keys. The generated keys are then kept on the device itself, which is connected to the Internet. A hardware wallet is considered a cold type of a bitcoin wallet and is believed to be the safest option for storing and managing your bitcoin funds. To access your wallet, you need to plug in a device into your laptop or PC. When it is plugged in, it will connect you to the server. This system makes the wallet not vulnerable to any theft or hacking. Hardware bitcoin wallets are perfect for those who store large numbers of bitcoins.

Paper Wallet

It is a physical type of a wallet looking like a piece of paper, on which the private key and the Bitcoin address are printed in the form of a QR code. To execute cryptocurrency transactions, you need to scan this QR code. There are certain paper wallet websites where you can download code and generate private keys and addresses while being offline. This makes paper wallets resistant to online cyberattacks. However, there are certain risks associated with the use of paper wallets that you should be aware of. One of them is that you cannot send funds partially  – only the entire balance. This makes the use of paper wallets risky and even dangerous.

How To Protect Your Bitcoin Wallet?

As a bitcoin owner, you should understand that there is nothing more important than protecting your bitcoin wallet and the funds you store. Here are several recommendations on how to keep your digital money safe:

  • Make sure you are using the right type of wallet. For example, if you store a large number of bitcoins, it makes sense to invest in a hardware wallet. It may cost you a few hundred dollars, but you will know that you are using the safest option.
  • Encrypt the wallet.  The basic form of security you should start with is a strong password because it is the first line of defence. Strong encryption is one that contains a combination of numbers, special symbols and characters, and capital letters. Make sure your password is something that only you know and do not share it with anyone else. It could be the name of your favourite song, a special place, or anything else that is deeply personal to you. Also, make sure that you remember your password. If the password is too complicated, you can write it down on a piece of paper and hide it somewhere.
  • Use Two-Factor Authentication (2FA). It is an additional line of defence used to protect your wallet. Even if someone obtains or guesses your password, the 2FA system will not allow them to access your wallet. Two good and most popular 2FA options are biometrics and Google Authenticator.
  • Update your software. Just like with your PC, laptop or smartphone, you need to update your bitcoin software regularly to be able to receive security and stability fixes. Moreover, updates also often contain new features that you can use to strengthen the protection of your bitcoin wallet and security of your account.
  • Back up your wallet. Certain types of bitcoin wallets can be backed up and encrypted. An example is a mobile wallet. However, when you are backing up the wallet, make sure that backups are not tied to the same location. Try to back your wallet up in different places and on various devices. It would be best if you also used different types of media, including USB keys, CDs, and papers.
  • Use Offline Transaction Signing. Offline transaction signing is a method of trading based on the use of two computers. One computer that holds the wallet and signs off on transactions remains offline, and the other one creating unsigned transactions is connected to the Internet. This method allows you to create transactions on the computer connected to the Internet, save them on a USB device, sign the transition on the computer that is offline, and send them back to the connected computer. Even though it is a time-consuming process, you can be sure that your funds are safe.
  • Use multisig wallets.  It is a type of a wallet that can be accessed by multiple users, whose approval is required to make any transactions or manage the bitcoins that are stored in the wallet.

There are different types of bitcoins wallets with their advantages and disadvantages. When choosing a bitcoin wallet, think about the number of bitcoins you are going to store, the transactions you are going to make, and the security risks that you may face. Regardless of the type of bitcoin wallet you have, you need to make sure that it is protected and is not accessible to anyone except you. The best way to do it is to make sure you use the right type of wallet,  have a strong password, back your wallet up regularly, update your software, and use other modern security measures.

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Disclaimer: The information provided on this blog is for informational purposes only and should not be taken as any form of advice.

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