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The complete beginner’s guide to Bitcoin wallets What will you learn in this guide? Everything you need to know, including what a Bitcoin wallet is, how to get it, and what to watch out for. Not in the mood to read? A Bitcoin wallet is a program for sending and receiving bitcoins. A Bitcoin wallet does that by interacting with Bitcoin’s ledger, known as the blockchain.
Generally speaking, Bitcoin wallets are a bit similar to how email works. Like emails, receiving Bitcoins requires a unique personal address. This unique address is called your Bitcoin address, and—just like your email address—you can share it with anyone who wants to send you bitcoins. The final ingredient that’s missing is your password. With email, you choose your own password, while with Bitcoin, the wallet chooses it randomly for you. This password is called your private key and—similar to your email password—it should never be shared with anyone. A private key is just a very long string of numbers and letters that acts as the password to your bitcoins.
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It’s from this secret combination that your wallet derives the capability to tell the Bitcoin network you want to send your Bitcoins to another destination. The most important thing to remember is this: Whoever knows your private key has control over your bitcoins. The private key is also used to generate your Bitcoin address. You download a wallet program to your mobile phone or laptop.
A Bitcoin address is created by running some sort of mathematical algorithm on your private key. Even though the Bitcoin address is generated from the private key, there’s no way to figure out what the private key is just by examining a Bitcoin address. A wallet’s core function is the creation, storage, and use of the private key. In other words, it automates Bitcoin’s complex cryptography and blockchain interactions for you. You could argue that the program itself isn’t that important—the only thing that matters is the private key. For example, if you have a Bitcoin wallet on your phone and that phone gets stolen, but you’ve written down your private key on a piece of paper before that happened, you could just download a new Bitcoin wallet to a different phone, import the private key to that new wallet, and regain control of your bitcoins again. HD wallets generate a phrase known as a seed or mnemonic phrase.
This seed is a set of common words that you can memorize instead of the long and confusing private key. As you can imagine, it’s much easier to create a backup of 12 simple words than a long, confusing string of numbers and letters. Additionally, an HD wallet can create many Bitcoin addresses from the same seed, so you don’t have just one Bitcoin address. All the transactions sent to addresses created by the same seed will be part of the same wallet. How to choose the best Bitcoin wallet Different people use different Bitcoin wallets for different purposes.
For example, if I need to store a large amount of Bitcoin safely, I will use a different wallet than if I just want to have some small Bitcoin change to pay for a cup of coffee. Usually, wallets vary on the scale of security versus convenience, and you need to decide where you want to be on that scale. How many bitcoins will I be storing? How frequently will I use the wallet? Can I afford to pay for a wallet?
Will I be storing additional coins other than Bitcoin? Do I need to carry the wallet around with me? Do I need to share the wallet with someone else? How much do I value my privacy? Do I trust myself to safeguard my wallet, or do I want to give a third party the task of doing so? Depending on the answers to these questions, it should be easier for you to choose a wallet.
Most popular Bitcoin wallets are listed on the top of this page, so now it’s just a matter of choosing the best wallet for your needs. You may want to use more than one wallet. For example, you can use a hardware wallet for large sums of bitcoins and a mobile wallet with a small balance on it for daily payments. This way, even if your mobile phone breaks or gets stolen, you’re not risking a lot of money.
Below is a detailed description of the different types of wallets you can find and which wallet is best suited for what purpose. Internet connection and therefore cannot be hacked remotely. Some examples of cold storage wallets are hardware wallets, paper wallets, and brain wallets. 1 Hardware wallets Hardware wallets are physical devices that safely store private keys. They usually come in the form of a flash drive that can connect to your computer in order to interact with them. Hardware wallets are built to protect your private key even if the device they are connected to is compromised by malware.
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You can even use them with a public computer you don’t trust. To send your bitcoins to someone using a hardware wallet, you’ll need to have your hardware wallet connected to a computer and to use some sort of web page that allows control over the wallet. Hardware wallets offer the optimal mix between security and ease of use. Their only limitation is that you need to keep your hardware wallet on you at all times in order to send the coins.
2 Paper wallets Paper wallets are just pieces of paper with a private key or seed written on them. When you keep your private key on a piece of paper, only someone who can physically access that paper can steal your bitcoins. Another thing to consider is that to send the bitcoins you have on a paper wallet, you will have to import the private key into some form of digital Bitcoin wallet. 2 Hot wallets: The most convenient way to store Bitcoin A hot wallet refers to any form of Bitcoin wallet that is connected in some way to the Internet. Hot wallets, while being the most popular type of wallet, are also the least secure because they allow access to their inner workings through Internet connections. 1 Mobile wallets These wallets store your private key on your mobile phone. I actually consider these wallets to be the least secure of all wallets.
As phones are frequently lost, broken, or stolen, it’s strongly advised that you enable two-factor authentication, password-protect your wallet, and create a private key backup. Mobile wallets are highly convenient and are designed to provide as much security as possible in an insecure environment. Nonetheless, substantial sums should not be stored on a mobile wallet unless it’s being used in tandem with a hardware wallet, which we’ll discuss in a minute. 2 Desktop wallets These type of hot wallets store your private key on your computer. As long as your computer is free of malware or any security weaknesses, your Bitcoins are safe. However, we all know that’s not the case for most of us. Internet a valuable target for hackers.
3 Web wallets Markets, exchanges, betting sites, and other Bitcoin services frequently require you to deposit funds into their online hot wallets in order to conduct your business. These web wallets are the least secure option for storing bitcoins because the operators own the private key to the bitcoins stored on their site. You’re basically asking someone else to hold your coins for you. Web wallets are also more vulnerable to hackers since they have many possible loopholes along the way. For example, the website in question, the device you’re using to connect to the website, or the Internet connection can be monitored to steal your bitcoins. On the other hand, web wallets are highly convenient, as they allow you to buy, sell, and send bitcoins at a moment’s notice. More competent web wallet services will provide two-factor authentication options, such as validating every account login with a text message, to guard against external hackers.
Even so, for storing any significant amount of coins, web wallets are not worth the risk. 1 newbie mistake and never keep your bitcoins in a web wallet. 1 Multisig wallets Multisig stands for multisignature, a wallet that allows sending bitcoins, only with the approval of enough private keys, out of a set of predefined keys. To clarify, let’s say that Alice, Bob, and Charlie all want to open a business together and invest some of their Bitcoins, but none of them actually wants only one person to have the private keys to the money. So they each get one key and use a multisig wallet that requires two out of three of those keys. This way, none of them can run away with the money alone, but they also don’t need all three of them to pay expenses.
For example, if Alice wants to run away with the money, she can’t because she only has one key. But if Bob is missing and Alice and Charlie want to pay an expense, they can do it with their two keys. Multisig doesn’t have to be only two out of three—it can be almost any combination. Company’s board of directors allows payments only by vote of a majority. Multisig is often used for escrow services, in which two parties decide on a transaction that requires two out of three keys. If the seller and buyer don’t agree, a trusted third party will arbitrate and release the funds. 2 SPV wallets Some wallets, often referred to as full nodes, hold a full copy of the blockchain in order to validate each and every transaction.
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SPV wallets are faster and consume less disk space than their counterparts. Since the blockchain today is becoming increasingly big, many wallets offer an SPV solution for limited-capacity devices such as mobile phones, tablets, and desktops. 3 Brain wallets Brain wallets are just a way to create a private key out of a predetermined text or set of words. So instead of getting a randomly generated seed or private key, you can decide for yourself on a passphrase and use some basic algorithms to generate a private key from that passphrase.
However, brain wallets have a significant disadvantage by having a higher probability of being hacked. This is because people are usually very predictable in what they use as passwords or supposedly random text, and hackers have a way of knowing that. To prove this point, some tests have been done where simple passwords have been used for brain wallets and deposited with funds. The funds have been quickly stolen.
Additionally, one Bitcoin user lost four bitcoins from his wallet after using a brain wallet private key generated from an unknown Afrikaans poem. This proves that even if you think you’ve found an obscure text for a passphrase, you’re still in danger of being hacked. Now you know about all of the wallet types that are out there. Bear in mind that some wallets will fulfill more than one criteria. For example, you can have a mobile SPV wallet that also has a multisig feature. Backing up your Bitcoin wallet Because private keys and seed phrases have complete power over your Bitcoins they must be kept secret and safe.