You’ve likely heard of a Bitcoin wallet, but what does that actually mean? Like any other currency, Bitcoin needs to be stored somewhere. We usually keep our paper money in a wallet but as Bitcoin is entirely digital it needs to be stored as such. When storing your Bitcoin you need a digital wallet. There are several different types of wallets, each with its pros and cons, allowing people to find an option specific to their trading needs. Here is everything you need to know about what a Bitcoin wallet is and how it works.
What Is A Bitcoin Wallet?
A Bitcoin wallet is a digital address that keeps a record of your Bitcoin transactions and balance. Each Bitcoin wallet has a unique set of public and private keys. Public keys refer to the wallet’s address (to where users can send you BTC), similar to a bank account number. Private keys are more akin to pin numbers, and allow users to send BTC. Private keys should never be shared with anyone.
It’s important to note that while the network is entirely decentralized and all transactions on the Bitcoin blockchain are visible for anyone to see - wallets belong to individuals and are controlled by owning the wallet’s private keys.
Different Types Of Bitcoin Wallets
Just like physical wallets, digital wallets also come in many different forms. All of these wallets have their own benefits, with several disadvantages as well. It is important to make a choice based on your trading needs and one that balances both ease of use as well as security. Here are some different types of wallets and information on how you can use them. They typically fall into one of these two categories: cold wallets and hot wallets.
Hot wallets are online wallets that are constantly connected to the internet and easy to access. These generally are more vulnerable to hacking.
Cold wallets are stored offline, and only briefly connected to the internet when sending and receiving BTC. This makes them more secure and less likely to be hacked.
Within these two categories, there are several options.
A web wallet, as the name suggests, allows you to keep your Bitcoin on the internet. Platforms offering web wallets generally store your private keys and are convenient because they allow you to access and move your funds easily (great for day traders and traders requiring quick access to their portfolios).
A lot of these web wallets allow you to store multiple cryptocurrencies. On the flip side, these wallets are generally not as secure as they are vulnerable to attacks from hackers. If you store all your cryptocurrency on such a wallet, there is a higher chance of loss due to potential underlying security issues. Be sure to use reliable platforms and not to put all your eggs in one basket.
A mobile wallet is an application that you can download onto your mobile device. These types of wallets are extremely useful for those who like to have constant access to their crypto portfolios (i.e. day traders). Increasingly, mobile wallets are gaining features like being multi-currency. In terms of security, these wallets share risks with desktop wallets.
Desktop wallets store Bitcoin on a computer’s desktop in an application or program. Security-wise they are somewhere in between an online wallet and a hardware wallet. However, these wallets can still be prone to attacks by hackers, especially if your computer is not protected adequately against online threats or if you store your private keys on the same desktop (don’t do that!).
Just like the wallet you keep in your pocket, a hardware crypto wallet is something tangible. These wallets can come in the form of a USB drive or have Bluetooth functionality allowing for easy access to your mobile or desktop wallet. You can keep your cryptocurrency on a hardware wallet and keep it disconnected from the internet, this is known as “cold storage.”
Some types of hardware wallets allow users to store multiple cryptocurrencies. The drawback of such a wallet is that they do not allow users to move their cryptocurrencies quickly as in the case of web wallets, which could mean the loss of trading opportunities especially during periods of excessive price volatility. These wallets are typically used by traders opting for longer-term trading strategies.
This wallet is basically your private key printed on a piece of paper. A paper wallet is considered to be the coldest of all wallets. These wallets have some drawbacks such as they are printed on a piece of paper and as such are prone to fraying, fire and other damage.
They are also easy to lose and once they are lost, there is no quick way to access coins stored on them (if any way at all). However, some people tend to favour paper wallets as they offer the benefits of cold wallets without having to actually purchase a device. Paper wallets share the disadvantages of hardware wallets.
How to Use A Bitcoin Wallet
Although all Bitcoin wallets have their own unique features, they share similar processes. This is a general round-up of how to use a Bitcoin wallet:
- Download and install a mobile or desktop wallet or open an account with an online service such as Oobit to gain instant access to a secure web wallet.
- Make sure to use a strong password when signing up and use an accessible email address. Note that unlike a bank account there is no centralized support that stores your information or allows any “reset password” options.
- Locate your Bitcoin address, this will allow others to be able to send you BTC. On Oobit you can access your Bitcoin wallet address by selecting the Bitcoin option below Balances, and selecting Send. You can also use this address to transfer BTC from another wallet you own to your new one.
- If necessary, make sure that you write down your passphrase or store your private key in a safe place.
Why Use A Bitcoin Wallet?
Having a Bitcoin wallet is a basic necessity and a first step to using Bitcoin. The wallet will enable you to hold, trade, and purchase Bitcoin. Moreover, with a Bitcoin wallet you can do what you do with a real wallet — pay for goods and services.