Bitcoin Wallets:
Everything You Need to Know to Get Started
What is a Bitcoin Wallet?
Bitcoin news has been in the headlines a lot over the past couple years. Maybe you followed the news about Bitcoin price soaring to new heights, or maybe an editorial about the ‘Bitcoin bubble’ caught your eye. But if you’ve only been paying attention to news about prices, you’re missing the big picture. Bitcoin and the blockchain technology it’s based on are set to change the world! It’s easy to get overwhelmed by all the new information when you’re first getting started with Bitcoin, but don’t worry, we’re here to make it easy for you. In this post we’re going to look closely at one important topic — Bitcoin wallets.
How do Bitcoin wallets work?
While the wallet in your pocket is made of leather and holds cash, a Bitcoin wallet is a piece of software and it holds — you guessed it — Bitcoin! The important thing to understand is that although people talk about having Bitcoin ‘in’ their wallet, Bitcoin itself is never actually kept inside a wallet. That is because Bitcoin is stored on the Bitcoin blockchain and it can never leave the blockchain to go anywhere else. The blockchain is a special kind of network that safely stores information about all the Bitcoin accounts in the world. What a Bitcoin wallet actually holds is a secret string of numbers and letters called a private key. Every account on the blockchain has one private key which is generated when the account is created. This private key is not backed up on a server somewhere the way your bank keeps your password, so no one can recover it for you if you lose it. It is your responsibility to keep it safe! Anyone who knows the private key of an account can spend that account’s Bitcoin. You should never share your private key with anyone, since then they will be able to spend all your Bitcoin! Each account also has a public key which is used to make public addresses where you can receive Bitcoin. Public addresses can be safely shared with anyone who wants to send you Bitcoin. Don’t mix them up!
Types of wallets:
Hot wallets — Hot Bitcoin wallets are called ‘hot’ because they are always connected to the internet or kept on a device which is connected to the internet. This means that transactions can be made quickly and conveniently at any time. The downside is that because hot wallets are connected to the internet, they are open to attack from hackers who want to steal your Bitcoin! Hot wallets come in many different formats such as desktop applications, mobile applications, browser plugins, and web based. Since hot wallets remain connected to the internet, many of them also provide additional functions such as reporting Bitcoin price, Bitcoin news, cryptocurrency exchange, and much more!
Cold wallets — Cold Bitcoin wallets are called ‘cold’ because they are never connected to the internet, or they are only connected briefly when sending transactions. Since they are not connected to the internet, cold wallets are much more secure than hot wallets. However, this also makes them less convenient to use, especially if you make frequent transactions. Like hot wallets, cold wallets also come in several different formats. The most popular types of cold wallets are hardware wallets. A hardware wallet is a special digital storage device with built in software to make it easy to secure your keys and make transactions. In contrast to hot wallets, cold wallets do not even need to use software at all! For example, a piece of paper or engraved metal with your private and public key written or etched on top is another kind of cold wallet.
Backing up your wallet:
While we all do our best to keep our Bitcoin wallets safe, accidents and theft can happen to even the most cautious of us. It is important for you to always keep a backup of your wallet, or else you may be at risk of losing your Bitcoin forever. There are a few different ways to make a wallet backup, but the important thing to understand is that they are all just different ways of storing your private key. The simplest way to backup your wallet is by writing your private key down on a piece of paper which you can then store in a safe place. A better option is to write down a ‘mnemonic phrase’ on a piece of paper instead of your private key. A mnemonic phrase is a list of 12 to 24 words which can be used to generate your private key. In order to use this option, you must make sure to choose it when you first generate your account. This is a good option because it is unlikely you will make a mistake when writing down your mnemonic phrase, but it is very easy to make a mistake when copying your seemingly random private key’s 64 letters and numbers. Your private key information can also be stored in a QR code which you can print out for safe keeping. Many Bitcoin wallets also allow you to export your private key as an encrypted, password protected file. You can then store this file on a USB drive or other offline storage device in a safe place.
Keeping your Bitcoin safe:
We strongly recommend you to keep your backups offline, either on a hardware device or on paper / metal, etc. If your backup is kept on a device connected to the internet, your Bitcoin is at very high risk of theft. If you absolutely must keep your backup on an internet connected device, make certain that it is in an encrypted format. We recommend you do not backup large amounts of Bitcoin this way. You should NEVER keep your unencrypted private keys on a device connected to the internet. Make more than one backup. You can never tell when tragedy may strike. If your house does burn down, you don’t want your one and only Bitcoin wallet backup to go up in smoke too!
Choosing the right wallet
When it comes to choosing the right wallet, you should consider how you intend to use it. If you plan to buy Bitcoin as an investment and hold it for the long term without buying and selling, your best option is a hardware cold wallet, or even a paper wallet for extra security. Cold wallets provide you with the best security, so they are the best option for holding large amounts of Bitcoin as a long term investment. If you’re just curious about the technology and want to play around with some small amounts of Bitcoin, then it might be worth it to give up a little security for the convenience of a desktop or mobile hot wallet which allows you to conveniently make transactions whenever you want. If you plan to invest but also want to be able to make transactions easily, your best bet is to use both hot and cold Bitcoin wallets. You can store the majority of your holdings in highly secure cold wallet offline, and a smaller amount in your convenient hot wallet. That way you get the best of both worlds.
