Cryptocurrency is in the headlines every now then. Bitcoin is no doubt the most popular cryptocurrency. Bitcoin wallet is needed to store Bitcoins. We have penned this blog to help you understand what is a Bitcoin wallet and the types of Bitcoin wallets.
What is a Bitcoin wallet?
Private key is a password to the Bitcoins. Bitcoin wallets create, store and use the private key to validate Bitcoin transactions. A private key is a secret combination of numbers and letters. The Bitcoin wallet generates the private key randomly. The Bitcoin address is created from the private key by running an algorithm on it. However, the private key cannot be deciphered from the Bitcoin address. Bitcoin address is supposed to be shared with people with whom transactions are to be made. However, the private key should never be disclosed to anyone. Anyone in possession of the private key is in complete control of the Bitcoins. The Bitcoin wallet uses the private keys to signal the blockchain that Bitcoins are to be sent to another destination. Also, it is used to validate transactions. The Bitcoin wallet basically automates and simplifies the complex blockchain technology and cryptography for its users.
It is only wise to store your private keys offline. This means it is best to write the private key on paper and store it safely. Obviously, storing the private keys on a computer or a flash drive connected to the internet is to be avoided. Mainly because our computers are never free of malware and hackers can gain control over the computer through the internet. In case the phone with the Bitcoin wallet gets stolen but you have the private keys written on a paper. You can always download a new Bitcoin wallet in a new phone. Then have control over your Bitcoins by importing the private key to it. In case you don’t write it down, then the Bitcoins are lost forever with the phone. This is another advantage of storing private keys offline.
Bitcoin wallet categories
Custodial Bitcoin wallets:
Using a custodial Bitcoin wallet to store Bitcoins means you actually do not own them. This is because custodial Bitcoin wallets do not give their users access to the private keys, the company holds it. As mentioned earlier, anyone with private keys has full control over the Bitcoins. The Bitcoin wallet company can steal your Bitcoins, commit fraud, freeze your savings and can even go bankrupt. Since these are not federal backed, you will not be able to recover your savings. Thus, custodial Bitcoin wallets are risky.
Non-custodial Bitcoin wallets:
Non-custodial Bitcoin wallets give their users full control over the private keys. With full control on private keys, the wallet user is the sole owner of the Bitcoins. This makes non-custodial Bitcoin wallets safer than custodial ones.
Bitcoin wallet types
Cold wallets or offline Bitcoin wallet:
Cold wallets are non-custodial Bitcoin wallets which are not linked to the internet. Cold wallets do not have the risk of being hacked remotely.
Examples of cold wallets:
- • Hardware wallets: Hardware wallets, physical devices, are the safest form of Bitcoin wallets. Hardware wallets are usually available in the form of flash drives which need to be connected to computers. A software or web page is used to access the Bitcoins, in the hardware wallet, for transactions. They are designed to safely store the private keys even if the computer has malware. Hardware wallets are so secure that they can be used even on public computers. The problems with hardware wallets are that you need to buy them and for every Bitcoin transaction the wallet should be with you.
- • Paper wallets: A paper with the private key written on it. For transactions involving Bitcoins stored in paper wallets the private key needs to be imported to a digital wallet. Also, paper Bitcoin wallets get destroyed very easily. So, it is recommended to create multiple copies so that the Bitcoins can be recovered if one wallet is destroyed.
Hot wallets or online Bitcoin wallets:
Unlike cold wallets, hot wallets are linked to the internet. Popular for their convenience, these online Bitcoin wallets are not safe though since they have link with the internet.
Examples of cold wallets:
- • Mobile wallets: Mobile wallets are hot wallets installed in mobile phones. Mobile wallets are risky given that mobiles get stolen, lost or broken easily. It is advisable not to store large amounts of Bitcoins in mobile wallets. It is recommended to password-protect the mobile wallet, enable two-factor authentication, and have a private key backup.
- • Cheaper transactions: Digital currency allows cheaper transactions, especially an advantage in the case of international transfer. Normally international transactions are expensive since they involve high transaction fees and currency conversion charges.
- • Convenient international transactions: Digital currency, mainly cryptocurrency can be transferred internationally without being stopped and taxed.
- • Transactions at any time: Fast digital currency transaction possible at any time of the day and any day of the week. Traditional currency transactions are slower outside bank hours and on weekends.
Disadvantages of digital currency:
- • Little difficult to use: Some people might find digital currency a little difficult to use. Transacting in digital currency may require time and effort to learn. First step is to learn how to open a digital wallet and store the digital currency securely in the wallet. Thereafter you can start transacting in digital currency.
- • Desktop wallets: Desktop Bitcoin wallets are hot wallets installed in a computer with internet connection. Desktop wallets store the private keys in the computer. In case the computer contains any malware or is not secured, there is every possibility of losing the Bitcoins and private keys.
- • Web wallets: Online hot wallets of crypto exchanges, crypto markets and other crypto service providers are web wallets. Web wallets are popular for their convenience of selling or buying Bitcoins in a jiffy. Trustworthy web wallets will provide two-step authentication to ensure security of the Bitcoin wallet. It is, however, wise not to store large sums of Bitcoins in web wallets. Since web wallets are custodial wallets which basically means the wallet company owns the private key. Therefore, giving the company full control over the Bitcoins. Web wallets also can easily be hacked. Thus, storing Bitcoins in web wallets is risky.
It is important to understand that security is priority for storing Bitcoins Bitcoins in various Bitcoin wallets. In short, cold wallets are for secure long-term storage and hot wallets are less secure meant for quick transactions. With thousands of Bitcoin wallets available, it is important to consider various factors before choosing the best Bitcoin wallet.