Bitcoin wallets: A beginners guide to storing BTC
What is a Bitcoin wallet?
Now, it is easier than ever to Buy, sell and trade Bitcoin (BTC). After you own BTC, the next step is to ensure that it is stored in a safe place. Perhaps you are wondering, how to store Bitcoin?
BTC is a digital currency that is stored in an electronic wallet that can be accessed by using a private key. However, you don’t have to do this directly. A wallet app automatically uses a private key to sign the outgoing transactions and also generates wallet addresses for you using that key.
A Bitcoin wallet is a digital wallet that allows you to send and receive Bitcoin. This is similar to having a physical wallet. So, what is the point of a Bitcoin wallet? Rather than keeping physical money, the wallet saves the cryptographic information needed to access Bitcoin addresses and send transactions. Other cryptocurrencies can be stored in some Bitcoin wallets.
The device containing your Bitcoin wallet stores the private key, not the coins themselves. Your coins are stored on the Bitcoin blockchain, and your private key is required to authorize transfers of those coins to another person’s wallet.
There are several different forms of Bitcoin wallets that cater to different requirements and vary in terms of security, convenience, accessibility and more. So, how to choose a Bitcoin wallet?
There are two crucial steps to choosing the best Bitcoin wallet for you. You must first decide what type of crypto wallet you require and consider the individual wallets to discover the ideal one for you.
For instance, full-node wallets cater to decentralization and support the Bitcoin network, and there are mobile wallets that offer built-in cryptocurrency exchanges and convenient quick response (QR) code scanners, among other kinds of functionality, depending on the wallet you use.
It’s important to ensure that the wallet you choose is compatible with the currencies you are storing and caters to your specific security and usability needs. This article aims to guide the readers about Bitcoin wallets.
How does a Bitcoin wallet work?
To send and receive Bitcoin, cryptographic key pairs are used. A key pair is made up of a private key and a public key that corresponds to it. Sending Bitcoin requires the usage of private keys that must be kept secret. Receiving Bitcoin requires public keys that can be shared with anyone. Public keys are created by deriving a private key from them.
A seed is generated when you create your Bitcoin wallet. Mnemonic phrases are used to display seeds in the form of a succession of words. This seed will be used to generate each Bitcoin key that you’ll need to transmit and receive Bitcoin.
A Hierarchical Deterministic (HD) framework, an industry standard for Bitcoin key creation and administration, is the name of this design. When you want to accept Bitcoin, most wallets will automatically generate fresh public keys.
The issue of public key or address reuse is no longer an issue. Anyone might easily follow your whole payment history if you use the same public key every time you receive Bitcoin. Treating keys as one-time-use tokens increases a user’s privacy significantly. A user can always restore their wallet as long as they know their recovery seed, which is often a 12- or 24-word list initialized with their wallet.
So, how much does a Bitcoin wallet cost? If you're only storing Bitcoin in the wallet, then using a Bitcoin wallet costs nothing. If you’re trying to complete a transaction, however, the owner of the exchange or device that houses your wallet will charge you different fees depending on what you're trying to do.
A wallet can cost anywhere from zero dollars to $200 or more. You'll most likely pay a fixed fee of a few dollars or a percentage of the total transaction value if you use a wallet as part of an exchange.
Types of Bitcoin wallets
For those actively using Bitcoin on a daily basis to pay for goods in shops or make trades face-to-face, a mobile crypto wallet is an essential tool. It runs as an app on your smartphone, storing the private keys and allowing you to pay for things, trade and store crypto with the phone.
Moreover, some apps make use of the smartphone’s near-field communication feature, or NFC, which means users can simply tap their phone against the terminal without having to provide any information at all.
Mobile wallets take advantage of simplified payment verification technology, as they only operate with small subsets of the blockchain that rely on trusted nodes in the Bitcoin network to ensure that they have the correct information.
The disadvantage is that these trusted nodes have control over the coins and transactions, which counters Bitcoin’s trustless philosophy. Nevertheless, these wallets are necessary for mobile phones due to their limited system resources, but this is a potential downside of having easy access to funds.
Furthermore, as another byproduct of being a convenient on-the-go solution for Bitcoin storage, mobile wallets are prone to malware and hacking. You can lose control of your wallet if someone simply gains access to your mobile device, especially if there is no two-factor authentication enabled.
Two-factor authentication (2FA) is the second layer of protection where you enter a code in addition to your username and password to log in. A key difference between a 2FA code and a password is that the 2FA code is either sent to your email or phone via SMS to help verify that it is you trying to log in. A more secure 2FA method is to use an authenticator app, such as Google Authenticator, FreeOTP, or Authy because it’s invulnerable to SIM swap attacks or email hacks.
It is advised to only deposit as much Bitcoin as you need into the mobile wallet and store larger Bitcoin holdings in a separate hardware or paper wallet.
There’s a large variety of Bitcoin wallet apps for devices running on Android and iOS. They are light wallets that don’t download the entire blockchain to your phone or tablet but may still scan the blockchain to calculate your balance. Be wary of scams and counterfeit wallet apps, as there are many out there that will steal your private keys.
Web wallets (exchange wallets)
Web wallets store your private keys on a server, which are constantly online and controlled by a third party. Different services offer different features, some of which can link to mobile and desktop wallets and replicate your addresses across the devices you own.
Much like mobile wallets, e-wallets enable their users to access their funds on the go from any device connected to the internet. The organizations running the website can gain access to your private keys, thus gaining total control of your funds.
Most e-wallets operate on exchanges, and there have been instances of exchanges shutting down and making off with their users’ funds. Exchange wallets are also frequently targeted by hackers because they are accessible using only your email address and password.
In some cases, exchange wallets offer some degree of protection from the loss of funds. For example, insurance or backup funds to repay users if the exchange is hacked.
The prevalence of leaked passwords and leaked emails make this an especially serious security risk because people often use the same email addresses and passwords across many different services. Remember that your email address is half of your login credentials.
Desktop wallets are downloaded and installed onto your computer, storing the private keys on your hard drive or solid state drives (SSD). By definition, they are more secure than online and mobile wallets, as they don’t rely on third parties for their data and are harder to steal.
They are still connected to the internet which makes them inherently less secure. However, desktop wallets are a great solution for those who trade small amounts of Bitcoin from their computers.
There are a variety of different desktop wallets that cater to different needs. Some focus on security, some on anonymity, convenience, decentralization and other things. Wallets that run as full nodes download the entire blockchain onto your computer. This requires hundreds of gigabytes of disk space and a fast internet connection. However, they offer granular control over your transactions that you won’t find in most wallets. A few benefits of running such a wallet include but are not limited to:
Replace-by-fee checkbox: This enables you to increase the transaction fee later if you want to speed up your transaction.
Intuitive drop-down box with the transaction fee and speed control.
Performance: Transactions are broadcast directly to the memory pool without going through a third-party node provider.
API and CLI: The command-line interface (CLI) offered by full node wallets provides a vast array of controls not available in light wallet apps. The application user interface (API) provides app developers with the ability to integrate Bitcoin-related functions in their apps. This can also be used to build your own wallet app.
A hardware Bitcoin wallet is a rather unique type of Bitcoin wallet that stores private keys in a secure physical device. It is believed to be the most secure way of storing any amount of Bitcoin. Unlike paper-based wallets, which must be imported to software at some point, hardware wallets can be used securely and interactively. They are immune to computer viruses, as the funds stored cannot be transferred out of the device in plaintext and, in most instances, their software is open source.
Most hardware wallets have screens that add another layer of security, as they can be used to verify and display important wallet details. For instance, a screen can generate a recovery phrase and confirm the amount and address of the payment you wish to make. So, as long as you invest in an authentic device made by a trustworthy and competent manufacturer, your funds will be safe and secure.
Never purchase a hardware wallet from any used item marketplaces. There are fake hardware wallets in circulation that will steal Bitcoin and other cryptocurrencies. Always purchase hardware wallets from the manufacturer and check that you are on their official website. Check the URL in your browser’s address bar to ensure it’s correct.
A paper wallet is a physical document that contains a public address for receiving Bitcoin and a private key that allows you to spend or transfer Bitcoin stored in that address. Paper wallets are often printed in the form of QR-codes so that you can quickly scan them and add the keys to a software wallet or a wallet app to make a transaction.
A paper wallet can be generated using services that allow users to create a random Bitcoin address with its own private key. The generated keys can then be printed with some services that offer a tamper-resistant design or even an option of ordering holographic labels.
The main advantage of a paper wallet is that the keys are stored offline, which makes it highly resilient against and completely immune to hacking attacks, including malware that logs keystrokes, like keyloggers. However, some precautions when creating a wallet still need to be taken. You must ensure that no one is watching you create your wallet or can see where you’re storing it.
To rule out the risk of any spyware monitoring your activities, it is recommended to use a clean operating system, such as Ubuntu, running from a USB flash drive or DVD. Once the paper wallet is set up, the website code should be able to run offline, allowing the user to disconnect from the internet before actually generating the keys. Finally, use a printer that is not connected to a network.
Moreover, it’s important to understand that you are printing valuable private information on a piece of paper. Certain measures should be taken to protect that piece of paper. For instance, it is recommended to keep it in a sealed plastic bag and to store it in a dry, safe place to avoid water damage and general wear and tear. Some people prefer laminating it and storing it in a safety deposit box.
Physical Bitcoin vs banks
Physical Bitcoin coins tend to be preloaded with a fixed amount of BTC with the intention that its value cannot be spent as long as the private key remains hidden. This is usually achieved by using a tamper-evident seal.
The first of its kind, Bitbill, was shaped like a credit card, but most alternatives that followed were shaped like a round medal. Mike Cadwell, a cryptocurrency enthusiast nicknamed “Casascius,” created the first of the popular Casascius physical Bitcoin in 2011. Private keys were hidden under a peelable hologram, and when removed, it left a tamper-evident mark. When redeemed, the coin lost its digital worth. Since then, there have been several new coin manufacturers and some companies offer preloaded cards that contain a specified amount of crypto.
Physical Bitcoin is now primarily used as collectors’ items due to the inherent limitations of physical currency. One of Bitcoin’s key value propositions is to provide seamless transfers anywhere in the world — physical coins make that impractical.
Many banks stifle Bitcoin-related activities including, but not limited to, wire transfers to cryptocurrency exchanges. Banks usually cite money laundering as a reason for opting not to offer this service, although they clearly have an incentive to suppress it to protect their own business model. This is due to the fact that Bitcoin is designed to reduce or eliminate the need for custodians such as banks.
In recent years, conventional financial institutions, such as banks, have started expressing an interest in not only developing their own cryptocurrencies but in providing custody services for existing cryptocurrencies such as Bitcoin. Regulators are also moving to enable banks to provide cryptocurrency custody services for banks.
Banking for cryptocurrency could be considered redundant, as Bitcoin stores coins and wallet information securely on its blockchain. Bitcoin also provides the ability to conduct transactions internationally without needing approval from a bank or minimum balance fees. Nonetheless, banks have been trying to stay relevant as cryptocurrency grows.
There are also regulated cryptocurrency banks that can custody Bitcoin. They offer bank-like protections such as account monitoring and can step in if suspicious activity is detected. These services also offer the ability to sell your cryptocurrency and withdraw to a conventional bank account.
These services are useful especially if you’re not holding cryptocurrency long term. Their similarities to banks don’t end there, however, they can freeze your account or your funds can be seized. You would also be subjected to withdrawal limits, Know Your Customer (KYC) requirements and surveillance even though the overall experience from crypto native banks is more decentralized in comparison to the traditional banking system. Furthermore, there are only a handful of such banks that operate in a fully regulated manner.
Bitcoin wallets and security
There are various security-related risks associated with Bitcoin wallets as follows:
Now, the key question arises: is the Bitcoin wallet safe? The most evident answer is yes. But, it all depends upon the security approach selected by the user. Since cryptocurrencies are high-value targets for hackers, wallet security is critical and users must be aware of the following key points:
How to cash out your Bitcoin wallet?
You can't convert Bitcoin to cash whenever you want, but you can sell your BTC anonymously on the blockchain for the fiat currency of your choice. A cryptocurrency exchange can manage the transaction and find a buyer on your behalf, allowing you to turn the value of your Bitcoin into cash swiftly.
The restrictions and timeframes for moving your fiat currency to your bank account vary by wallet, but most may be completed within one to three days after the Bitcoin sale is completed.