Introduction to Bitcoin Wallets


6 mins read May 17, 2023

As with any asset, you need a way to store it and keep it safe. It’s the same with bitcoin. A Bitcoin wallet helps you secure your cryptocurrency, although unlike the physical wallet you are used to or even the other digital wallets you may know.

So, how does a bitcoin wallet work

What Is A Bitcoin Wallet?

A bitcoin wallet is a uniquely designed software program that helps you store your bitcoin. Technically, bitcoin isn’t stored in the wallet; instead, the wallet provides the necessary tool to securely access your bitcoin and carry out transactions. This tool is known as the “bitcoin address”.

The bitcoin address is a unique set of alphanumeric characters - between 26 and 35 characters - that serves as the designated location for your bitcoin on the blockchain.  What this means is that when you try to buy bitcoin or someone sends bitcoin to you, your bitcoin address is where it is sent to.

Every bitcoin address has two cryptographic keys: a private key and a public key.

The simplest way to understand what a private key is is to think of it as the PIN to your bank account. The private key is what proves that you indeed own your bitcoin because without it, you cannot access the bitcoin at a particular address. . And just as you are advised to never reveal your bank account PIN to anyone, it is essential that you never reveal your private key to anyone else.

Why is this important?

A public key, on the other hand, is like your bank account number. When your private key is generated when you create a bitcoin address, a corresponding public key is also generated from the private key. 

In simple terms, this is what happens:

  • To create a bitcoin address, a private key is first generated. This private key, as the name implies, is secret and is used to encrypt and authenticate bitcoin transactions on the blockchain.
  • Once a private key has been generated, a corresponding public key can be obtained using an existing algorithm that the Bitcoin network uses.
  • And lastly, a bitcoin address, which is a shortened form of the public key is created.

Now, we have cryptographic keys that can be difficult for a non-cryptographic user to understand. This is why bitcoin wallets exist. A bitcoin wallet can help you generate and store your private and public keys when you create a bitcoin address. This way, you only need a PIN or strong password to access your bitcoin address.

There are different kinds of wallets, though, and they operate in different ways. Let’s look at each type of bitcoin Wallet.

Types Of Wallets

Bitcoin wallets can exist either as software or hardware.

A typical software wallet is a digital wallet that is linked to the internet. Usually, you need just a password to access a software wallet. 

There are 3 main types of software wallets:

  1. Desktop wallets

Desktop wallets are software programs that can be installed on a computer. The desktop wallet functions as an address for you to complete transactions on the Bitcoin network. It also allows you to easily store your private key on your desktop.

Because some computers can be corrupted by malware, desktop wallets may often be at risk. This is why it is advisable to take precautions, such as encrypting the files of your wallet,  securing your computer with a strong password, being alert while connected to the internet and using 2-factor authentication. It is also advisable to move substantial amounts of bitcoin to cold storage.

Examples of desktop wallets include Exodus, Bitcoin Armory, Wasabi, Electrum.

  1. Mobile wallets

Mobile wallets are similar to desktop wallets, however, they exist as mobile applications on Android or iOS smartphones. bitcoin transactions can easily be completed by scanning the QR code provided on the application. This type of wallet is very practical for bitcoin users who perform daily bitcoin transactions. 

As with desktop wallets, mobile wallets are also susceptible to malware and hackers. In fact, there are many applications on App Stores that are malware; this is why it is important to only choose mobile wallets you know and trust before downloading or using. You should also choose a wallet that uses state-of-the-art security to encrypt your coins. In addition, it is good practice to backup your private keys in case your mobile phone is compromised, lost or broken. Examples of mobile wallets are Yellow Card, Hive Android, and Mycelium.

  1. Web wallets 

Web wallets are bitcoin wallets that can be created and accessed directly via a mobile or desktop web browser. Unlike desktop and mobile wallets, you do not need to install or download an application or software program on your device.

Web wallets are always easy to create. Usually, you would be required to set a personal password in order to access this account while your private key is managed by the service provider. While web wallets are convenient to set up and use, they are often targets of hackers because they are always connected to the internet.

Also,  service providers of web wallets often hold private keys to the bitcoin addresses they create. However, some allow their users to have shared control of their private keys. 

For instance, Yellow Card’s web wallet offers notable security features that safeguard customers' cryptocurrencies. So you can send, receive, buy, sell or hodl your bitcoin securely. Other examples of web wallets include Coinbase and Blockchain.

Hardware wallets

Hardware wallets work on physical, electronic devices designed to generate private and public keys using a random number generator (RNG). The keys remain stored in the device without being connected to the internet. Hardware wallets are a form of cold wallet and are considered a safer alternative for bitcoin storage. While these wallets offer higher security against malicious online hacking, poor firmware implementation can pose a risk.

Hardware wallets aren't very suitable for daily transactions as it is not as easy to access your bitcoin compared to the ease of the other types of wallets. 

Hardware wallets are more commonly used for hodling or securing a large amount of bitcoin. However, because you require a physical device, hardware wallets aren't free; you may also be required to pay a sum to access them. Hardware wallets require that you set up a pin code to protect your device, which may be requested during a recovery phase.

Examples of hardware wallets are Ledger Nano X, Trezor T. 

Paper wallets

A paper wallet is a physically printed document or piece of paper that contains your private key and bitcoin address. This information is printed on paper as QR codes which can be easily scanned to complete bitcoin transactions on the Blockchain. Some paper wallet websites allow their users to download their codes to effectively generate new keys and addresses without being connected to the internet as security against hacking. Paper wallets are an alternative to secure your bitcoin for an extended period. 

However, paper wallets do not come without certain limitations. Paper wallets aren't suitable for sending your funds partially but often require that you send your entire balance at a go. The process to send it partially might require the use of other wallets such as a desktop wallet.

For instance, if you wish to make a partial transaction, you would need to send your entire balance to another wallet, either a mobile or desktop wallet. After completing your transaction, you would be required to transfer your remaining funds to your paper wallets. This doesn't allow for daily transactions and may prove inconvenient for some bitcoin users.

Paper wallets may pose a security threat as the printed paper's content may be easily compromised or stolen.

Cold vs Hot Wallets

Crypto wallets can be defined as either hot or cold depending on how they operate.

What is a hot wallet?

A hot wallet is a crypto wallet that is linked to the internet. . Hot wallets are suitable for bitcoin users who perform regular transactions because they are easy to set up and access.

What is a cold wallet?

Cold wallets are the direct opposite of hot wallets as they aren't connected to the internet. Investors or other bitcoin users who prefer to hodl their bitcoin are the primary users of cold wallets. These wallets utilise a physical medium in storing keys offline thus making them less susceptible to hackers.

To this effect, cold wallets are a safer alternative for Bitcoin users who prefer to store their bitcoin for an extended time. The act of storing your bitcoin offline for an extended period is referred to as "cold storage." As a means to safeguard the cryptocurrencies of its users, Yellow Card holds the larger percentage of its bitcoin in a cold wallet.

In conclusion...

There are numerous options for you to secure your bitcoin., it is best that you do the appropriate research in selecting the crypto wallet that is best for you before setting up an account. Your cryptocurrency wallet contains your private keys, bitcoin address, and other necessary information; thus, it is essential that you set up your Bitcoin wallet with a trusted platform.

Disclaimer: This article is meant to provide general guidance and understanding of cryptocurrency and the Blockchain network. It’s not an exhaustive list and should not be taken as financial advice. Yellow Card Academy is not responsible for your investment decisions.

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