What is a bitcoin wallet? Forbes UK consultant

Even though Bitcoin exists only digitally, you still have to keep it somewhere, whether you hope to use it to purchase goods or services today or to invest in it for the long term.

That’s why when you start buying Bitcoin, you will also need to start using a Bitcoin wallet. Fortunately, cryptocurrency wallets generally function like physical wallets – they keep pace with your cryptocurrencies and store information that proves ownership of any tokens you have in them.

What is a bitcoin wallet?

A Bitcoin wallet is a digital wallet that can hold bitcoin as well as other cryptocurrencies, such as Ethereum or XRP.

“A Bitcoin wallet (and any crypto wallet, for that matter) is a digital wallet that stores cryptographic materials that gives access to the public Bitcoin address and enables transactions,” says Alexander Kish, CEO of Onchain Custodian, a digital asset custody service. Bitcoin wallets not only hold your digital currencies, but also secure them with a unique private key that guarantees that only you, and whoever you give the code to, can open your Bitcoin wallet. Think of it as a password on an online bank account.

With a crypto wallet, you can store, send and receive coins and various tokens. Some only support basic transactions while others include additional features, such as built-in access to blockchain-based decentralized applications known as dapps. Among other things, these may allow you to lend your cryptocurrency to earn interest on your holdings.

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How does a bitcoin wallet work?

Since Bitcoin runs on a secure digital ledger called the blockchain, using a Bitcoin wallet is not as simple as opening a leather flap. For this reason, it can be helpful to think of a Bitcoin wallet like an email, says Sarah Schellman, a fintech and blockchain consultant with Perkins Coie.

To send an email, you must use your password to log into your account, enter the recipient’s address, and then hit send. To send Bitcoin, you likewise need your encrypted key, basically your password, to access your cryptocurrency. You will then need the intended recipient’s Bitcoin wallet address, similar to an email address, to send the cryptocurrency to them.

In the Bitcoin network, a public address is an identifier that indicates a specific ledger entry (for example, a Bitcoin balance) on the blockchain, and a private key is what enables its holder to make changes to the associated ledger entry (for example, to transfer Bitcoin to an address different) ”, says Shtylman.

It is important that you keep track of the key to your Bitcoin wallet. If someone else owns it, they can hack your wallet and send it to their own wallet. And if you lose your key, you may lose access to your cryptocurrency. This is because many cryptocurrency wallets are decentralized and cryptographically secured, which means that there is no central customer support number that you can call to prove your ownership, identity and password reset. It is estimated that 20% of all bitcoins currently in circulation, worth billions of dollars, are lost to digital wallets that are not accessible to users.

Bitcoin wallet types

As with physical wallets, Bitcoin wallets come in a range of styles, each offering a trade-off between convenient access and security against theft.

cell phone

Mobile wallets, such as Mycelium and Edge, are those that run as apps on phones, tablets, and other mobile devices. “Transactions are easy as funds can be sent to other wallet addresses represented by QR codes,” notes Adrian Przelozny, CEO of Independent Reserve, an Asia-Pacific crypto exchange. “While it’s great in terms of portability and convenience, it’s also the least safe.” Not only can the cryptocurrency wallet itself be hacked, but if someone steals your device, they can also take your coins.

the web

Web-based wallets, such as Coinbase and Blockchain.com, store your coins through a third party online. You can access your coins and make transactions through any device that allows you to connect to the internet. These web-based wallets are often associated with cryptocurrency exchanges that allow you to trade and store cryptocurrencies in one place.

While restful web-based wallets still carry many of the same risks as mobile wallets, i.e. they can be hacked since they are connected to the internet. Although this is rare and stolen money is generally replenished through insurance, you may not want to take that risk with your money. In addition, there were times when exchanges were closed and people lost coins in their web wallets.

desktop

Desktop wallets, such as Atomic Wallet, Electrum, and Exodus, are programs that you can download to a computer to store coins on your hard drive. This adds an extra layer of security versus web and mobile apps because you don’t rely on third-party services to hold your coins. However, hacks are possible because your computer is connected to the Internet.

hardware

Hardware wallets are physical devices, such as a USB drive, that are not connected to the web. To make transactions, you first need to connect the hardware wallet to the Internet, either through the wallet itself or through another device connected to the Internet. There is usually another password involved to make the connection, which increases security but also increases the risk that you could prevent yourself from encryption if you lose the password.

Hardware-based crypto wallets are also known as cold storage or cold wallets. (In contrast, online wallets are called “hot wallets.”)

“By design, hardware wallets make transactions more complex as users have to connect their devices to the Internet to sign an outgoing transaction,” says Brzozny. “As such, it is beneficial for those who are investing for the long term and are afraid of leaving their coins on the exchange.”

paper wallets

In a paper wallet, you print your key, usually a QR code, on a paper document. This makes it impossible for a hacker to access and steal your password online, but then you need to protect the physical document. “Paper wallets are rarely used anymore, as they probably pose the greatest risk in terms of damage, loss or theft of the private key,” Kech notes.

What to consider when choosing a Bitcoin wallet

Choosing the best crypto wallet for you can be a daunting process, so here’s what you should keep in mind while evaluating your options.

You are not bound to any particular type forever; You can have multiple bitcoin wallets. You can combine the best features of each, such as keeping a small amount in your mobile wallet for transactions while keeping the bulk of your holdings in a more secure hardware wallet.

1. Think about how you plan to use encryption

“The trade-off usually comes down to security versus speed. In other words, security versus convenience,” says Berzozny. For someone who frequently trades and spends tokens, the best crypto wallet may be the most convenient mobile or web option that is directly connected to the exchange, while someone who owns a lot of cryptocurrency as a long-term investment may be better off using a cold storage pocket wallet .

However, keep in mind that any time you withdraw cryptocurrency from the exchange and the wallet you bought it with, you may have to pay a withdrawal fee to transfer it to your wallet of choice.

2. Find the reputation of the portfolio

When you buy cryptocurrency, you are generally not tied to any one wallet type or brand. Take the time to read reviews about the user experience, additional features, and of course security. Pay attention if your wallet has been hacked and avoid those who have faced serious breaches in the past.

3. Find wallet backup options

Some wallets allow you to back up your data using another method, either online or on a physical device. This way if your computer or mobile device crashes, you can regain access to your coins. If you plan to own a lot of cryptocurrency, you can prioritize wallets that allow you to fully backup your data.

4. Pay attention to key management

Different wallets have different settings for who is responsible for keeping the private keys, which has major implications for you, Schilman points out. In some wallets, the wallet service provider manages the wallet keys. This means that you may be able to regain access if you lose your key by contacting them.

However, other wallets are completely dependent on the user. Even the manufacturer may not know the private key that secures the wallet. In these cases, it may be impossible for you to regain access to a wallet whose key you lost.

If you are concerned about locking out your Bitcoin wallet, you can focus on those providers that hold your key. However, if the lack of crypto centralization is what appeals to you, you can opt for a crypto wallet where you retain complete control of your key – and therefore, your coins.

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