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How is Bitcoin stored in wallets and which is the best one?

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  • Published At: 15.02.19 22:59
  • Last Updated At: 10.12.19 19:39
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Dr. Hatu
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If you’ve heard of Bitcoin or have even the slightest interest in it, you may have heard about Bitcoin wallets.

From a first glance, they may seem similar to PayPal or even online banking. That’s not an invalid comparison since Bitcoin wallets can be used to store digital money, make transfers, receive payments and manage your funds.

 

How are Bitcoin wallets different from bank accounts?

Bitcoin wallets are different from bank accounts mainly because of how Bitcoin works; so, let’s first go over some basic aspects of Bitcoin and Bitcoin transactions.

Unlike bank transfers, which are authenticated by a single company, Bitcoin payments need to be scrutinized by all of its users to be considered valid.

Bitcoin makes use of a technology known as blockchain. It was invented in 2009 (by a person who remains anonymous to date!). The blockchain is a record of every Bitcoin transaction that ever happened, grouped in blocks. Anyone can have a copy of the blockchain and to attest the validity of new transactions before adding it to their version of the chain. This can automatically be done using an application called Bitcoin Core. This way, the blockchain is considered valid if there’s a consensus about it.

Each block also contains a unique code with information about the block which comes before it, making it impossible to retroactively modify the blockchain or include a duplicate transaction.

This is what makes Bitcoin so secure.

 

What are Bitcoin wallets used for?

It's important to have a clear grasp of what really is a Bitcoin wallet. What is known as a wallet is, in fact, a pair of codes (called keys) which you can use to sign your transactions and receive bitcoins.

Bitcoin wallets are automatically generated for you when you start using a new wallet application. The first aspect of the wallet is your private key. Like signing a cheque, you use it to prove you’re the legitimate owner of the bitcoins you’re sending. Private keys (as the name suggests) should never be shared (or even typed in anywhere!).

Each private key is associated with a public key, which is essentially the address of a wallet and is used to identify the person who is receiving the bitcoins. Public keys sometimes are shared in the form of QR codes. This way, it’s easier to send Bitcoin to their corresponding wallets, as most mobile wallets are able to read those codes.

Summing up: You use your private key when you’re the recipient from a transaction, and your private key if you’re the payer.

Bitcoin wallets exist in many forms, each serving a different utility even though the fundamental purpose is to store Bitcoin. 

 

Hot wallets

Hot wallets are able to store bitcoins and automatically use your private key to make payments. They need to be connected to the internet to work.

Some of them offer additional features, such as integration with credit cards or the ability to store multiple cryptocurrencies.

They are classified into the following categories:

- Desktop wallets
- Mobile wallets
- Web wallets


Once active, hot wallets will not ask you to enter your private key.

 

Desktop wallets

As the name suggests, these are wallets developed for desktop computers. It’s important to note that a desktop wallet will only work on the computer it was first installed. There are many known cases of people losing considerable amounts of Bitcoin after their computer stopped working.

To prevent this, most desktop wallets provide something called a “seed’, which is a series of words which you' should write (not print!) in a piece of paper. In case you need it, you can then use this seed to recover your assets in any compatible wallet.

When you create a new key, you’re also offered the option to print them, but writing down your seed is a preferable approach since you don’t want your private key being displayed anywhere (even on your own screen).

 

Copay is one of the most used desktop wallets. It has a friendly user interface and is available for Windows, MAC, and Linux.

Armory is an option for users who are looking for even more protection, as it offers additional security features. It’s also available for all major operating systems.

 

Mobile wallets
Mobile wallets are pretty much like their desktop counterparts, except that they can be used in smartphones, allowing you to make Bitcoin payments anywhere. As more and more merchants are accepting Bitcoin around the globe, they come very handy.

Some mobile wallets also offer integration with desktop applications and can be used, for instance, as an additional level of authentication.

The BreadWallet is a simple, intuitive mobile wallet available for Android and iOS.

 

 

Online or Web wallets
Online wallets can be accessed directly from your browser, which means you don’t need to download any software to start using it. After registering and choosing a username and password, you can access your online wallet from any computer or mobile device.

Although making them more convenient, this characteristic also makes online wallets vulnerable to hacks than the other wallets, because, if by any chance someone your password gets stolen, the attacker will be able to control your funds.

For this reason, it’s always recommended to set an additional factor of authentication (such as SMS) to your online wallet account.

BTC.com provides one of the oldest web-based Bitcoin wallet services.

 

 

Cold wallets

Cold wallets are perfect for storing large amounts of Bitcoin. Since they are not connected to the internet, they are immune to online attacks.

A cold wallet can be a USB stick, external HDD or even a piece of paper!

You generally cannot make Bitcoin payments using a cold wallet. To retrieve your funds stored on them, you need to connect your device to your computer and use a hot wallet application

You can create a cold wallet using a USB stick by generating a wallet.dat file from your desktop wallet software. Each time you want to transfer funds from your cold storage, you’ll need to need to connect this flash drive and export the file.

Remember: your cold wallet is only 100% safe when it’s not connected to any device. When you connect it to your computer, it’s subjected to the same vulnerabilities as a hot wallet.

To further increase your cold wallet security, you can choose to encrypt your wallet.dat file.

You can also create a cold wallet using a simple paper. Most desktop wallets offer the option to print a paper wallet for you, which will contain your public key (in alphanumeric and QR code form) and your (preferably encrypted) private key.

Paper wallets are mostly useful as a safe backup to recover your funds in case something happens with the device in which your wallet application is installed.

 

Hardware wallets

Hardware wallets are the best of both worlds: they are handy enough so you can use them to make daily transactions while also being safe enough to store large amounts of Bitcoin.

Unlike standard USB sticks, they are developed especially to store and manage Bitcoin. For this reason, they are able to:

- Sign Bitcoin transactions with a single click
- Protect your wallet file in a special chip which cannot be accessed by attackers, even when connected to your computer
- They can be integrated with desktop wallets

When you turn on a new hardware wallet for the first time, you’re provided with a series of words and instructed to write them down so, if somehow you lose your device or it stops working, you can insert it in a new one (or in a compatible virtual wallet) to recover your bitcoins.

You may also set a PIN, which will be required to unlock the device. This way, even if you lose your hardware wallet, your bitcoins are still safe.

The two major hardware wallet brands are the Trezor and the Ledger Nano S. Trezor is the most popular, while the Ledger Nano S costs a little bit less.

 

What kind of wallet should you choose?

That really depends on what your goals with Bitcoin are.

Are you planning to buy stuff in stores which accept Bitcoin as payment? You won’t be able to do so with a cold wallet. 

Do you want to buy some Bitcoin once and hold it as a long term investment? There’s no need to use a hot wallet, then.

Are you ok with spending some cash for extra convenience and security? Consider acquiring a hardware wallet.

 

There's a Bitcoin wallet to serve any type of storage needs. Regardless of the type of wallet you choose, be mindful of potential scams and remember that there are wallet options that ensure you don’t need to type your private key to make a payment with Bitcoin, and these options ensure security. 

 

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