What is a Bitcoin Wallet

What is a Bitcoin Wallet? An Introduction to Storing Bitcoin

Bitcoin is a store of value and a medium of exchange just like traditional currency. Therefore, it can be stored, exchanged, or used to make payments. However, unlike traditional currency, bitcoin is a digital decentralized cryptocurrency that supports peer-to-peer transactions. Therefore, Bitcoin holders cannot use the bank to store, receive, or transfer Bitcoin. So, how is Bitcoin stored and its transactions managed? This is where a Bitcoin wallet comes in.

What is a bitcoin wallet?  

Bitcoin wallets are software programs that allow users to receive, store, and send Bitcoin. The wallets interact with the Bitcoin blockchain network that records all bitcoin transactions. Bitcoin wallets keep track of keys used for signing bitcoin transactions. Private keys are the only proof of bitcoin ownership and hence very critical in the bitcoin world. Crypto wallets are available for mobile phones, stand-alone hardware, and personal computers.  

How does a bitcoin wallet work?

A bitcoin wallet does not store bitcoins literally, as the name may suggest. Instead, they keep the keys that connect to bitcoins that live on the blockchain network. 

The two most important components of a bitcoin wallet are a private key and a public key. A private key is required to access and manage users’ bitcoin balances and to send bitcoin to other wallets. On the other hand, receiving bitcoins requires public keys that can be shared by anyone.

An email account is a good illustration of how Bitcoin’s public and private keys work. One needs a program (an email service) such as Google, Yahoo, and Outlook to send, receive, and manage emails in their accounts. Users, need an account password to access and manage messages in their accounts. Once they are logged in, they can read messages in their accounts and send messages to other email addresses. A password is the enabler of all these activities. Therefore to secure one’s email account, one must keep their passwords private and secure. This is similar to private keys. They enable users to access their bitcoins on the blockchain, see the balances and send the tokens to another wallet address.

Receiving an email requires an email address. This address can be shared publicly by anyone who wants to send the users an email. Email addresses are unique to ensure the message only reaches the intended recipient. Similarly, receiving a bitcoin requires users to have a public key. A public key is unique to a bitcoin wallet. Unlike private keys, public keys can be shared publicly with anyone who wants to send bitcoins to the wallet.

Public and Private Keys

The public and private keys are the most fundamental aspects of a bitcoin wallet. Public keys are cryptographic codes that one receives when they create a bitcoin wallet to help them receive bitcoins. The keys are long series of numbers and letters. A bitcoin address usually begins with “1” or “3” and may look something like this: 1FZbgi27cpjq5GjdwV9eyHuJJnkLtktZc8. A wallet may also have a quick response (QR) code, which acts as a public address and can be used to transfer bitcoins to a wallet.

A private wallet is also a cryptographic code of numbers and letters. It grants users ownership of bitcoin in their wallets. Private keys enable bitcoin wallets to communicate with the blockchain when transferring bitcoins. Anyone with a wallet’s private key has full control of the wallet and can use it to transfer assets from the wallet to any destination at any time. A private key may take different forms from a 256-character long binary code, a 64-digit hexadecimal code, or a Mnemonic phrase. Private keys also help in generating public keys, in a one-time and one-way process. A bitcoin private key cannot be generated from a public key, making the wallet secure.   

There are different classifications of bitcoin wallets depending on factors such as who holds custody of the private keys and whether the wallet is used online or offline.

Custodial and non-custodial wallets

The private keys for a custodial wallet are kept by the company offering the wallet services. Therefore, such companies have the responsibility of securing the users’ funds. On the other hand, they have access to users’ funds, which may be risky. However, such funds could be easier to recover if a user loses their details. Examples include Binance and Coinbase.

For non-custodial wallets, only the owner of the wallet has the access to the private key. This makes such wallets secure as long as the owner keeps the key out of reach of anyone. Examples of non-custodial wallets include Metamask and Trust Wallet.

Hot and Cold bitcoin wallets

Hot wallets are connected to the internet. They are the most common bitcoin wallets. They include web-based wallets, desktop wallets, and mobile wallets. A mobile wallet stores keys on a user’s mobile phone. They can be the least secure wallets since phones are easily lost, stolen, or broken. However, these wallets are most convenient since they enable users to access their bitcoins any time anywhere as long as the phone is connected to the internet. Desktop wallets store private keys on the user’s personal computer. These wallets can also be at risk, especially if the computer experiences a malware attack. Web wallets include crypto exchanges, betting sites wallets, and other service provider wallets. They are the least secure of all the hot wallets.

Cold wallets operate offline and are the most secure type of bitcoin wallets. They can be in the form of paper or offline hardware such as a password-protected USB or computer. There are also special encrypted cold wallets such as Trezor and Ledger. No one can hack them. Additionally, all cold wallets are non-custodial, with users having full control of their private keys.