Bitcoin is the cryptocurrency with the largest trading volume, but to securely store, send, and receive Bitcoin, you need a secure wallet that only you can access.
Bitcoin wallets come in various forms, such as hardware devices, mobile wallets, or paper wallets, each with different security features.
Security is key when using a Bitcoin wallet, as losing your private key means permanently losing access to your Bitcoin.
Cold wallets provide offline storage for Bitcoin, making them more secure from online threats, while hot wallets are easier to use but increase security risks.
Bitcoin has been the cryptocurrency with the largest trading volume for many years, but to securely store Bitcoin, you need a secure place that only you can access. This is where Bitcoin wallets come in handy.
Bitcoin wallets come in various forms, including small hardware devices, computer software, and smartphone apps. Additionally, some wallets can handle various cryptocurrencies.
No matter which type of wallet you choose, whether you are an experienced trader or a cryptocurrency novice, wallets are essential for securely and conveniently storing cryptocurrencies.
This beginner's guide to Bitcoin wallets will provide you with a detailed introduction to what a Bitcoin wallet is and how it works, allowing you to start with confidence.
What is a Bitcoin wallet?
A Bitcoin wallet is a digital wallet that helps you securely store, send, and receive Bitcoin. It works like a virtual version of a regular wallet, but with its unique features. It doesn't store cash, but rather the keys to unlock Bitcoin.
When you want to send cryptocurrency, the Bitcoin wallet uses something called a private key to authorize the transfer of Bitcoin. The private key is like a secret password that gives you full control over your funds. Without it, you cannot access or use your Bitcoin.
But the problem is, if someone gets hold of your private key, they can take your Bitcoin. No problem! That's why keeping your private key secure is so important.
Bitcoin wallets also have a public key, which can be used to send Bitcoin. However, don't worry, the actual Bitcoin is not stored in your wallet. It is securely recorded on the blockchain, a digital ledger that tracks everything.
Long before digital wallets became the mainstream tool for storing digital assets, Bitcoin's mysterious creator Satoshi Nakamoto created the first Bitcoin wallet in 2009.
How Bitcoin wallets work
When creating a Bitcoin wallet, something called a "seed" is generated, which is the starting point for creating encryption keys. The seed is usually displayed as a series of 12 or 24 words, known as a mnemonic phrase. As long as you have this recovery seed, even if you lose your device, you can recover your wallet and access your Bitcoin.
Most Bitcoin wallets use a hierarchical deterministic (HD) key generation system. This system automatically creates a new public key for each transaction. Why? Reusing the same public key makes it easier for others to track your payment history, reducing your privacy. Using a new public key for each transaction makes your financial activities more private.
Bitcoin transactions use a model called UTXO, which stands for unspent transaction output. Here's how it works.
Each Bitcoin transaction has an input side, which is the amount you send, and an output side, which is the amount the recipient receives. But Bitcoin doesn't automatically split the amount like cash. Instead, if the amount you send exceeds the exact amount, the network sends the remaining "change" as UTXO to you. The remaining "change" can be used for the next transaction.
If you're just using a wallet to store Bitcoin, you usually don't need any fees. However, completing transactions usually incurs fees. These fees vary depending on whether you are using a cryptocurrency exchange, a wallet on a hardware device, or other types of services. Some wallets charge a small fixed fee, while others charge a percentage of the transaction amount.
Types of Bitcoin wallets
It's hard to determine the best Bitcoin wallet for beginners or advanced traders, as security options and specific features determine what suits each person. Choosing the right Bitcoin wallet first involves considering their types.
Hot wallets
Hot wallets, also known as "software wallets," are applications that make it easy for users to manage Bitcoin. Because these wallets are always online, they are practical but vulnerable to threats such as malware and hacker attacks. Hot wallets come in various forms:
Mobile wallets: Run as smartphone apps, allowing you to store and trade Bitcoin daily. They use simplified payment verification, but are vulnerable to hacker attacks if security features such as two-factor authentication (2FA) are not enabled. Popular examples include Trust Wallet and Crypto.com Wallet.
Web wallets: Online wallets that store private keys on online servers controlled by third parties, often connected to cryptocurrency exchanges. They are convenient to use but vulnerable to hacker attacks or exchange failures. Popular examples include Blockchain.com Wallet and Binance Wallet.
Bitcoin Lightning wallets: Lightning wallets are designed for the Lightning Network, enabling fast, low-cost transactions. Suitable for daily spending, but not ideal for long-term storage due to fees and reliance on vendors. Popular examples include Wallet of Satoshi and Phoenix.
Desktop wallets: Installed on computers, they store private keys locally, giving them more control and security compared to mobile or web wallets. Desktop wallets like Exodus and Electrum are connected to the internet, which may pose some risks.
Any type of hot wallet—whether mobile, web, or desktop—can be custodial or non-custodial:
Custodial hot wallets: Managed by third parties (such as exchanges) that keep your private keys and control access to your funds. This means you need to rely on the exchange to ensure the wallet's security.
Non-custodial hot wallets: Users directly control their private keys, meaning you are fully responsible for the security of your Bitcoin, ensuring it is not lost or stolen.
Cold wallets
Cold wallets, also known as hardware wallets, are physical devices that store Bitcoin. These wallets are designed to store private keys offline, avoiding online threats such as hackers. They are suitable for long-term storage but not very convenient for frequent transactions. Here are the types of cold wallets:
Hardware devices: Small devices like the Ledger Nano or Trezor that securely store private keys offline. These wallets are user-friendly, not affected by viruses, and have features such as screen verification for transactions.
Paper wallets: Physical documents with public and private keys, often in the form of QR codes. Although paper wallets have high security and can withstand online attacks, they need to be handled carefully to prevent physical damage or loss, and they can be cumbersome during transactions.
Cold wallets can be either custodial or non-custodial, depending on who controls the private keys:
Non-custodial cold wallets: Users have full control over their private keys and are responsible for their security.
Custodial cold wallets: These cold wallets are managed by third parties, adding convenience and trust in the service.
How to set up a Bitcoin wallet
There are two main options for creating a Bitcoin wallet: setting up a hot wallet or a cold wallet. Here is a simple guide to setting up a Bitcoin wallet.
Setting up a Bitcoin hot wallet
Step 1: Choose a hot wallet
The first step is to choose a reliable software wallet. Find the official website and select your preferred way to access the wallet, such as a mobile app or browser extension.
Once you've chosen a wallet, download it from the official app store or website to ensure security. The app will be installed on your phone or computer.
Step 2: Create an account
Open the downloaded wallet, enter your details such as name, email, and password, and create an account. Some apps may also require authentication.
Step 3: Add Bitcoin
Once your wallet is ready, you can add BTC by transferring from another wallet or bank account, exchanging with other cryptocurrencies, or using other available methods in your chosen wallet. To do this, use the provided wallet address or scan the QR code for easy transfer.
Setting up a Bitcoin cold wallet: Hardware device
Step 1: Choose a cold wallet
Choose a reliable cold wallet by researching its features and reviews. Find the official website to purchase the wallet.
Step 2: Purchase and install the hardware device
After purchasing the hardware wallet, follow the manufacturer's installation instructions. This usually involves connecting the device to a computer or mobile device via USB or Bluetooth and installing the required software. Remember to store your password or security words.
Step 3: Transfer Bitcoin
Once your wallet is set up, you can transfer Bitcoin by linking the hardware wallet to an exchange or broker account. The Bitcoin transferred to the hardware wallet will be stored offline, making it safe from online threats.
Setting up a Bitcoin cold wallet: Paper wallet
Step 1: Go offline
To maximize security, disconnect from the internet when creating a paper wallet to avoid online attacks.
Step 2: Generate keys
Use an offline tool to generate Bitcoin private keys and seed phrases on paper. Be careful when entering and verifying this information to avoid errors.
Step 3: Print and store
Print or write the private keys on paper, then store them securely in a safe place, such as a lockbox or safe. If someone accesses your paper wallet, they can access your Bitcoin, so ensuring the security of the paper wallet is crucial.
How to ensure the security of your Bitcoin wallet
Bitcoin wallets face security risks such as phishing emails or malware, so being cautious is key to securely storing BTC. Although Bitcoin wallets are generally secure, your security depends on the security measures you choose. Here are some basic steps to ensure the security of your Bitcoin wallet:
Use strong, unique passwords: Create complex passwords consisting of letters, numbers, and special characters. Avoid using easily guessed information such as birthdays or names.
Enable 2FA: Add an extra layer of security by requiring a second form of verification, such as a mobile verification code. Even if your password is leaked, it can protect your wallet.
Use hardware wallets: These wallets store your private keys offline, making them safe from online hacker attacks. They are the safest option for long-term storage of Bitcoin.
Keep software updated: Regular updates fix security vulnerabilities and add new protection measures. Always update your wallet and software to the latest version to ensure security.
Securely store backup phrases: Backup phrases are the keys to opening your wallet; store them offline in a secure place. Never share them with others, and avoid storing them digitally to prevent hacker attacks.
Research third-party wallets: Choose wallets with a good track record and strong security measures. Ensure they do not store private keys online or have weak encryption features.
Use multi-signature wallets: Multi-signature wallets require more than one private key to authorize transactions. This makes it harder for attackers to access your funds.
Beware of phishing scams: Always verify website URLs, and be cautious of unsolicited emails or messages. Phishing scams lure you into revealing private information such as keys or backup phrases.
Regularly review wallet activity: Regularly check your transaction history and balance. If you notice unauthorized activity or suspicious transactions, you can take immediate action.
Use cold storage for large Bitcoin holdings: For large amounts of Bitcoin, use offline storage methods such as hardware or paper wallets. Cold storage can protect your funds from online risks.
Avoid using public WiFi: Public networks are insecure and susceptible to attacks such as man-in-the-middle attacks. When accessing your wallet, use a VPN or connect through a secure network.
