Bitcoin Wallets

What is a Bitcoin Wallet?

If you have cash, you probably store it in some type of wallet. Otherwise, your money just isn’t safe. If you have ever seen someone walking around the mall with money inadvertently hanging out of his pocket, you are probably familiar with the urge to reach out and take it. Wallets are designed to keep your cash, and other confidential items like your credit and debit cards, safe. You probably store your wallet in a safe place and routinely check to make sure that everything that is supposed to be in there is, in fact, in there.

Now, your wallet can have everything in it that it is supposed to have and still be stolen. If an unscrupulous someone finds out where you keep it, or you happen to leave it laying around somewhere, it will be gone with little hope of ever recovering it. Hence, while the wallet itself exists to protect its contents, you as the owner of the wallet must take the steps to ensure that that wallet itself is safe.

Bitcoins need a wallet too. Since Bitcoins don’t exist in cash form but are actually a part of a computer program, they can’t be kept in the same kind of wallet that you hold your cash and credit cards in. There are special types of wallet that are designed to hold your Bitcoins. Bitcoin wallets are very similar to bank accounts. They display your current balance and any transactions that you have engaged in.

Bitcoin itself is more secure than the United States government websites. It is impregnable and immutable. However, security breaches have happened. These breaches aren’t able to attack the actual Bitcoin code and software, but rather attack the wallets and exchanges that are used to hold individual users’ Bitcoins. As you will see, while the wallets are designed to keep your Bitcoins safe, ultimately you are the one who is in charge of the wallet’s security. Companies that host wallets must guarantee a certain level of security (otherwise, no one would use their wallets), but you must take measures on your own to ensure that your security is not compromised. This chapter will look at the different types of wallets available and help you make the best decision as to which wallet is right for you.

Hot wallets: All cryptocurrency wallets fall under two categories: hot and cold. A hot wallet is one that is connected to the internet and therefore can make faster transactions. Hot wallets are best suited for people who need to access their Bitcoin accounts fairly often to make a lot of transactions. Those who use Bitcoin to do a lot of trading may find that a hot wallet is the most beneficial for their needs. The downside of a hot wallet is that it is more vulnerable to hacking and other security breaches. Major Bitcoin hacks, such as the one at Mt. Gox, involved hot wallets.

Cold wallets: A cold wallet is one that is not necessarily connected to the internet and can be accessed and used without an internet connection. Transactions made with cold wallets can take considerably longer, so they are not suited for people who want to use Bitcoin for a lot of purchases. Because they are not connected to the internet, cold wallets are much more secure from security breaches.

Thin wallets: Thin wallets are a type of wallet that does not connect to the entire blockchain. Rather, it connects to a single node on the network, and from that node, the transactions are broadcast to the entire network. Thin wallets save a lot of time and storage space because the entire blockchain does not need to be downloaded.

Mobile wallets: A mobile wallet is one that is designed to work on an Android or iOS mobile platform. Mobile wallets allow you to take your Bitcoins with you anywhere you go, and some even allow you to make on-the-spot transactions, similar to Apple Pay. However, they are probably the least secure of any type of hot wallet. The private key is stored on the mobile device, so if the mobile device becomes compromised in any way, the private key could be exposed. This could lead to the entire Bitcoin account being compromised.

Hardware wallets: A hardware wallet is a type of cold wallet that exists as computer hardware. They include things like USB drives and smart cards. The private key is usually embedded within the hardware and therefore much less prone to being stolen. Regarding online security, hardware wallets are probably the most secure type of wallet. However, keeping the hardware itself secure is imperative. Hardware wallets can cost $100 or more, so they aren't for people who just want to experiment with Bitcoin.

Online web wallets: Online web wallets are a type of hot wallet that store all of the account information on the cloud. They are ideal for people who make a lot of online Bitcoin transactions. However, they are also the least secure.

Physical wallets: A physical wallet is a type of cold wallet that can be printed out and stored in a safety deposit box for an indefinite period of time.

Desktop wallets: A desktop wallet can be considered as a “warm wallet,” as it is neither entirely hot nor cold. It exists as software downloaded to your computer desktop, which can be used when connected to the internet. Keep in mind that you should not store large amounts of Bitcoin on your desktop because if the desktop becomes compromised, so does your account.

Bitcoin clients: Bitcoin clients are the wallets originally used by the founders and are associated with the Bitcoin core. They are the opposite of thin wallets, as they are connected to the entire network and contain the entire blockchain.

How to Choose the Best Bitcoin Wallet for Yourself

To choose the best Bitcoin wallet for yourself, you need to know what are your own goals for using Bitcoin. If you want to use Bitcoin for everyday transactions — everything from buying coffee to buying things off of overstock.com — then you will probably want to use a hot wallet. Additionally, if you want to engage in trading, you will also want to use a hot wallet. Because a hot wallet is connected to the internet and can process transactions faster, it is best suited for people who want to make frequent transactions.

If you want to use Bitcoin as a type of investment so that your money can grow in tandem with the exponential growth of Bitcoin’s value, then you will probably want to use a cold wallet. Cold wallets are not adapted for frequent purchases but are great for storage. If you are concerned about security, then you will probably also want to use a cold wallet, as it is much less likely to be hacked.

How to Store and Secure Your Bitcoin Wallet

Securely storing your Bitcoin wallet is of the utmost importance. Besides choosing a reputable company to host your wallet, there are several different steps that you can take to maintain the integrity of your wallet and Bitcoin account. The most important thing is to never, ever, ever share your account information. Your private key is what the blockchain uses to process transactions from your account; if it becomes compromised, some unscrupulous individual will be able to go in and drain out your entire account.

Another thing that you can do to maintain your wallet’s integrity is to use several different wallets, especially if you have a large amount of Bitcoins. That way, if one wallet becomes compromised, the rest of your money will still be intact. Avoid reusing addresses to send and receive Bitcoin, and make sure to create multiple secure backups of your wallets.

Mastering Bitcoin for Beginners - Neil Hoffman