As we have already discussed, Bitcoin is a virtual currency made up of 0s and 1s. They are collected and stored in a software portfolio called a wallet. A wallet identifies amount of cryptocurrency with unique addresses that are used to send and receive money.
A cryptocurrency wallet is a digital wallet that is used to store and transact in different cryptocurrencies. The crypto wallet doesn’t exactly “store” the currency as real-world wallets do. Instead, it stores public and private keys which help in sending and receiving money. Bitcoin owners save bitcoins in either an online wallet or a paper wallet which are similar to a physical wallet. Wallet holds keys to each bitcoin, securing them and preventing any fraud.
What are public and private keys?
The public key is the address to which others can send you the money, while the private key is that which you will use to send money to anyone. It is important that ONLY you should know your private key; otherwise anyone who knows your private key can steal your money.
You should not lose or reveal your private key come what may. Otherwise, losing your private key is similar to losing your money. You should use at least two different techniques to save and store your private keys.
As of now, let us discuss two methods of storage that can be used to store crypto money; hot storage, and cold storage.
As a recap, a wallet is used to −
- Send and receive money as cryptocurrency
- Collect and store coins created by the miner
- Synchronize blockchain with all nodes of the network
Opening a wallet is fairly simple; one can download free and paid bitcoin wallets from internet. Some deal only in bitcoins while others handle multiple cryptocurrencies.
A Bitcoin wallet is simply an app, software, website, or device that manages Bitcoin private keys for you.
Types of Bitcoin Wallets
There are several types of wallets available in the market. They can be of several types as follows
A paper wallet is a piece of paper on which the public address and private address are printed, usually in the form of QR code. Public address is used to receive bitcoins, and the private address is used to send or transfer the bitcoins stored at that address. The paper wallet should be used securely and not revealed or lost. The paper wallet can be generated by using services like Bitcoinpaperwallet or Bitaddress, and then can be printed out.
Mobile, Desktop and Web Wallets
These are software apps available on mobile phones, desktops, laptops or websites that allow bitcoin transactions.
For those people who use Bitcoins frequently, paying for goods and services, a mobile bitcoin wallet is a necessary tool. A mobile app runs on your smartphone, has your private keys and allows making payments directly from your phone.
A full Bitcoin client would require access to the complete Blockchain ledger, which needs several gigabytes of storage. Therefore, mobile wallets use simplified payment verification (SPV) technology which works with very small subsets of the Blockchain. In spite of being a convenient on-the-go solution for Bitcoin transactions, mobile wallets are very susceptible to hacker attacks and also if the mobile is lost, others can access the wallet.
A hardware wallet is a physical electronic device to secure bitcoins. The hardware wallet must be connected to your computer or smartphone, before bitcoins may be spent.
The three most popular and best Bitcoin hardware wallets are as follows −
- Ledger Nano S
Hardware wallets are the preferred choice if large amounts of bitcoins need to be stored and are secure, reliable, and convenient. Bitcoin hardware wallets isolate private keys from internet-connected devices that are vulnerable to hackers. Your private keys are held in a secure offline environment on the hardware wallet.
Hot wallets are Bitcoin wallets that run on internet connected devices like a computer, mobile phone, or tablet. Private keys are secret codes that hot wallets generate on an internet connected device. As such we cannot say these private keys are completely secure.
Hot wallets are like your physical wallets which you use to store some cash, but not your life savings. Hot wallets are useful if you make frequent and small payments, but are not suitable to store a large amount of bitcoins.
Software wallets allow us to send and receive bitcoins and are mostly free. There are some paid software wallets which provide some extra value-added services.
Opening a Bitcoin Wallet Account
We can go to sites like coinbase.org and sign up with our name, email id and phone number. Opening a wallet account is like opening a bank account where we can send, receive and store money in bitcoins.
In Coinbase, we can create multiple wallets which is a great way to organize the record of your expenses and savings. By default, there are following wallets in Coinbase, namely, Bitcoin BTH wallet, Bitcoin Cash BCH wallet, Ethereum ETH Wallet and Litecoin LTC Wallet. You have a wallet in US dollars as well so that you can buy and sell the cryptocurrencies using US dollars.
Each account on Coinbase is a bunch of addresses. New addresses are generated for each transaction on Coinbase automatically and stay mapped with your account forever and it is secure to reuse them.
Each wallet account is associated with an address and QR code as displayed. For example, selecting bitcoin wallet and then clicking on the BTC wallet address shows below address along with its QR code.
We can download bitcoin software client which might take a few hours to download all blocks to our computer that now acts as a node in the network. We have to ensure that there is enough bandwidth and storage for full block chain size which is over 145 GB. It is also possible to use a wallet without downloading the bitcoin client.