Why do you need a Cryptocurrency wallet?
Bitcoin unlike traditional currencies, is a digital currency. Bitcoins are intangible, they don’t have a physical substance. This means that the way you use it is also different. Bitcoin wallets are used to store and make transactions with Bitcoins. You can choose between Hardware, Paper, Desktop, Web and Mobile wallets. Each wallet has different levels of security and usability depending on your needs.
Bitcoin ownership is established through digital keys and digital signatures. These keys are generated locally on Bitcoin end-users’ computers using special software called a Bitcoin client. They can be stored in a file, in a database, or just printed on a piece of paper, but most commonly they are stored in a Bitcoin wallet. The keys within each user’s wallet allow the user to sign transactions, thereby providing cryptographic proof of the ownership of the bitcoins sourced by the transaction. This guide will show you how to choose a wallet for bitcoin or other cryptocurrencies.
Keep in mind that if you don’t know who generates your private keys, where they are stored, or if someone else has them (as when using a cryptocurrency exchange), they are not actually yours, as seen in the case of MtGox, which discontinued its operations in February 2014.
“Like email addresses, Bitcoin addresses can be shared with other Bitcoin users who can use them to send bitcoins directly to your wallet.
Unlike email addresses, you can create new addresses as often as you like, all of which will direct funds to your wallet.
A wallet is simply a collection of addresses and the keys that unlock the funds within.
There is practically no limit to the number of addresses a user can create.”from Antreas Antonopoulos’s book, Mastering Bitcoin
The basics of Bitcoin wallets
Firstly, we must distinguish Bitcoin wallets and Bitcoin clients:
- A wallet is a collection of data (e.g. the Bitcoin user’s private/public key-pair and his address) enabling a user to receive and send bitcoins, in the form of spendable outputs.
- A client is the software that connects a user to the Bitcoin network. It handles all the communication, updates the wallet with incoming funds and uses information from the wallet to sign outgoing transactions.
There are different types of Bitcoin clients:
- Full client: A Full client, or “full node” is a client that stores the entire history of Bitcoin transactions, manages the user’s wallets and can initiate transactions directly on the Bitcoin network. (Node=a point on a network contributing towards validating transactions – in this case your computer)
- Web client: A Web client is accessed through a web browser and stores the user’s wallet on a server owned by a third-party.
- Lightweight client: A Lightweight client stores the user’s wallet but relies on third-party owned servers for access to the Bitcoin transactions and network. The lightweight client does not store a full copy of all transactions and therefore must trust the third-party servers for transaction validation.
- Mobile client: A Mobile client, usually used on smartphones, can either operate as a full client, a lightweight client, or a web client. Some mobile clients are synchronized with a web or desktop client, providing a multi-platform wallet across multiple devices, with a common source of funds.
Sending and Receiving Bitcoin/Cryptocurrencies Steps
- When first created, a Bitcoin/cryptocurrency wallet is empty.
- In order to receive some bitcoins or another cryptocurrency you have to inform the sender about your wallet’s address, just like we would provide our email address to someone who wants to send us an email.
- In this case, to send bitcoins, a sender can just copy and paste the receiver’s address: e.g. 1NmCXMB8R8y1ewiPs2zKF7Me7tbkLeVG4i
- If the sender is using a mobile wallet, it could be more convenient to scan the relevant QR code.
- After every transaction is confirmed, it becomes a part of Bitcoin history, and is included in the public ledger, i.e. the blockchain.
- Each transaction corresponds to a chain of ownership transfer and is maintained in a distributed, peer to peer network of Bitcoin nodes.
1. Hardware Wallets
- Provide extra security and fault tolerance as they are not connected anywhere and cannot be hacked like a computer.
- Private keys generated, stored within the device and never leave the device.
- Transactions signed within a PIN protected external device – does not need to be imported to software.
- Backups are required by most wallets. (usually a 12 word mnemonic phrase).
- Make sure you buy from original stores to avoid the danger of a compromised shipment.
Ledger Nano X is a secure Bitcoin hardware wallet. It connects to any computer through USB and embeds a built-in OLED display to double-check and confirm each transaction with a single tap on its buttons. You can read my article about Ledger Nano X, here.
Trezor is a hardware wallet providing a high level of security without sacrificing convenience. Unlike cold storage, Trezor is able to sign transactions while connected to an online device. That means spending bitcoins is secure even when using a compromised computer.
2. Browser Wallets
- Least secure choice, after exchanges. Examples: BitGo, Green Address, Circle, Coinbase, Coinkite, Xapo, Blockchain.
- Web wallets store your private key (i.e. password) for you on their servers.
- May come by a mobile application or using your browser on a personal computer.
- You are trusting a company not to steal your funds and disappear, or to not get hacked.
The most commonly used browser wallet is Blockchain.com. With over 27 million wallets and very small transaction fees it is the #1 choice for new users who need something easy, trustworthy and fast. You can store Bitcoin, Bitcoin Cash, Ethereum and Stellar coins on it. You can also buy Bitcoin through Visa & Mastercard or bank transfer. It is recommended that you secure your wallet with extra protection, e.g. connect your mobile number, add Google Authenticator 2fa by scanning the QR code & use a 12-word recovery phrase which will enable you to gain access to your wallet if you lose your password or get access from whatever device by using this phrase.
3. Desktop Wallets
- Software downloaded and installed on a PC or laptop.
- Complete control over your coins.
- No third-party is able to steal your coins.
- They can be full nodes or lightweight.
Bitcoin Core is a full Bitcoin client and builds the backbone of the network. It offers high levels of security, privacy, and stability. However, it has fewer features and it takes a lot of space (200 GB) and memory.
Electrum’s focus is speed and simplicity, with low resource usage. It uses remote servers that handle the most complicated parts of the Bitcoin system, and it allows you to recover your wallet from a secret phrase. It supports cold storage and multisig technology.
Wasabi (Recommended for privacy)
Wasabi is an open-source, non-custodial, privacy focused Bitcoin wallet for Windows, Linux and Mac. Built-in Tor anonymity network, CoinJoin and coin control features.
Exodus is a desktop wallet of top design and aesthetic. It gives you control over your private keys, it offers cold storage and supports multiple cryptocurrencies, including many Ethereum ERC-20 tokens.
They are used as lightweight clients and most of them allow you to back up your wallet with a mnemonic phrase. Good for daily use and scanning QR codes.
Samourai (Recommended for privacy)
Samourai creates products that make it easier to use Bitcoin privately. Samourai Wallet brings reusable payment codes, stealth mode, remote commands, Tor, and ShapeShift to anyone with an Android phone. The most private mobile wallet.
The mobile version of Electrum wallet. Your private keys are encrypted and never leave your device. Your wallet can be recovered from a secret phrase and it provides cold storage.
Trust Wallet (Binance)
With Trust Wallet you have complete control over your private keys that are only stored on your device. You can store & send Bitcoin and other multiple coins as well as 30,000 ERC20 Ethereum tokens! Trust Wallet will work seamlessly with Binance DEX, allowing you to make instant trades on the decentralized exchange.
Ethos is branded as a universal wallet. It supports Bitcoin, Ethereum & 100+ Cryptocurrencies. With the Universal Wallet, you generate a single Ethos SmartKey for each wallet instance you create, and it takes care of the rest – providing automated maximum security management of all of your digital assets.
The mobile version of blockchain.com wallet. You can use a 4-number pin to secure it and a back-up phrase.
“A paper wallet is a mechanism for storing bitcoins offline as a physical document or object that can be secured.
Paper wallets are generally created by printing a brand new public address and private key onto paper, and then sending bitcoins from a “live” wallet to the printed wallet’s public address for safekeeping.”
A “paper wallet” consists of two components:
The public address, which has to be available to anyone that wants to send bitcoins to you.
The private key, which is the key you need in order to use, spend your own bitcoins.
Must be stored on a safe place, make at least 2 copies. It provides maximum protection from cyber-attacks/hardware failures/operating system errors/breakdowns etc. Must be imported to software at some time, unlike hardware wallets.
Make sure you are working offline when generating a paper wallet! Use multiple paper wallets; i.e. generate a different wallet for expenses that you pay using bitcoins, and use different ones for long term storage of bitcoins. Only the owner of bitcoins (who knows the password) can decrypt the wallet and gain access to the private keys. This paper wallet can also be used to receive bitcoins by scanning the QR code.
In a few words
You need a wallet to store your cryptocurrencies and to make transactions with them. Each wallet has a receive address and a send address. If you want to send bitcoins to someone you ask him for his bitcoin address, if you want to receive bitcoin from someone you give him your receive address. The safest way to store your bitcoin is offline on a hardware wallet device (cold storage). Just choose one of the wallets above and your are ready to go!
You can also read my first guide explaining what is Bitcoin and blockchain technology:Share this post