- What is a Bitcoin Wallet?
- How do Bitcoin Wallets Work?
- Why are Bitcoin Wallets Important?
- Types of Wallets
- How to protect your Wallet
April 7, 2021 | AtoZ Markets – While the concept of Bitcoin may be new to some, the digital asset has been revolutionizing the financial world for over a decade. The “trendsetter” of the crypto ecosystem, BTC is becoming a very common investment holding among many individuals.
Proponents of cryptocurrencies argue that digital assets such as Bitcoin are safer, easier, and more private than fiat currencies. For those that are interested in buying crypto they will need a secure and convenient storage solution (a crypto wallet).
If you think about a traditional wallet that you use to hold your cash and credit/debit cards. To ensure the safety of these materials you keep them in one place. Your Bitcoin/crypto wallet is the same concept, only it’s digital. Each Bitcoin transaction record is stored on the blockchain. However, a Bitcoin wallet stores an assortment of BTC private keys. Your wallet is usually password encrypted and protected from unauthorized access. This means that your crypto wallet is controlled by you and you only.
Ready to get started? In this article you will learn what a Bitcoin wallet is, how they work, the different types of wallets, and other important security tips that can help keep your cryptos safe.
What is a Bitcoin Wallet?
A Bitcoin wallet is a tool that individuals can use to interact with the blockchain network. A wallet provides a quality storage facility to keep your digital currency safe. Crypto wallets can be generally broken down into 3 groups, hardware, software, and paper wallets. Which depending on how they work can also be referred to as hot or cold wallets.
How Bitcoin Wallets Work
Millions of people use crypto wallets, yet there is a lack of understanding on how they work. With traditional “pocket” wallets we essentially store our currency. However, with a digital wallet currency does not get stored in a single location nor do they exist in physical form. Instead, transaction records are stored in the blockchain. Bitcoin wallets can generate the necessary data that is needed to send and receive crypto via blockchain transactions. Every crypto wallet has:
- A public key is used to receive funds and identifies the user’s account in the blockchain. Your public key is used to encrypt data and is open to anyone in the network.
- Private keys are the opposite and are used to decrypt data. This means they are only used to sign transactions and prove that the individual owns the related public key. As the name implies these are private and should remain that way. Regardless the wallet you are using, the private key gives access to your cryptos. In the case where your device gets compromised, you will still have access to your funds on another device providing you have the right private key.
Why are Bitcoin Wallets Important?
As mentioned above Bitcoin does not exist in any physical form. Instead, it is private keys, which are used to access your public address that needs to be stored securely. Bitcoin transactions are made possible by the combination of the recipient’s public and private keys.
A combination of the recipient’s public key and your private key is what makes a Bitcoin transaction possible. Bitcoin wallets come in different forms and cater differently to diverse requirements. Furthermore, they may differ in terms of security, convenience, and accessibility.
Types of Wallets
There are several types of wallets that provide different ways to store and access your digital currency. Essentially all wallets offer different features, for instance, extra security, better user experience, or convenience.
Hot vs Cold Wallets
As mentioned, depending on how they operate crypto wallets can be classified into two, Hot or Cold wallets.
Hot wallets are any wallets that are connected to the internet. This type of wallet is easy to set up, user’s funds are quickly accessible, meaning increased convenience for the individual.
Cold wallets then are those that have no connection to the internet. Instead, they make use of a physical medium to store the keys offline. This attribute makes them resilient against hacking attempts. This is why many would consider them the safer alternative for storing their Bitcoin or other cryptos.
When it comes to security, users will be hard-pushed to find anything better than a hardware Bitcoin wallet. A hardware wallet is a physical device used for crypto transactions. Although hardware wallets make transactions online, they are never connected to the internet. They work in that they store a user’s private key on a hardware device, for instance, a USB.
Users simply plug their device into any internet-enabled device enter their pin and carry out their transaction. This simple to transact method keeps your money offline and in turn, makes it virtually impossible for a hacker to access your keys.
These types of wallets are downloaded to a specific laptop or computer and can only be accessed from that single device. Desktop wallets do offer great security and convenience for users, however, in the case where your computer is hacked or gets a virus there is the possibility of losing your funds.
Although these wallets offer the utmost convenience, they are also the least secure. This is because the wallet provider has full control, and your private keys are stored online (in the cloud) making them more vulnerable to attacks.
These wallets are very similar to desktop wallets in that they run off a single device, i.e. an app on a mobile device. This makes them available anywhere, anytime.
A paper wallet is another offline cold storage mechanism for storing bitcoin. This includes printing out your public and private keys on a piece of paper which can then be stored in a secure location. While the name implies a physical copy or printout of your public or private keys, this can also refer to a piece of software. For instance, using the form of a QR code, that can be scanned in future transactions.
When choosing the right wallet to store your Bitcoin always look for attributes such as security, convenience, user experience, and compatibility.
How Can I protect my Wallet?
Bitcoin wallets are high-value targets for pesky scammers and so keeping your asset safe is essential. Some safeguards include:
- Encrypting your wallet with a strong password.
- Frequent desktop and mobile wallet backups.
- Be sure to have up-to-date antivirus software.
Safe and convenient storage is crucial for anyone that buys cryptocurrencies. Zeply adds an extra layer of security through a robust 2-Factor Authentication system.