Key takeaways
- Bitcoin is the most traded cryptocurrency, but to store, send and receive it safely, you need a secure wallet that only you can access.
- Bitcoin wallets can take 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 losing access to your Bitcoin permanently.
- Cold wallets offer offline storage for Bitcoin, making them more secure from online threats, while hot wallets are easier to use but come with increased security risks.
Bitcoin has held its top spot as the most traded digital currency for many years, but to store it safely, you need a secure place that only you can access. That’s where a Bitcoin wallet comes in.
Bitcoin (BTC) wallets are available in a variety of formats, including small hardware devices, computer software and smartphone apps. Also, some can handle various cryptocurrencies.
No matter the type of wallet you select and whether you are an experienced trader or a newbie to crypto, a wallet is essential for safely and conveniently storing your cryptocurrency.
This beginner’s guide to Bitcoin wallets will break down what a Bitcoin wallet is and how it works so you can get started with confidence.
What is a Bitcoin wallet?
A Bitcoin wallet is a digital wallet that helps you safely store, send and receive Bitcoin. It works like a virtual version of a regular wallet but has its unique features. Instead of holding cash, it keeps the keys that unlock your Bitcoin.
When you want to send crypto, a Bitcoin wallet uses something called a private key that authorizes you to transfer your Bitcoin. This private key is like a secret password that gives you full control over your funds. Without it, you can’t access or spend your Bitcoin.
But here’s the catch — If someone gets hold of your private key, they can take your Bitcoin. No questions asked! That’s why keeping it safe is so important.
Bitcoin wallets also have a public key that allows you to send Bitcoin. But don’t worry; the actual Bitcoin isn’t stored in your wallet. It’s safely recorded on the blockchain, a digital ledger that tracks everything.
Did you know? The first Bitcoin wallet was created by Bitcoin’s mysterious founder, Satoshi Nakamoto, in 2009, long before digital wallets became mainstream tools for storing digital assets.
How Bitcoin wallets work
When creating a Bitcoin wallet, something called a seed — a starting point for creating your cryptographic keys — is generated. This seed is often shown as a series of 12 or 24 words, called a mnemonic phrase. As long as you have this recovery seed, you can restore your wallet and access your Bitcoin, even if you lose your device.
Most Bitcoin wallets use a system called hierarchical deterministic (HD) key generation. This system automatically creates a new public key for each transaction. Why? Reusing the same public key can make it easier for others to track your payment history, reducing your privacy. Using a new public key for every transaction keeps your financial activities more private.
Bitcoin transactions operate on something called the UTXO model, which is short for Unspent transaction output, and here’s how it works.
Every Bitcoin transaction has an input, the amount you’re sending, and an output, the amount the recipient gets. But Bitcoin doesn’t split amounts automatically like cash. Instead, if you send more than the exact amount, the network sends the leftover “change” back to you as a UTXO. This leftover can be used in your next transaction.
If you’re only using your wallet to store Bitcoin, it typically costs nothing. However, completing transactions typically comes with fees. These fees vary depending on whether you’re using a crypto exchange, a wallet on a hardware device or another type of service. Some wallets charge a small fixed fee, while others take a percentage of your transaction.
Types of Bitcoin wallets
It’s hard to determine the best Bitcoin wallet for beginners or advanced traders, as security options and specific features define what will work for each person. Choosing the right Bitcoin wallet first involves considering their types.
Hot wallets
Hot wallets, also known as “software wallets,” are apps that let users manage their Bitcoin easily. Since these wallets are always on the internet, this makes them practical but vulnerable to threats like malware and hacking. Hot wallets can take various forms:
- Mobile wallets: Run as smartphone apps that let you store and trade Bitcoin daily. They use simplified payment verification but can be vulnerable to hacking if security features like two-factor authentication (2FA) aren’t 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 linked to crypto exchanges. They are convenient to use but susceptible to hacks or exchange failures. Popular examples include Blockchain.com Wallet and Binance Wallet.
- Bitcoin Lightning wallets: Designed for the Lightning Network, Lightning wallets enable fast and low-cost transactions. Suitable for daily spending, they’re less suitable for long-term storage due to fees and reliance on providers. Popular examples include Wallet of Satoshi and Phoenix.
- Desktop wallets: Installed on computers, offering more control and security than mobile or web wallets as they store private keys locally. Desktop wallets, such as Exodus and Electrum, are internet-connected and can pose some risks.
Any type of hot wallet — whether mobile, web, or desktop — can be either custodial or non-custodial:
- Custodial hot wallet: A third party, such as an exchange, holds your private keys and controls access to your funds. This means that you rely on the exchanges’ security of your wallet.
- Non-custodial hot wallet: Users control their private keys directly, meaning you are fully responsible for securing your Bitcoin and ensuring it’s not lost or stolen.
Cold wallets
Cold wallets, also known as hardware wallets, are physical devices for storing Bitcoin. These wallets are designed to keep private keys offline and safe from online threats like hacking. They can be suitable for long-term storage but less convenient for frequent transactions. Here are the types of cold wallets:
- Hardware devices: Compact devices like Ledger Nano or Trezor store private keys securely offline. These wallets are user-friendly, immune to viruses and have features like screens to verify transactions.
- Paper wallets: Physical documents with your public and private keys, often in QR code form. While highly secure against online attacks, paper wallets require extra care to prevent physical damage or loss and can be cumbersome for transactions.
Whereas it’s a hardware wallet device or a paper wallet, cold wallets can be either custodial or non-custodial, depending on who controls the private keys:
- Non-custodial cold wallets: Users have full control of their private keys and are responsible for their security.
- Custodial cold wallets: These cold wallets involve a third party managing your private keys, adding convenience and a certain level of trust in that service.
Did you know? If you lose access to your Bitcoin wallet’s private key and recovery seed, there is no way to recover your Bitcoin. It’s crucial to store these securely and never share them.
How to set up a Bitcoin wallet
Creating a Bitcoin wallet involves two main options: setting up a hot or cold wallet. Here’s a simple Bitcoin wallet setup guide.
Bitcoin hot wallet setup
Step 1: Choose a hot wallet
The first step is selecting a reliable software wallet. Locate the official site and choose the preferred way of accessing the wallet, such as a mobile app or browser extension.
After choosing your wallet, download it from the official app store or website to ensure it’s safe. The app will be installed on your phone or computer.
Step 2: Create an account
Open the downloaded wallet and create an account by entering your details, such as your name, email and a strong password. Some apps may also require identity verification.
Step 3: Add Bitcoin
Once your wallet is ready, you can add BTC by transferring it from another wallet or a bank account, exchanging it with other cryptocurrencies or using other methods available in the chosen wallet. To do this, use the wallet address provided or scan a QR code for easy transfers.
Bitcoin cold wallet setup: Hardware device
Step 1: Choose a cold wallet
Select a reliable cold wallet by researching the features and reviews. Locate the official site to purchase the wallet.
Step 2: Buy and install a hardware device
After purchasing your hardware wallet, follow the manufacturer’s setup instructions. This usually involves connecting the device to your computer or mobile device via USB or Bluetooth and installing the required software. Remember to store the passwords or security words.
Step 3: Transfer Bitcoin
After setting up the wallet, you can transfer BTC by linking the hardware wallet to an exchange or brokerage account. The Bitcoin transferred to the hardware wallet will be stored offline, keeping it safe from online threats.
Bitcoin cold wallet setup: Paper wallet
Step 1: Go offline
For maximum security, disconnect from the internet when creating your paper wallet to avoid online attacks.
Step 2: Generate keys
Use an offline tool to generate a Bitcoin private key and seed phrase on paper. Be careful when entering and verifying this information to avoid errors.
Step 3: Print and store
Print or write down your private keys on a piece of paper, then securely store them in a safe place, like a lockbox or safe. If someone gains access to your paper wallet, they can access your Bitcoin, so it’s vital to keep it secure.
Did you know? Exit scams frequently happen when wallet providers or the founders of cryptocurrency projects vanish with users’ money, leaving investors with nothing. This can occur when working with unreliable platforms or when Bitcoin wallets are not adequately secured.
How to keep your Bitcoin wallets secure
Bitcoin wallets come with security risks like scam emails or malware, so staying cautious is crucial for storing BTC securely. While Bitcoin wallets are generally secure, your safety depends on your chosen security measures. Here are some essential steps to keep your Bitcoin wallets secure:
- Use strong, unique passwords: Create complex passwords with a mix of letters, numbers and special characters. Avoid easily guessable information like birthdays or names.
- Enable 2FA: Adds an extra security layer by requiring a second form of verification, such as a code from your phone. It helps protect your wallet even if your password is compromised.
- Use hardware wallets: These wallets store your private keys offline, making them immune to online hacking attempts. They’re the most secure option for long-term Bitcoin storage.
- Keep software up-to-date: Regular updates fix security vulnerabilities and add new protections. Always update your wallet and software to the latest version to stay secure.
- Store backup phrases securely: Backup phrases are the key to your wallet; store them offline in a safe place. Never share them, and avoid storing them digitally where they can be hacked.
- Research third-party wallets: Choose wallets with a proven track record and strong security practices. Ensure they do not store private keys online or have weak encryption.
- Use multisignature wallets: Multi-sig wallets require more than one private key to authorize a transaction. This makes it harder for attackers to gain access to your funds.
- Beware of phishing scams: Always verify website URLs and be cautious with unsolicited emails or messages. Phishing scams trick you into revealing private information like keys or backup phrases.
- Review wallet activity regularly: Regularly check your transaction history and balances. Immediate action can be taken if you notice unauthorized activity or suspicious transactions.
- Use cold storage for large holdings: For significant Bitcoin amounts, use offline storage methods like hardware or paper wallets. Cold storage protects your funds from online risks.
- Avoid public WiFi: Public networks are insecure and susceptible to attacks like man-in-the-middle. Use a VPN or connect through a secure network when accessing your wallet.
Thus, always stay vigilant when managing your Bitcoin wallets. Security is a continuous process, and taking proactive steps can protect your assets from potential threats. Stay informed and prioritize safety to ensure your investments remain secure.