Just like you use a wallet to carry your money around or use a safe deposit box to store jewelry and precious metals, you need to use a Bitcoin wallet to store and access your Bitcoins. But with so many dangers lurking online, as opposed to the physical world, it’s important to get to know how Bitcoin wallets work and learn the benefits of the many types of wallets you have today before choosing one.
To help you with this, here’s an in-depth guide to the different types of Bitcoin wallets, how they are used to access your Bitcoins, as well what advantages or disadvantages they offer to you as a user.
How Bitcoin Wallets Work
When you think of wallets, it’s natural to think of physical or digital devices that you use to store money in them. However, Bitcoin wallets are different than physical wallets, or e-wallets for that matter, as they don’t actually store your Bitcoins but just the location of your coins.
You see, whenever you buy Bitcoins they aren’t transacted to your wallet but they instead remain “stored” in the blockchain – Bitcoin’s digital ledger. To access them, you will need what is called a “private key” that proves you own that specific number of coins recorded in the blockchain. So, your Bitcoin wallet is basically a “safe” for this key and, if taken, it can be used to transfer/spend your BTC.
Cold Storage Wallets
One of the most popular ways of storing Bitcoins is by using “cold storage” wallets, i.e. wallets that have no access to the internet. The main reason why cold storage is preferred by many is that it minimizes risks of malware attacks and hacks that have taken so many Bitcoins throughout the years. However, even cold wallets will not be 100% reliable all the time.
Hardware wallets are the priciest of cold wallets but they are also one of the most secure ways to store your Bitcoins. Basically, hardware wallets are small physical devices built for storing your private keys offline. They come with more secure authentication protocols than other types of wallets and they are the preferred way to store larger sums of Bitcoin.
Hardware wallets use PINs and “seed phrases” to grant you access to your Bitcoins. A seed phrase is a long phrase (24+ words) made up of random words that can be used to access your Bitcoins again even if you lose or destroy your hardware wallet. A PIN, on the other hand, is used together with other authentication methods to transfer your Bitcoins through a computer connected to the internet.
Paper wallets are technically cold storage wallets that store the address to your private keys on printed paper. Paper wallets are cheaper than hardware wallets but they can also be risky because they can get damaged or lost, giving someone else access to your Bitcoins. Therefore, if you use a paper wallet, make sure that you make backup copies and store all of them in locations only you have access to.
You can also store your Bitcoins in a removable hard drive or a USB drive that you can encrypt to prevent anyone from accessing your keys. Just like paper wallets, when using encrypted drives you will need additional copies as drives can likewise be damaged. But unlike hardware wallets, you will not have any “seed phrase” to restore your Bitcoins if you lose or damage all of your drives.
Hot Storage wallets are wallets that are connected to the internet. As such, they are more susceptible to phishing attacks, malware like keyloggers, or viruses. In general, hot storage wallets are more recommended for keeping small amounts of Bitcoin that you can risk losing while larger investments are recommended to be kept in additional offline wallets.
Mobile wallets are wallets you can install on your Android/iOS devices and use to buy items in stores, shop online or transfer Bitcoins to other users. They are a good solution for anyone that wants to use Bitcoins fast and easily online or offline but they are also open to the security risks that come with online wallets or using mobile phones.
Online wallets are online providers of wallets that you can use to send/receive and access your Bitcoins wherever you are. Online wallets are often offered through Bitcoin exchanges, which means that you can also use them to buy or sell directly, and they can be linked to your desktop and mobile wallets.
Their biggest disadvantage, however, is that your keys are kept in an online website and in the hands of a third-party provider who will be 100% in charge of the safe storage of your Bitcoins. Online wallet services and exchanges are also more likely to be a target for cybercriminals than other types of wallets.
Desktop wallets are wallets that you can install on your laptops and desktops. They offer full control over your Bitcoins and are often compatible with hardware and mobile wallets. However, by using a desktop wallet, the security of your coins will be entirely up to you, so if your PC gets infected in any way you can risk losing your coins. On the plus side, you can set them up to use your PC for cold storage.
What’s the Best Type of Wallet?
There’s no right answer to this question. What wallet you choose will depend mostly on the size of your Bitcoin investment and the speed of transactions and security you want to enjoy. The common way to store Bitcoins for most people is to keep a fast and easy-to-use hot wallet for storing smaller sums of money for payments and using a second cold wallet to keep larger investments safe.
You can also disperse your Bitcoins into several wallets so that you’ll never risk losing everything if one wallet gets breached. Whatever road you choose to take, always make sure that you pay extra attention when transferring Bitcoins as the transactions can never be reversed, but also to never hand your private keys to a person or a service you can’t really trust.