What is a Bitcoin Wallet?
A Bitcoin wallet is where you can store your keys to access your bitcoin. The term “wallet” has been used since the early days in Bitcoin, but it doesn’t really give the right idea; a more appropriate term would be “keychain” because it stores the keys that allow you to unlock your bitcoins and spend them.
The keys that allow you to unlock your bitcoins and spend them are known as “private keys”. A wallet’s main function is to store your private keys and allow you to spend your bitcoins using those private keys. The wallet also has to prevent other people from accessing your keys and being able to spend your bitcoins.
There are different kinds of wallets that do this, some are more user friendly and convenient, other ones are not very user friendly but they are more secure and are considered safe for holding large amounts of bitcoins. I will be going through the most common types of wallets and explaining their advantages and disadvantages.
A custodial wallet is a wallet where you do not control the private keys, but there is someone that has access to the keys and uses them to move the bitcoins when you ask them to. An example of this would be wallets on exchanges. These wallets can be convenient because they allow you to trade instantly, without having to send bitcoins to the exchange and having to wait for the exchange to receive them. These wallets may be convenient for trading, but they are the least secure kind of wallet that exists.
The fact that these wallets tend to be on exchanges with large amounts of coins from many different people makes them a very desirable target for hackers. Another big issue is that you can’t prove that the exchange has all of its customers bitcoins.If the exchange for some reason went offline.
When you are buying on an exchange you should take the bitcoins you purchased off of the exchange as soon as possible to minimize the risk of losing your bitcoins.
A very important concept here is “not your keys, not your bitcoins”, if you do not have access to the keys to be able to spend the bitcoins, they are not really your coins; they are the coins of whoever has access to those keys.
Examples of custodial wallets are wallets on websites like Coinbase, Kraken or QuadrigaCX.
A Hot wallet is a wallet where the keys to spend your bitcoin are owned by you, and are stored on the device (phone, tablet, or computer). These are more secure than custodial wallets because they are not as big of a target for hackers.
Even though these wallets are more secure than custodial wallets they should not be used to store large amounts of bitcoin. These wallets should be treated similar to how you treat the physical wallet you carry around with you; you should only put whatever amount you consider spending money in it.These wallets are very convenient to use and allow you to send bitcoins with just a few clicks.
Examples of hot wallets are phone and computer wallets like GreenAddress, Samurai, or Bread Wallet.
A hardware wallet is a physical device designed to store private keys securely and in a way that they never are directly on the internet, making it harder for them to be hacked.
Hardware wallets are slightly more inconvenient than hot wallets because they are physical devices that need to be plugged into a computer or phone to be used, but they are considered very secure and can be used to store large amounts of bitcoins. When setting up a hardware wallet a backup should always be written down so that the bitcoins can be recovered even if the physical device is lost or destroyed.
Examples of hardware wallets are the Trezor One or the Ledger Nano S.
A paper wallet is a bitcoin wallet that is printed, usually on a piece of paper, but sometimes can also be printed or stamped on metal too.For a paper wallet to be as secure as possible, it has to be generated on a computer that will never be connected to the internet after the creation of the wallet.
Paper wallets are the most secure kind of wallets; since the information is not stored on an electronic device there is no way for the wallet to be hacked.
Paper wallets are the most secure solution, but should be only used by very tech savvy people because they are not very easy to use or create.
Paper wallets can not be used directly, they have to be imported into a hardware wallet or hot wallet to be sent. Paper wallets are single use, and every time you use bitcoin from a paper wallet you should create a new paper wallet. For these reasons most users should not use paper wallets and should just resort to hardware wallets, which are sufficiently safe to store all their bitcoin.
To see how a paper wallet is created you can visit https://www.bitaddress.org/.
To generate a secure paper address you must use a computer that is not online, and will not be online after the creation of the paper wallet. Generating wallets online is not very secure, and can be even less secure than a hot wallet.
I do not recommend using wallets from bitaddress, unless you are sure you are sure you are using it the correct way.