Now that you know what Bitcoin is, naturally, the next thing you’d have to ask is, how can you store your bitcoin if you have one? This is where the Bitcoin wallet comes in handy.
A bitcoin wallet is not a physical wallet for storing your bitcoins. As bitcoins do not physically exist, they can’t be stored anywhere. Instead – it uses private keys which are used to access your public Bitcoin address, and transaction signatures.
How to Bitcoin Wallets Work
Your Bitcoin wallet consists of a Bitcoin address – a randomly generated public key that can be viewed by anyone. It also has a private key that goes along with the private key. These keys are correlated and you cannot use Bitcoins without these pairings.
Bitcoin wallets come in handy to relate your public and private keys to Bitcoin and match these keys to show the records of associated transactions in which the public can also view.
The wallet does not hold your Bitcoins, it only has permission for you to have transactions via Bitcoin. If you’ve lost your Bitcoin wallet, you lose all your assets. This is why it is very important to secure your keys.
Backup Keys
In case you lose your wallet or forgot your password/private key, you can use a backup key or phrase to recover your bitcoin. These backup keys come in a form of a seed phrase which consists of 24 randomly generated words taken from your private keys.
To ensure the highest security, the seed phrases must only be written down on paper. These phrases are only visible to you, which means that the wallet client operator cannot retrieve them.
Here’s an example of a backup key:
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You can use the backup key to perform wallet recovery or import your wallet to a Bitcoin wallet client.
Types of Wallet
Paper Wallet
Paper Wallet is a document that contains a public address for receiving Bitcoin and a private key that allows you to spend or transfer your Bitcoin. Paper wallets are printed in a form of a QR code so you can scan them and make a transaction.
The benefit of a paper wallet is that the key is stored offline which means it is completely immune to hacker attacks. However, you still need to be careful when creating a wallet. Before generating a wallet you need to make sure that nobody is watching you do it. You avoid the risk of spyware or any monitoring software, create a paper wallet on a freshly installed operating system or a bootable OS. Then use a printer that is not connected to any network to print the paper wallet.
Physical Bitcoin
Physical Bitcoins are the best way to store your funds safely and it is an extremely useful wallet to use when trading offline. This physical Bitcoin is preloaded with a fixed amount of BTC and the intention is its value cannot be spent as long as the private key is hidden.
Mobile Wallet
This type of wallet runs in your smartphone, storing your private keys and allowing you to make transactions using your phone. Some apps take advantage of the phone’s NFC feature making it easier for you to make transactions by simply tapping the phone on any NFC terminal or phones with NFC.
Despite it being the most convenient solution for storing Bitcoin, it is prone to hacker attacks. You can easily lose control of your wallet if someone gains access to your smartphone.
Desktop Wallet
Desktop Wallets are desktop applications you download and install to your computer then store your private keys on your computer’s hard drive. These are more secure than mobile wallets as they don’t rely on third parties for data and are harder to steal. However, they are connected to the internet, which makes them prone to hacking as well. Desktop wallets are a great solution for people who trade small amounts of Bitcoin from their computers.