What is a Bitcoin Wallet?
In the simplest terms, a bitcoin wallet is a software program for sending, receiving, storing and monitoring your bitcoins — similar to a bank account. However, technically speaking, bitcoin is not stored anywhere.
Every bitcoin holder has a private key — a very long secret code consisting of numbers and letters that is saved in the bitcoin wallet. When transactions happen on the blockchain, the funds are merely associated with the wallet of the recipient, seemingly changing their ‘location’.
Wallets are divided into two general camps: hot wallets and cold wallets. Hot wallets are commonly referred to as software wallets. When people refer to cold wallets they’re usually talking about hardware wallets.
Online wallets – These wallets operate completely on the web, which is why they’re also known as ‘web wallets’. They come in two general forms: free, open source websites like MyEtherWallet and — much more commonly — websites that you pay a fee to use. The latter are more commonly known as ‘exchanges’ and are the easiest wallets to use since all you have to do is sign up for an account on a website like Coinbase and they give you an easy to use dashboard to handle your crypto. Since they handle so many people’s coins it makes them the most likely target for hackers, making this an insecure method of storage. See the ‘Centralized Exchanges’ section above for more on this.
Mobile wallets – They store your private key on your mobile phone. Regardless of the security level of the wallet app, this is not a secure option. Jaxx is an easy-to-use software wallet that also allows for trading between different cryptos right within the wallet.
Desktop wallets – They store your private key on the computer. As long as the computer is malware free and doesn’t have security flaws your Bitcoin are safe. Jaxx also offers a desktop version of their program.
Hardware wallets – Your private key is stored on an external device (USB) and can be used on any computer. These are the most reliable bitcoin wallets because they provide seed backup in case the device gets lost or stolen. In order to perform bitcoin operations, you need to connect the hardware wallet to the internet. The only negative feature of this wallet is that you need to have it with you at all times if sending and receiving coins. Trezor is a good example of a hardware wallet.
Paper wallets – Your private key (or seed) is written on a piece of paper and can only be stolen with direct physical access. They’re pretty secure, but prone to damage over time unless stored somewhere the paper and ink won’t degrade. So it’s necessary to make multiple copies over time to prevent their destruction. Also, to perform bitcoin transactions, you need access to some kind of digital bitcoin wallet.
Brain wallets – Some people take it as far as to remember the entire 12 phrase recovery seed by heart. They use mnemonics (memory techniques) to store the recovery seed in their memory, making them a living, breathing, bitcoin wallet. There are not a lot of people who do this, mainly because of how forgetful we are as a species.
TIP: Regardless which bitcoin wallet you choose it’s always best to have a backup in a secure and encrypted location. Update security software and use applications with multisig transactions to sleep peacefully sleep at night.