Using a Bitcoin wallet
Whether you’re buying or selling Bitcoin, trading it for goods or services, or just holding on to what you have, you will always need some way to store it. There are a number of different storage options available for users of Bitcoin and other cryptocurrencies, and it’s a good idea to have your own personal “wallet” to keep your digital tokens safe. In this guide, you’ll learn everything you need to know about crypto storage, and find out what the best Bitcoin wallet service for you might be.
What is a Bitcoin wallet?
Obviously Bitcoin isn’t like everyday physical currency, and it’s also not really comparable to money kept in an online bank account. Technically, Bitcoin isn’t really “stored” anywhere. A Bitcoin wallet is just a software program that allows a Bitcoin balance to be registered on the network. Whoever owns the wallet can change the balance by receiving Bitcoin, or sending Bitcoin to other wallets.
A Bitcoin wallet is composed of two essential elements: a “private key” and a “public key”. The public key indicates a particular address on the Bitcoin network, where a Bitcoin balance is registered (although the public key and the wallet address aren’t the same thing, as we’ll see later). What owning a wallet means is that you also have its private key. This private key allows you to access the Bitcoin, changing the wallet’s balance by “moving” funds elsewhere on the network.
What is a private key?
Both the public and private keys for your secure Bitcoin wallet are usually in the form of a long string of letters and numbers (it’s known as a hexadecimal number, which is like a regular decimal number made up of the digits 0-9, but also with the letters a-g indicating different values).
In terms of crypto storage, your private key can be thought of as the key or the code to unlock your personal safe, which only you have access to. Using the crypto stored in a wallet is only possible with the private key, so nobody else can get access to your funds. But it’s also important to remember that, unlike a physical storage box, your Bitcoin wallet doesn’t actually contain anything real. So, if you happen to lose your private key, the cryptocurrency tokens that you previously had access to are gone forever, with no way of using them again.
When a new user first initiates a transaction on the Bitcoin network, a new private key is generated. It’s used as a kind of digital identification, or a signature to prove ownership of funds at a particular node on the network. Only the user should be able to see the private key. When a transaction is broadcast publicly, so that it can be verified before being added to the blockchain, the private key associated with it is encrypted for security reasons. This creates a public key, which is a shorter version of the private key.
What is a public key?
The private key and public key form a pair, and the latter is generated from the former, using a complex hashing algorithm. (For more about hashing functions, see our page “Is Bitcoin Mining Profitable?”). This algorithm is set up so that, for any given output, it’s nearly impossible to calculate what the input was. This means that. although the keys are associated with each other, the private key is still fully encrypted. There’s no viable method for anyone to reverse the encryption process and figure out your private key from your public key.
If we think of your Bitcoin wallet as a mailbox that stores your crypto, the public key functions like its address. This is how other users on the network know where to reach you, so they can send crypto as if they’re sending letters through the mail. You could also think of it like a bank account number, which you share with someone when you want to receive payment. However, the public address is, technically, slightly different from the public key. Although they serve essentially the same function, the public address is generated from the public key, by applying the hashing algorithm again. This just results in a shorter number, which makes it easier for people to carry out transactions on the network.
If we continue the mailbox analogy, it’s helpful to imagine that the storage box is also transparent. A wallet address is publicly visible and, once its public key has been shared, anyone can see how much crypto is in it. However, only one user can actually do anything with this crypto, because as we mentioned above, there’s no way of figuring out the private key from the public key. Also, if you happen to lose your public key, this can easily be found again from the private key.
Types of Bitcoin wallet:
A cryptocurrency wallet is used to store your private key digitally, and in doing so it also registers the public key and public address for your funds. There are a number of different wallet options, and they register the private key in a number of different forms, offering you varying levels of security and control over your crypto.
A digital Bitcoin wallet is just a specialised version of a digital wallet, which is a piece of software that allows passwords, account numbers, and other secure data to be stored digitally. Storing the key digitally also means that you can interface easily with other applications via your wallet, giving you quick access to your holding.
The six main types of crypto wallet are: paper wallets, metal wallets, hardware wallets, desktop wallets, mobile wallets, and web wallets. As we’ll see, these storage solutions can also be categorised into two different types: hot storage and cold storage.
- Hot storage
Hot storage is perhaps the most common way to hold your crypto, and is usually free of charge, but these methods also offer the least secure Bitcoin wallet service. Any crypto wallet that is connected to the internet in some way is a hot wallet. This includes websites and custodial services that hold your Bitcoin for you, as well as software wallets available for desktop and mobile devices. Keeping your private key somewhere online means that you can easily carry out transactions with other users, sending and receiving crypto quickly and conveniently whenever and wherever the internet is available. Also, it’s usually remote storage, so there’s no need to worry about storing a physical object somewhere.
The danger of hot storage is that the convenient internet connection also makes the funds more vulnerable to hackers. Anyone who can gain access to the server that has your private key will be able to use your crypto holdings however they please. Even without hacking, there’s also a danger that the third-party storage service itself can’t be trusted (see more of that below).
- Cold storage
With cold storage, your Bitcoin wallet is usually a physical object of some kind, allowing you to keep your private keys completely offline. This offers a higher level of security, as it limits who can potentially gain access to your crypto. However, you will have to make sure that the cold wallet itself is kept somewhere safe. You’ll also need to have some kind of backup storage available.
The different types of cold wallet include paper or metal wallets that have private keys printed on them, as well as dedicated hardware that is designed specifically for the purpose of storing your private keys.
- Paper Bitcoin wallet
Though we usually talk about storing a private key digitally or on some specialized equipment, it is possible to just write down your private key on a piece of paper. This is potentially the most reliable and safest Bitcoin wallet solution, as it doesn’t depend on any additional technology, but a scrap of paper is also something that could be easily lost or stolen. And it’s the least practical alternative, as you usually need to have your key in a form that can be accessed by the Bitcoin network.
While it’s not recommended that crypto users just write down their private keys, a paper wallet is a common type of crypto storage solution. This option makes use of paper, but offers a more digitised alternative, registering your private key as a printed QR code. When you buy Bitcoin or other cryptos from a Bitcoin ATM, this is how your funds will usually be given to you. The terminal will print out a paper receipt with the private key for the crypto that you’ve bought. You can simply take this free Bitcoin wallet, and scan its QR code with other devices or applications in order to access your crypto holdings that are stored within it.
- Metal Bitcoin wallet
A metal wallet is relatively rare compared to the other types, and it’s mostly used by dedicated crypto enthusiasts. It can be quite expensive, costing up to $100, but it’s a particularly secure way of storing your crypto. A metal Bitcoin wallet functions in a similar way to a paper wallet, but instead of the private key being printed on a piece of paper, it’s stamped or engraved on a small metal strip or block. This is usually a high-grade stainless steel, or sometimes titanium. Metal wallets are resistant to heat and corrosion of various kinds, don’t have any technology that can malfunction, and don’t require an internet connection to use. If you’re not likely to misplace a small piece of metal, then a metal wallet is probably the most secure Bitcoin wallet solution for you.
For the safest Bitcoin wallet solution possible, many crypto users will use their metal wallet as a backup for another type of wallet, using it to record their seed phrase instead of their private key (or sometimes both).
- Hardware Bitcoin wallet
A hardware wallet offers probably the most security of any Bitcoin storage solution. They come in a variety of different forms, but they’re usually small devices that generate and store public keys on their internal microchips. They often have Bluetooth or USB connectivity to allow you to link up to a computer and transfer your private keys elsewhere. Sometimes they’ll also have a dedicated software application that works in tandem with them, and they tend to be protected by passwords, PINs, and other security systems. Even if someone is able to steal the device itself, transferring private keys from a hardware crypto wallet is usually very difficult.
One of the most popular hardware wallets for storing Bitcoin and other cryptos is the Trezor One, manufactured by Trezor. Ledger’s Nano series of devices are also popular hardware solutions for Bitcoin storage.
- Desktop Bitcoin wallet
With a desktop wallet, keys are stored in software that’s kept on a desktop (or laptop) computer. This gives you the autonomy and security of a paper or metal wallet, as the program is offline and only accessible on one device. It also means that you don’t have an extra item to keep track of, and a computer is also much more difficult to lose than a piece of paper. However, it’s also a more obvious target for thieves. Another issue with desktop wallets is that, unlike paper or metal wallets, they rely on technology to function correctly. If there’s an issue with the programming, or with your computer itself, you could lose access to your crypto holdings.
If you’re a Bitcoin novice and you enjoy the convenience of a brand like Coinbase, but you also want to opt for a non-custodial storage solution, the Coinbase desktop app is one popular option. Exodus and Bitcoin.com also offer great desktop wallets.
- Mobile Bitcoin wallet
A mobile Bitcoin wallet uses the same basic software as a desktop wallet to store your private key, giving you access to your crypto via a mobile device instead of your computer. Mobile wallets are usually compatible with both iOS and Android devices. They work in the same way as payment apps like Google Wallet, Samsung Pay, and Apple Pay, which allow you to access funds directly via your smartphone or another mobile device. They make use of a QR code to interact with the Bitcoin network. The QR code is displayed on the screen, and you can scan this at any physical location that accepts crypto as payment, or to buy and sell at a Bitcoin ATM machine. (For more information about Bitcoin ATMs, check out our guide). You can also just go online and send crypto to and from your wallet through the software.
Though they’re probably the most convenient Bitcoin wallet service, mobile wallets do pose some risks in terms of security. If your phone is lost or stolen, then you could lose access to your crypto holdings, possibly forever. They also regularly connect to the internet, so are vulnerable to hacking and other kinds of data breach.
However, if you choose the right mobile wallet, you can store your Bitcoin and other cryptocurrencies with a high level of security, as well as the convenience of mobile access and a number of other useful features.
- Web Bitcoin wallet
The web wallet is one of the most popular types of Bitcoin storage solution, due to its simplicity and convenience. Public and private keys are stored online, just like the data for any other website. This allows you to have access to your crypto via the wallet’s website, whenever and wherever you can use the internet. As well as dedicated wallet sites, you can keep your crypto on most of the leading crypto exchanges and brokers, such as Coinbase and Binance.
A web wallet makes storing crypto a lot easier, particularly if you’re worried about losing your keys or having to find ways of backing them up. And if you’re a newcomer to the crypto space, using a web wallet means that there’s no need for you to learn anything technical about keys and different types of software and hardware. Another advantage is that it’s a free Bitcoin wallet, usually allowing you to store your crypto without having to pay anything extra. In the case of storing your crypto on exchanges, it also allows you to trade it much more quickly, as it’s already accessible and you don’t have to send it to a trading platform before you can buy or sell.
Though using a website storage service for your Bitcoin is incredibly straightforward, few Bitcoiners would recommend it as an option. This is because it’s a custodial solution. Essentially, you’re storing your crypto on the servers of whatever website you’re choosing to use. Many users will do so without ever finding out their private key. There’s a common phrase used in Bitcoin circles: “not your keys, not your crypto”. When you use a web wallet, you’re giving it to someone else, and trusting that they will allow you access to it when you want to. This goes against the “trustless” philosophy of the crypto space, which is intended to promote financial autonomy and cut out third-parties and middlemen. Web wallets act like banks or other financial institutions, which many diehard Bitcoin advocates oppose.
Can crypto exchanges be trusted?
Keeping your Bitcoin or other cryptos with an online trading platform or a broker has its obvious advantages. If you’re a day trader, someone who regularly cashes in and out of fiat currency, or just someone with limited technical expertise, it’s tempting to make use of the web wallets offered by Binance, Bitfinex, Coinbase and other crypto sites. They’re as easy to use as an online bank or payment app, they offer you immediate buying, selling, and trading with other users, and they do all the hard work of crypto storage for you. But there are huge risks involved with custodial solutions that many Bitcoin users, particularly newer ones, can overlook.
Let’s take a look at the history of Bitcoin, and specifically the history of various online exchanges that have popped up to facilitate trades and storage. One of the biggest events in early Bitcoin history was the hacking of Mt.Gox back in 2014. This Japanese trading platform, which launched in 2010, once handled over 70 percent of global Bitcoin transactions. But security breaches led to its eventual demise in 2014, after it had lost almost 750,000 BTC over the course of three years. As well as being unable to cover customers’ lost holdings, the company’s failures sent the Bitcoin price plummeting, and damaged the reputation of the space for many years to come.
Crypto exchange hacks:
Mt. Gox might be the most notorious exchange hack, in terms of the effect it had on the market in its early years, but it’s not even the biggest. We’ve seen a number of other major security breaches, including:
- Coincheck. In January 2018, this Japanese exchange lost a huge amount of NEM tokens after a security breach, totalling around $534 million according to the prices back then.
- Bithumb. On June 19, 2019, this South Korean exchange lost crypto tokens which would have been worth around $30 million at the time.
- Bitgrail. At the start of February 2019, this Italian exchange lost Nano tokens worth up to $195 million. Many suggested that the founder of the platform may have had a hand in the theft, although Nano developers have also been blamed, along with hackers.
In most of these cases, customer’s funds are insured, so their holdings weren’t directly affected by the hacks. But it’s always a risk to hold crypto on the servers of a company that could be vulnerable to major security breaches, and there’s no guarantee that your crypto will be covered if the exchange does lose control of it.
Also, even if your funds are safe, there can be major delays and costs involved with withdrawing them, and it can sometimes take months or even years to be reimbursed. Even during the course of its regular operations, exchanges can freeze trading or withdrawals without warning, essentially blocking your access to your own crypto funds.
Which is the best Bitcoin wallet?
We’ve mentioned a number of popular storage solutions for Bitcoin and other cryptos in each category. If, like many novices or casual crypto users, you’re opting for a software wallet, the Exodus crypto wallet is a great option. It’s probably the most user-friendly software available for storing crypto and carrying out transactions, with a polished, intuitive interface that’s specifically intended for use by newcomers to the space. Available for iOS and Android, as well as desktop and laptop computers, it offers support for Bitcoin along with over 100 other crypto assets.
The Bitcoin.com wallet is another promising alternative. It’s designed primarily for Bitcoin and the popular hardfork altcoin Bitcoin Cash, and it even allows you to buy or trade these cryptos directly on exchanges from within the app itself.
What storage does Cryptospace provide?
Cryptospace could be the ideal option if you’re still undecided about what kind of storage you need for your crypto. We combine the benefits of cold storage and hot storage, offering all the convenience of a major trading platform but with a non-custodial service.
If you register an account with us, you can get easy access to an online crypto exchange, allowing you to buy and sell whenever you want to. Just register your crypto wallet with us, and it can be easily connected to our trading platform, so you can manage your portfolio through our services.
We also offer crypto ATMs for you to trade when you’re out and about, all over California and Nevada. Our service desks offer over-the-counter trading for individuals, companies, and institutions, as well as information and guidance.