Hello Reader,
We've already explored what a bitcoin address is and how they are protected by cryptography. Now we will learn what bitcoin wallets are, which options are available and how you go about using one. Yes, this is the post that gets you on board the digital currency train.
A wallet is simply a collection of bitcoin private keys which enables you to use multiple bitcoin addresses with ease
Generally, your wallet will be created by a Bitcoin application as part of the initial setup process. There are two ways that applications generate keys for your wallet:
Standard where a set number of keys are generated at wallet creation. You will need to save a copy of the wallet file itself and write down your password. If you ever use more than the initial batch of keys (e.g. as change addresses, remember you will need to save a new backup of your wallet.
Deterministic where a seed is generated at the wallet creation. This seed is used in an algorithm to derive a never ending series of keys. Knowing the seed is enough to recover all of the keys.
Bitcoin wallet types
There are many different types of Bitcoin wallet, so first let's take a look at each of the key ones:
Desktop wallet apps
A desktop wallet is an application that you can download and run locally on your computer. There are many variants, and all platforms (e.g. Windows, Mac OS, and Linux are supported. You control the private keys and therefore have full control over your coins. Your wallet is only as secure as your computer, if it is compromised (e.g. by a virus or trojan), it's likely that you will lose your coins. Desktop wallets can be further divided into those which download the entire blockchain (slow but secure) and SPV wallets which connect to a third party for their record of the blockchain (fast but a little less secure).
Mobile wallet apps
A mobile wallet is an app that you can download and run locally on your smart phone. Again there are multiple to choose from and both iOS and Android are supported. Generally, you control the private keys and therefore have full control over your coins (although this is dependent on the app). Your wallet is only as secure as your phone, if it is compromised (e.g. by a virus or trojan), it's likely that you will lose your coins. Mobile wallets are generally SPV wallets.
Online wallets
An online wallet is one hosted by an online provider. They manage the wallet software and allow you to access your coins via their website. They are easy to use but beware, you do not control private keys so if the provider is compromised or disappears, so will your coins.
Paper wallets
A paper wallet is normally just a public / private key pair that has been generated on an offline computer (or even manually with dice sometimes). People normally write or print these out on a few pieces of paper and secure them in safe spaces. You control your keys and there is no risk of them being hacked. This process is more difficult than the rest and doesn't give you simple access to your coins.
Brain wallets
A brain wallet is similar to a paper wallet, but the address or key is memorised by the individual rather than written down. The advantage is that it is absolutely secure (barring torture!). The disadvantage is that you are likely to eventually forget your wallet or seed. But you have a great memory right? There are many stories on Bitcoin forums of people forgetting brain wallets, so not advised.
Hardware wallets
A hardware wallet is a physical device that looks like a USB stick. The wallet itself contains your private keys in a secure element. When you want to spend some coins, you connect it to your computer (or phone), open compatible wallet software, create a transaction and then request for it to be signed. At this point your hardware wallet will flash asking whether you wish to proceed. Assuming you do it will sign the transaction (note it doesn't give your computer the private key). The advantage of a hardware wallet is that they are as secure as a paper wallet but easy to use. The disadvantage is the cost and the fact they are almost an advertisement asking to be stolen. Hardware wallets will be the subject of a standalone post, so look out for it soon.
So which type should I choose?
This is ultimately a personal choice based on your specific circumstances and preferences. You will generally want to consider these questions:
How much do I have to protect?
If you are only looking to store a relatively low amount of coins (e.g. less than $1,000), then a mobile wallet or online wallet are the easiest options whilst you learn more about crypto currency and start to increase your holdings. If you have more than that, I would first start with a desktop wallet and transition to a paper or hardware wallet as your holdings become more substantial.
Do you need your wallet to be mobile?
Then a mobile wallet or online wallet are your best bet.
Do you not trust an online wallet provider or your personal devices security?
Then your only options are a paper or hardware wallet.
What do you use?
I've been on a journey. I started with an online wallet when I was dipping my toe in the water. Then I transitioned to a desktop wallet (technically airgapped which is another story) and now I use a hardware wallet.
What are some examples of desktop, mobile and online wallets?
Desktop wallets
Bitcoin core is written by the core developers of Bitcoin. It operates as a full client and requires the entire blockchain to be downloaded. It generates keys in a standard batch rather than deterministic manner.
Electrum is all about speed and ease of use. It is an SPV wallet so doesn't require the whole blockchain to be downloaded. It is also a deterministic wallet which provides you with a seed to write down.
Armory is an advanced wallet for power users. It requires the full blockchain to be downloaded but uses deterministic wallets. Armory also allows for the creation of airgapped cold storage wallets.
Mobile wallets
Breadwallet is available for iOS and android and is all about simplicity. Check out my guide to breadwallet here.
Electrum is all about speed and ease of use. It is an SPV wallet so doesn't require the whole blockchain to be downloaded. It is also a deterministic wallet which provides you with a seed to write down.
Online wallets
Coinbase is the biggest online Bitcoin exchange. It provides you with a simple to use online wallet. We will cover Coinbase in more detail in an upcoming post on buying bitcoin. Note that you do not own the private keys.
Which of these would you recommend?
For someone completely new to crypto currency and Bitcoin, I would start with Coinbase. They are well established, secure and used by millions. Beware that when using an online service, such as Coinbase, you do not have access to the private keys, so you are completely trusting the third party. This is fine for small amounts, but you should seriously consider setting up your own private wallet once you have a reasonable holding.
Once you have built up some confidence, I'd setup an Electrum desktop wallet or Breadwallet mobile wallet, dependent on your preference.
If you find yourself with a substantial holding and don't wish to purchase a hardware wallet, I'd look into Armory's cold storage feature.
That's all folks.
Join me next time as I explain the various ways you can acquire bitcoins.
Yours, X.
Sources
Content: Xexr.com
Image: Superawesomevectors