The development of the cryptocurrency market has always been accompanied by a search for ways to secure assets from scammers who are constantly on the lookout to improve their methods. Today, there are many solutions for storing Bitcoin as well as other cryptocurrencies that meet the needs of different industry players. In this piece we will analyze what wallets are, the difference between the types available, and take a look at which are better depending upon the needs at hand.
Types of Bitcoin Wallets
To start off, crypto wallets are most often characterized by three main parameters:
- The need for a constant internet connection;
- Custody;
- The format and the platform on which the wallet operates.
In terms of internet access, bitcoin wallets are divided into “hot” and “cold” ones, that is, the former work online, while the latter store currency on an offline physical medium that does not require a permanent network connection.
The next criterion, custody, is responsible for the storage location of a user’s assets. The debate here is between custodial vs. non-custodial wallets, with exchanges most often acting as the custodian in the industry. Accordingly, if the wallet is custodial, then the financial agent is responsible for the safety of the funds. If it is non-custodial, then only the owner has access to its keys.
The last criterion characterizes a specific bitcoin or crypto wallet solution, where each individual variety already has the properties that we discussed above. The following storage formats are those most often encountered:
- hardware (physical storage device);
- desktop (PC application);
- mobile (smartphone app);
- web wallets (browser extensions or websites);
- paper (physical banknotes, bonds).
At the same time, different wallets can possess several of the same properties. For instance, cold wallets (hardware, paper) can only be non-custodial, because exchanges cannot monitor funds stored on a physical medium. For the sake of convenience, let’s take a look at the three most common types of crypto wallets.
Software wallets are a general concept for hot non-custodial wallets that work either via a browser (web wallets) or are installed on a computer (desktop) or smartphone (mobile). The most well-known examples of multi-currency software wallets are Trust Wallet and MetaMask.
Hardware or cold wallets are physical devices for storing a user’s private keys, which are usually managed through a computer connection. Hardware solutions are thought of as being the most reliable way to store Bitcoin and other digital assets. There are many manufacturers of cold devices on the market, with one of the most striking examples being Ledger.
The most common platforms for creating a custodial wallet are crypto exchanges. In exchange for the opportunity to manage their assets as simply and inexpensively as possible (for instance, to make free off-chain exchanges), users give up access to private keys, and the assets themselves are stored by the provider, that is, the exchange. The most obvious vulnerability in this option is the possibility of a massive loss of funds in the event of hacking or compromise of the provider’s storage.
How to Choose a Crypto Wallet?
You need to make a decision about choosing a wallet based on your needs. For example, paper or hardware wallets are best suited for those interested in long-term asset storage. They are not all that convenient for conducting transactions, but the chances of them being hacked or funds being stolen are close to zero. At the same time, it is important to remember that in the event of the loss of a physical medium, it will be impossible to restore access to your assets.
If you intend to actively trade, then the best choice would be custodial software wallets. By connecting to a crypto exchange, the holder of digital assets will be able to stay abreast of everything and have access to a wide range of tools.
The choice of a wallet simply depends on which platform is more convenient for the cryptocurrency holder to work on — mobile, desktop, or browser.
Blockchain Addresses & Types
Another important wallet parameter (primarily software ones) is which identifier is used for transactions and the storage of digital assets on the blockchain. This string of characters is called a blockchain address.
In the case of Bitcoin addresses, there are four main formats:
- Legacy (P2PKH);
- Script (P2SH);
- SegWit (P2WPKH);
- Taproot (P2TR).
The key difference between them lies in the technologies that are used when receiving or sending assets. Addresses also have different characters at the beginning called prefixes. Legacy addresses start with the number 1, Script with the number 3, SegWit with the combination “bc1q,” and Taproot with the combination “bc1p.”
The very first address standard was Legacy, proposed by Satoshi Nakamoto. All currently available wallets and applications that work with BTC support both incoming and outgoing transfers from these addresses. The main drawback to Legacy addresses are high commissions.
To some extent, this disadvantage was offset by the Script address proposed in January 2012, with the transfer fee reduced by shifting them to the recipient.
Four years later, developers Peter Velle and Greg Maxwell proposed a new address standard known as SegWit that later became the most popular around. The commission was reduced even further due to the reduction of the block size in the BTC network by removing the signature from it.
The last type of address introduced (so far) is Taproot — its activation was completed in November 2021. Addresses of this particular standard offer their owners the lowest fees and cheaper payments on the Lightning Network. Yet, Taproot is still not supported by many wallets.
How are Transactions and Fees Generated on the Bitcoin Blockchain?
There are several steps to describe the process of conducting a transaction on the BTC network:
- Scanning of the recipient’s address and entering the amount to be sent;
- Sending funds;
- Digital signature by the wallet;
- The transaction is sent for verification by network nodes;
- The transaction is sent to the mempool (waiting to be included in the next block);
- Miners include the transaction in the next block;
- Hashing;
- The block is added to the network;
- Another node check and addition to the block;
- Transfer of funds to the recipient’s wallet.
As we discussed earlier, a commission is imposed on each bitcoin transaction. Its value depends on the transaction size, measured in virtual bytes. How many Satoshi (the smallest unit of account in bitcoins) must be paid for 1 byte of a transaction (Sat/vB) is determined when calculating the commission.
Simultaneously, the market conditions under which the transfer is made play an important role. For instance, when the demand for BTC increases and its price rises, the network becomes overloaded, meaning the commission for each transaction will be higher.
It is important to understand that the sender pays a commission not for the amount of funds transferred, but for the amount of information posted on the blockchain. As a rule, crypto wallets set a commission by default, but a user can increase it independently — this increases the chance that the transaction will be processed faster.
Using Bitcoin Wallets With GoMining
GoMining customers can receive mining reward payments to any wallet that supports Bitcoin. You can specify your external address for withdrawals by selecting a BTC wallet in the “Wallets” section.
For users’ convenience, daily rewards are first credited to a virtual wallet on the platform, from where they are automatically transferred to an external wallet address. GoMining customers can additionally set the withdrawal threshold themselves to save their external wallet from receiving crypto dust, or a small amount of Satoshi insufficient enough to pay the commission for their further withdrawal.
You can also manage these settings via the app menu, using the “Reward settings” button.
