What is a Bitcoin wallet?
Bitcoin wallets are central in cryptocurrencies use. Let’s review what they are and what their basic use is.
Basically, a Bitcoin wallet is a software that will allow you to manage your Bitcoins. You will be able to send or receive Bitcoin, and to check your balance. As well as you need and email provider like Gmail to handle your email, you need a Bitcoin wallet to manage your Bitcoins.
The wallets interact with the blockchain (what is blockchain), and update the balance. What defines a wallet is its private key.
What is a Bitcoin private key?
Basically, it is a long chain of numbers acting as the password of your bitcoin wallet. It could be defined as the coordinates of your Bitcoin. If you lose your key, you lose your Bitcoin, and if somebody gets it, this person controls your Bitcoin.
As you can guess, the fact this set of numbers is long and random makes it hard to remember. That is why HD wallets were created. Instead of the long and meaningless chain of numbers, the system will give you a set of 24 random common names (example: bread, clue, glass, tree, money, coat…) that you must remember.
A standard Bitcoin wallet will create a wallet.dat file, that contains its private key. Needless to say it must be kept secret, and copied, on a computer or even on a piece of paper.
The different kinds of wallets
There are different kinds of wallets:
- Full nodes wallets : They store a full copy of every transaction in order to validate them.
- SPV (simple payment verification) wallets / Lite wallets : They rely on full nodes to validate transactions. They have the advantage of taking less space than full nodes.
- Hot wallets : They are connected in some way to the internet. They are both considered as the most popular and least secure, since they can be accessed through internet. There are different kinds of hot wallets:
→ Web services wallets : They are used by some companies like betting site, for customers to be able to buy. You are basically letting these services guard your private keys. It is easy to see the danger, as a hacker could still the Web services customers wallets.
→ Desktop wallet : In this case, the key is stored in a computer. As you already know, nobody can be 100% sure of the security of its computer. A breach being possible, it is essential to remain careful.
→ Mobile wallet : The private key is, with this kind of hot wallets, stored in a mobile phone. Users need to be extremely careful with them, because in the case of a hack, a link could be made between user informations present in the mobile phone, like your phone number and geo-location, and the private key.
Still, mobile wallets are extremely convenient.
- Cold storage wallet : This refers to any kind of wallet that isn’t connected in any way to internet. They can take several forms:
→ Paper wallet: the private key is here written on a paper. The risk with it is the ket being lost or destroyed. It is then very important to make copies.
→ Hardware wallet: the private key is kept on devices, that will be needed in order to perform transactions. The limitation here is that you need to keep this wallet with you, otherwise no transaction will occur.
→ Brain wallet: the private key isn’t, like in the other cases, a random set of numbers. Instead, it is a password that the wallet owner needs to remember. The downside of it is the high risk of being hacked. Indeed, many people are very predictable when it comes to choose a password.
What type of wallet should I use?
Well, the answer depends on the use you will make of these Bitcoins.
If your need is to store a huge amount of Bitcoins, a cold storage wallet seems to be the way to go.
However, if all you need is a repository for a small amount of Bitcoin that will be used for coffee, your choice may be different. Usually, the more secure a type of wallet is, the less convenient it is, and vice-versa.
It is up to you to arbitrate on the type of wallet you need to use.
In any way, nothing forces to only use one type of wallet.