Now, you want to buy, or store or generally start somewhere with a little bit of coins. Establishing a so-called “wallet” is an important step in the process of obtaining digital money. But! Google it and try not to get lost in translations. There are so many different options: hot wallets/cold wallets; full node wallets/lightweight wallets; paper wallets/hardware wallets. Alas, none of them goes with Swarovski crystals. No worries, still and all. There’s definitely something out there that will fit you best.
Fast answer. Focus for a few moments. If somebody tells you, you don’t need private keys to send and receive bitcoins, they might be right. Also, they might mean you will not have full control over your money. Google the wallets that let you keep your private keys and you will probably close in on Electrum or Trezor. If you’re anything like me, though, you will want to zoom in and dig into details.
Behind every wallet there is a piece of code that lets you either send or receive bitcoins and store them with different degrees of security
Why is a private key important?
- Public and private keys your wallet generates and then stores are parts required to digitally sign (confirm) every new transaction of your money to another wallet.
- The transaction of bitcoins between wallets is not possible without your “signature”.
- The public key is possible to retrieve out of the private key.
- So if somebody else knows your private key and retrieves the public key out of it, they might “sign” the transaction— bam! You lose your money!
Since your private key is just a string of letters and numbers, you could print it out, copy it onto a USB drive, transfer it to your mobile app wallet or to a desktop wallet.
But it’s not just a string of letters and numbers at the end of the day.
The string is a piece of encrypted information that tells a story of your cash flow and lets you buy and sell stuff. This all leads us to the belief that a basic difference between all the wallets is how and where they store our private keys. In other words, are those wallets resistant to hacker attacks? Can we send our bitcoins at any moment of time from our wallets?
Not all of them, wallets, meet these basic criteria. Still, it doesn’t stop most people from using the whole range of different wallets. Different wallets are good for different purposes.
BTC wallets fall into two categories — hot/cold ones.
Hot wallets run on the Internet connected devices. Cold wallets are disconnected to the Internet.
Hot wallets might very in many respects. Some of them — browser wallets, for example — work on multiple devices and have nothing to install. You only sign up and log in. Other ones — such as desktop wallets — do require installation of the software to your computer.
Regardless of their type all hot wallets touch the Internet on a regular basis
If you keep large amounts of bitcoins in a hot wallet you keep your private keys in an unsafe environment. The good news, though, is that you always can transfer your money to someplace safe — to a colder wallet.
About each and every type of them, hot wallets, I’ve reported here:
Cold storages are pretty much physical — hardware USBs, paper wallets, physical bitcoins. They are less convenient than hot wallets, but fundamentally safer.
Cold wallets are good to store your money if you deal with large amounts of bitcoins.
About different types of them, cold wallets, I’ve reported here:
Before choosing a wallet, see, if there is a 2-factor authentication (2FA) option in your wallet. This is a technology that takes one more data piece for you to insert before you log in to your account. Say, hackers cracked a password to your wallet (the password was the first factor) — they still shall not pass. Because they don’t have access to your second factor which you still have to insert to access your account. That might be an sms code or a string generated by Google Authenticator on your other device. So if you enable 2FA option you protect your account with something you know (your password) and something you have (your phone).
Now, let’s imagine that somehow tough guys managed to crack the 2-factor authentication process. Here’s how they will never be able to transfer your bitcoins to their addresses — a multisig option. This is a technology that makes it harder for crooks to spend your money. Just appoint another person or a wallet protection service to sign your transactions together with you — and you’re safe even with a hot wallet!
Multisignature has been used for thousands of years to protect the security of crypts holding the most precious relics of saints. The superior of a monastery would give monks only partial keys for gaining access to the precious relics. Thus, no single monk could gain access to and possibly steal the relics.©
Now, let’s imagine for a minute that another bad thing happened: maybe your operating system failed or your phone was stolen… In other words, your wallet was gone! Hackers and thieves, they shall not pass, of course, due to those multisig and 2FA options — but neither shall you be able to restore your bitcoins. Unless you have a proper backup.
What is a backup, anyway? In information technology, a backup, or the process of backing up, refers to the copying and archiving of computer data so it may be used to restore the original after a data loss event ©. Does that mean that you have to copy and archive all the private keys that you have? The oldest bitcoin wallets might want you to. But this method is too messy and dangerous. It may happen that you lose reserved copies for whatever reason.
Nowadays the only thing you don’t want to loose is a seed, a 12-word or a 24-word string almost every HD wallet generates once you create it. In theory, if something happens, with the help of that seed you can easily restore key pairs on any HD wallet that supports this seed feature. Still, it is strongly recommended to only use the same HD wallet program with the same HD related settings for a particular seed.
There is one more thing worth double mentioning here. Again — not all HD wallets support this mnemonic code (12/24-word password) feature.
So while choosing a wallet make sure that it is an HD wallet. And make sure it will create a seed for you to memorise.
To not have a seed doesn’t necessary mean that your HD wallet isn’t safe. It might mean that the wallet provides you with a different kind of a backup… or that you have to copy and archive some data by yourself.
Last but not least — here’s one more reason why HD wallets are a good option. Bitcoin Core Developer Pieter Wuille originally created hierarchical deterministic wallets (hierarchical deterministic wallets) to provide higher levels of anonymity for those who often send and receive digital currency. Do you want for everybody to know how much money you transact? HD wallets keep that information safe.
The mnemonic code (12/24-word password/seed) was added later as a result of progressive enhancement in user experience. Indeed, to only keep that seed in a safe place is so convenient!