Disclaimer: This guide is not financial advice. You are responsible for the security of your own crypto assets. Disclosure: This guide contains referral links.
What is a Bitcoin wallet?
A Bitcoin wallet is a digital wallet which allows you to receive, send and store Bitcoin.
Every wallet comes with an address. The easiest way to think of a Bitcoin address is like a financial email address. It’s a unique address that is only accessible by you, via a password, only instead of receiving messages you are receiving Bitcoin.
Note that in this guide that wallets work the same for almost all cryptocurrencies, so the exact same information applies for Ethereum wallets, Dogecoin wallets etc.
Wallet Basics: Public and Private Keys
Every Bitcoin wallet contains two types of information known as keys.
- Public Keys
- Private Keys
What’s the difference?
Your Public Key is more commonly known as your Bitcoin address or wallet address.
Think of this as your bank account number. You can safely give your bank account number out to anyone, and even publish it publicly online. People can use it to send you money, but it doesn’t give anybody the ability to actually access your bank account.
This is exactly how a Public Key works. If people have your Bitcoin address, or Public Key, they can send Bitcoin to you, but won’t be able to access your Bitcoin. It is safe to give your Bitcoin address to anybody you want.
Your Private Key is the encrypted key to access your wallet.
Think of a Private Key like the Bitcoin version of your internet banking password. If someone gets access to your internet banking password, it means they could go into your bank account and steal all your funds. It’s exactly the same with your Private Keys. Never share your Private Key with anybody, ever. If anybody gains access to the Private Key to your Bitcoin wallet, your Bitcoin will be gone, forever.
What are the different types of Bitcoin wallet?
There are three main types of Bitcoin wallets:
- Exchange wallets
- Soft wallets
- Hard wallets
In this guide I will go through all of them and explain when you can/should use them.
Exchanges
Exchanges are platforms where you can deposit, withdraw, buy, sell, trade and send cryptocurrencies. Examples of exchanges are Coinbase, Binance and Kucoin.
Exchanges are not technically wallets. They are third parties which keep your assets in wallets for you, and manage them on your behalf.
Pros of exchanges
The main reason is for convenience.
Having your assets on an exchange means you can instantly buy, sell and trade when the opportunity strikes. If Bitcoin is spiking and you want to quickly sell some, sending it from your private wallet to the exchange might be too slow, and the price will have changed by the time it arrives. Having the ability to instantly interact with the market is one of the main reasons people keep their coins on exchanges.
The other reason is exchanges give you benefits, such as the ability to stake, join mining pools and earn interest.
The final and most common reason is that exchanges make things easy for beginners. Many people new to cryptocurrency don’t feel ready to manage their own wallets. Instead of needing to keep their own Private Keys secure, they prefer to have an account with a third party and access it with the more familiar “email address and password” login, and the third party takes care of the security of the Private Keys for them.
Cons of exchanges
Exchanges are not government guaranteed the same way bank accounts are, so if an exchange goes bankrupt or disappears, your coins will disappear with it.
For this reason people generally avoid keeping large amounts of assets on exchanges, preferring to use private wallets instead. This has happened many times in the past with exchanges being hacked, going bankrupt, or just being outright scams.
If you’re using an exchange, make sure it’s a reputable exchange backed by established and trusted people in the industry.
When To Use An Exchange Wallet
If you’re just starting out in crypto, it can be easier to use an exchange as your wallet while you only have a small amount of crypto assets.
Once you get more serious and accumulating more assets, you should start using the more secure soft and hard wallet options discussed later in this guide.
Exchanges I recommend
How To Set Up An Exchange Wallet
If you would like to use an exchange as your wallet, getting it set up is extremely easy and should only take a couple of minutes.
First, head to the Binance homepage and set up an account.
Once you’ve done that, head to the Wallet tab.
Click Fiat/Spot Deposit & Withdrawal.
Click the yellow Deposit button.
This should bring you to the Deposit page.
On that page you can select any coin you want, and you should have a wallet address available that will be associated with your account.
In the screenshot below, I am showing my wallet address for Bitcoin:
The alphanumeric string under “Address” is your Bitcoin address, or Public Key.
(You will not know your Private Key, as Binance secures this for you).
Soft wallets
Soft wallet is a term used to describe a web-based wallet.
These are wallets that are generated in a browser, an app, or software on your computer.
The main difference between a soft wallet and an exchange is you need to manage the Private Keys for a soft wallet on your own.
If you lose the Private Keys, it means you will no longer have access to that wallet.
Yes, that means if you have $1 million of Bitcoin in a soft wallet and you lose the Private Key (password), that $1 million is gone!
There is no 0800 number to call or link to reset your password. There are many people who have lost large amounts of Bitcoin because they didn’t take care of their Private Keys.
Pros of a soft wallet
- Easy to set up (usually free)
- Very convenient, can access your coins with a few swipes
- Reasonably safe
- Safer than exchanges
- Good for day-to-day usage
Cons of a soft wallet
- Not 100% secure (but still 99.9%, in most cases)
- Easy to be complacent and lose keys or jeopardise security
- Can’t earn interest or sell coins without first sending to exchanges
When to use a soft wallet
To be honest, I don’t actually use a soft wallet for anything. They are more secure than an exchange, but I prefer to use a hard wallet for anything I don’t keep on an exchange.
However, for anyone who doesn’t want to spend money on a hard wallet, a soft wallet is a good free alternative for coins you want to keep in your own custody.
Soft wallets are also necessary for people who use Bitcoin and crypto in day-to-day life, and need to be sending and receiving cryptocurrency on a regular basis. For example, Bitcoin has become legal tender in El Salvador recently and people are doing things like buying groceries and Starbucks with Bitcoin. For this, people will be using soft wallets.
Soft wallets I recommend:
How To Set Up A Soft Wallet
In this example I’ll set up a soft wallet using Trust Wallet.
First, download the Trust Wallet app on your phone.
You’ll be asked if you already have a wallet or want to create a new one. Select Create A New Wallet.
They’ll ask you to set a PIN number. This is not your Private Key. This is simply a PIN to secure the app on your phone and to give you easy access to the wallet.
Then you’ll be asked to back up your wallet. Pay attention because this step is important:
Once you click Continue, you will be presented with a display of 12 words in a specific order. In crypto, we refer to this series of words as your seed words.
The seed words are your Private Keys! (more technically, they are an encryption of it).
If somebody ever gains access to your seed words, they gain full access to your wallet and your Private Keys.
To backup your wallet, you should write these seed words down and keep them in the most secure place possible (ideally, on a piece of paper in a safe in your house, or in a bank vault). Some people keep them in a private Dropbox folder or email folder, but this is not as secure as you would think. For a soft wallet with just a few thousand dollars, that might be fine, but anything more and you will want secure offline storage of your seed.
I need to double stress that this backup is essential for the security of your funds. If you ever lose your phone, you will be able to restore your wallet on any phone using these seed words. Make sure they are secure! This will help you avoid ending up like this guy.
Once you’ve backed up your seed words/Private Keys, you will be presented with your wallet:
To find your Bitcoin address, click the Bitcoin symbol and click Receive.
This will bring up your Bitcoin address, both in alphanumeric form and QR code form:
That’s it! You have a working soft wallet.
You will also see within Trust Wallet you can send and receive a large variety of coins within the same wallet. Play around with it and see what you can do!
Hard Wallets
A hard wallet is a physical device which generates and stores your Private Keys securely. It looks something like this:
A hard wallet is the most secure way to store your crypto assets because the Private Key is never shown on your phone or laptop screen, it is generated securely within the wallet device itself and is never presented to the internet.
This means your funds are always 100% secure, unless you personally jeopardise your Private Keys by showing them to someone or losing them. Even a hacker with full access to your laptop will never be able to see your hard wallet Private Key, because it’s encrypted within the device and never actually shown to your phone or laptop.
However, because a hard wallet is still managed entirely by you, you still risk losing your coins if you don’t secure it properly.
Yes, that means if you lose the passwords or private keys to your hard wallet, those coins are lost forever. There is no 0800 number or support desk to call, or “forgot password” link you can click.
Pros of a hard wallet
- Maximum security
- Private Keys generated offline and off your phone/laptop
- Can store many different currencies
Cons of a hard wallet
- Costs money
- Can be inconvenient if regularly accessing funds
- Risk of loss if not managed properly
When to use a hard wallet
You can think of a soft wallet as the wallet you keep in your pocket, and a hard wallet as a safe in your house.
The soft wallet is great for paying for day to day things, but not great for keeping huge amounts of money.
The vault is not great if you need to access the money all the time, but perfect for a large amount that you want to lock away for a while.
For people holding large amounts of cryptocurrency, a hard wallet is the safest option.
Hard wallets I recommend
How To Set Up A Hard Wallet
First you will need to order a hard wallet from one of the manufacturers recommended above.
I have hard wallets from both these companies and both give very clear and precise instructions for setting up your wallet safely.
Wait for it to arrive in the mail and follow the instructions. They will walk you through generating seed words like in the soft wallet example above, creating a backup, and then accessing your assets via the device. It’s very secure and simple.
