What is the difference between a bitcoin vault and a bitcoin wallet
There are three possible ways to store your crypto: a wallet, a vault and an exchange. All three have different use cases and deserve their own place under the sun, but for a new cryptocurrency user the choice might become overwhelming. Besides, when it comes to the difference between a Bitcoin Wallet and a Vault, there are quite a lot of things to consider.
This article explores the difference between the BTC wallet and vault, and later focuses on exchanges and their implementations. If you are not interested in technical details and are simply looking for a “Cryptocurrency storage 101”, we have a nice infographic on the subject that explains the basic differences without delving on the reasons behind them.
What is a Bitcoin Wallet
In order to explain what exactly is a Bitcoin wallet, first we must explain what is Bitcoin and how it works.
A Bitcoin (and any other unit of any cryptocurrency) is a unique digital token. For example, “SaMpLe1rPe34nu5hbn3rx6pj4“. These tokens are stored on the Blockchain — a digital ledger that is encrypted and simultaneously updated on all devices that are connected to it. Each of those devices has a Bitcoin address (public key) that is used to identify it. Some of them have more than one.
If you want to learn more about coins, tokens and differences between them, check out our articles on Medium:
A Bitcoin wallet is a unique address on Blockchain that shows how many tokens (and of what kind) this user holds. It is visible to everyone, but in order to access it and transfer the Bitcoins somewhere else, you need to decrypt them. For that, you need a private key, which is known only to the owner of the Bitcoin wallet.
And now, to a reason why some wallets have more than one address. After using either of the addresses in the transaction, a user needs to generate a new address and replace the used one. The old one remains usable, but is considered compromised and not recommended to use. Some wallet users create many addresses in advance, in order not to be caught without one.
What is the difference between Bitcoin Wallets
There are many different kinds of Bitcoin wallets. We will review and compare the most interesting ones.
What is a paper Bitcoin Wallet
If you looked at the explanation above and thought “Wait a minute, I can simply write down the public and private keys and use a piece of paper as my wallet” — congratulations. You have figured out the safest, but not the most convenient way to store your Bitcoin. It would look somewhat like this:
Paper wallets are not connected to the internet and can not be hacked. But there are significant disadvantages to them too.
- You can only use a paper wallet once. Due to safety reasons, you should not use each paper wallet for more than one incoming and one outgoing transaction. Bitcoin Wiki has a whole page dedicated why you should not do otherwise. And while you can create a lot of keys for the same wallet, it will most likely lead to a massive mess.
- You can not recover your paper wallet. The second you lose this piece of paper, the wallet is gone with all the money on it. There is no fallback procedure to recover it, unless you made a copy of the wallet somewhere. And even then you can only hope that you will get it before someone else transfers all your crypto away.
Paper wallets are a rather inconvenient way to actually use crypto. But if you just want to store and not actively use — a paper wallet in a fireproof safe (or even a secure cell in a bank) is probably the best way to do this. For example, Winklevoss twins store their BTC fortune on paper wallets and they have no regrets about it.
There are a lot of ways to create a paper wallet. We recommend Wallet Generator — it does not transmit any sensitive data back home and is very easy to use.
What is an offline Bitcoin Wallet
As we previously learned, paper Bitcoin wallets are extremely safe, but not all that useful — mostly, because there is no way to update the keys. But you can solve this issues while keeping a similar level of security — all you need is a computer that would automatically update the keys while keeping them encrypted. This computer would then be called an offline Bitcoin wallet.
There are two types of offline Bitcoin wallets: a hardware wallet and a software wallet. Each comes with its own quirks and use cases.
What is a hardware wallet
Hardware wallets are dedicated devices that are meant only to keep track of your Bitcoin keys.
Advantages of the hardware Bitcoin Wallets
- Hardware wallets can not be hacked, just like the paper wallets;
- Hardware wallets require additional authentication to complete transactions, which means that the thieves won’t be able to steal your BTC easily.
Disadvantages of the hardware Bitcoin Wallets
- Hardware wallets are expensive — average price is $100 per wallet;
- Hardware wallets are cumbersome and require a PC to use;
The best hardware wallets are Ledger, Opendime and Trezor.
What is a software wallet
Software wallets are special applications that can be installed on your computer or mobile device. They are just as capable as hardware wallets, but are generally less safe.
Advantages of the software Bitcoin Wallets
- Software wallets are free;
- Software wallets require additional confirmation before the transaction;
- Software wallets are always within reach, either on your PC or on a smartphone.
Disadvantages of the software Bitcoin Wallets
- Software wallets require a lot of storage (up to 160 GB) or a constant internet connection;
- Software wallets are as vulnerable as the OS that runs on your device. For example, if you Android phone does not receive monthly security updates, you shouldn’t use it as a wallet.
- You have to make sure that they do not come with some sort of spyware, especially when it comes to mobile wallets. Best bet is to forbid them access to the GPS, SMS and other unnecessary data.
The best software wallets are Blockchain.info and Electrum. Both work on PC, OS X and Android, but only Blockchain.info has an iOS version.
What is an online Bitcoin Wallet
Let’s take the idea of a software wallet and take it one step further. After all, a lot of people nowadays carry more than a one device and it would be nice if a wallet was available from all of them. In fact, let’s put it on the cloud and make it available from all over the world!
This would be an online Bitcoin Wallet. They are equally loved and despised in the Bitcoin community — and deservedly so.
Advantages of the online Bitcoin Wallets
- Online wallets can be accessed at any time, from any device.
- Online wallets are easy to use and perfectly suitable for day-to-day Bitcoin payments;
- Online wallets can be recovered if the user had authenticated themselves with the wallet provider.
Disadvantages of the online Bitcoin Wallets
- Online wallets store Bitcoins not on the users’ device, which is a security risk;
- Online wallets require users to trust the wallet provider, which is a security risk.
- Online wallets do not provide users with their private keys, which is a security risk and sometimes inconvenient.
Bonpay has its own online wallet, where you can create an account in under a minute. Other popular choices are Bitcoin Wallet and Exodus. We also recommend you to learn how to secure cryptocurrency online wallets.
What is the difference between cold and hot storage
Some online wallets store Bitcoins on the same server that runs the online interface (a.k.a. hot storage). This leads to smaller expenses for the wallet provider and lets them significantly simplify the amount of development needed.
Other online Bitcoin wallets store tokens on the separate server that is not directly connected to the internet and can only be accessed from the internal network of the wallet provider (a.k.a. cold storage).
Cold storage wallets are infinitely more secure than the hot storage ones. While they do require additional expenses on the wallet providers’ side, they also protect your Bitcoins from the direct hacking attacks. After all, you can’t hack into something that is simply not there.
All wallets listed above, including the Bonpay wallet, use only cold storage.
What is a Bitcoin Vault?
The name Bitcoin Vault was, pardon the pun, coined by CoinBase in 2014 as a “more secure option for Bitcoin storage”, compared to their own online Bitcoin Wallet. Since then, a many other companies started providing both wallets and vaults as a separate service.
The main differences between the Bitcoin Wallet and Vault are:
- Advanced account protection. All payments from the Vault are delayed by 48 hours, during which the vault provider will try to contact the account owner personally. The payment will not proceed until the account owner voices the confirmation. If there are several owners (which is possible with group vaults), then all of them need to approve the transaction.
- Geographic distribution. Most of the Bitcoins are not stored on the same server. For example, Coinbase Vault stores 97% of Bitcoins in the geographically distributed network of servers, that is not connected to the global internet directly.
- Additional features. Some companies provide Premium features for their Vault users. For example, Xapo provides insurance for all the Xapo Vault accounts.
However, if you are looking for a significant difference between a Bitcoin Wallet and a Vault — you might be a little disappointed. At the end of the day, a Vault is just a Wallet on steroids with some more paranoid protection systems and some additional services. So when it comes to the BTC Vault vs Wallet face-off, the choice is completely up to you.
What is a Bitcoin Exchange and how does it store Bitcoin?
A Bitcoin exchange is a place to trade Bitcoin for other crypto- and fiat currencies. And in order to operate, an exchange needs to store each users’ cryptocurrency. Except that providing each user with their own separate wallet would seriously cripple the performance of the exchange — after all, prices on cryptocurrencies are changing every second and a lot can change in 20 minutes necessary to confirm the trade.
That’s why the exchange stores all Bitcoins (and other cryptocurrency tokens) on a single wallet. Each user is just given a different address and a limited access to only a certain sum that they “own”. I’m using quotation marks, because in reality these people own nothing — all tokens legally belong to Coinbase and the users are only “given access” to them.
Of course, this single “fat” wallet is a tempting prize for hackers and therefore a massive security risk. Not to mention that in the case of a hack, getting any kind of compensation will be impossible.
If the choice “Bitcoin Vault vs Bitcoin Wallet” is a toss-up, “Bitcoin Wallet vs Exchange” is not even an option. You should not store your Bitcoins (or any other tokens) at the exchanges.
But if you need to exchange your BTC for different tokens, you can try Coinbase and Binance.
To sum it up:
- There is no perfect solution. The safest ways to use Bitcoin are also the most inconvenient;
- When it comes to online storage, the difference between a Bitcoin Wallet and a Vault is minimal;
- “Bitcoin Wallet vs Exchange” is an obvious choice. Never store any sizable amount of coins on the exchange. And if you simply have to, move them away as soon as possible.
So how to store your Bitcoins?
At the end of the day, only you can decide how to store your Bitcoin. Everybody has their own preferences and standards for storing Bitcoin and there is nothing wrong with that. But keep in mind, that this can — and should — be an answer with multiple choices.
Here is, in our opinion, a perfect way to store a large amount of Bitcoins:
- Store 40% of your investments on a paper wallet in a bank. This is your emergency fund.
- Store 40% of your investments on a hardware wallet. Keep it safely hidden somewhere inside your house. This is your savings account.
- Store 10% of your investments on your smartphone. This is your spending account.
- Store 10% of your investments on the Bonpay Wallet. Use it to pay with a Bonpay Card at stores that do not accept crypto.
- Do not store anything on the exchange after you made the transaction.
If you follow all these rules, your cryptocurrencies will be both safe and easy to use, allowing you to discover all the advantages of the completely digital money.
Originally published at bonpay.com on September 7, 2018.
