Similar to holding large amounts paper money, bitcoin holders must take several precautions in order to protect their wealth. Although some traders might trade between Bitcoin and other cryptocurrency, it is best to keep your bitcoins safe by using a wallet.
As we have already mentioned, the term “wallet” is not an accurate description. Some prefer the term “keychain”. It’s also incorrect to say that a wallet “stores” bitcoins. A wallet stores a user’s private and public keys, which are used to sign transactions and access a public Bitcoin address.
There are many options for Bitcoin wallets, each with its own unique features. You may have different needs, so it is important that you consider both your trading and investment habits, as well as your security needs before choosing a wallet.
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Desktop Wallets
Desktop wallets allow you to run software programs on both desktop and laptop computers running popular operating systems like Microsoft Windows, Apple’s macOS and Linux. Desktop wallets allow one to access their bitcoin address from the same computer one could trade from. However, they are not as portable and usable out in the wild as mobile wallets.
Many computers in the world run Bitcoin Core, the de facto Bitcoin client. These computers form “nodes” on the network, which handle the crucial task of relaying transactions. However, the software allows users to create a Bitcoin account to send and receive Bitcoins as well as store their personal key.
Bitcoin Core, a desktop wallet that uses Bitcoin Core, can be too large to download and keep. Users also need to update the program regularly to ensure the Blockchain is up-to-date as new transactions are added and verified.
Not all desktop wallets are nodes. Some desktop wallets can be used to store keys, while others are designed by third-party developers. These are typically much easier to download and manage, and can be equipped with certain features or focusses that might appeal to investors.
Mobile Wallets
Mobile wallets can be installed on your smartphone just like their desktop counterparts. These are typically available on Apple’s iOS phones and Android phones. Some are also available for Microsoft’s less-used Windows Phone.
Mobile wallets offer traders and investors the flexibility of taking their wallet wherever they go. Desktop wallets can be quite heavy and are not easily portable. Mobile wallets can also be used to make quick and convenient payments with bitcoin or other cryptocurrency.
This requirement has a trade-off. Smartphones don’t have the same processing power and memory as most computers. Mobile wallets therefore do not download the whole bitcoin blockchain. Instead, they rely on a small portion of it to relay most transactions through what is called trusted nodes.
This basically outsources some computing power and memory required to use a Bitcoin wallet to other computers connected on the Bitcoin Blockchain.
A mobile wallet can store both the public and private keys of a user just like a desktop. However, most mobile wallets use QR-code scanning or Near Field Communications.
Mobile wallets can scan the QR code with their smartphone’s camera in the case of the latter. The code can be interpreted by the mobile wallet to another bitcoin address that users can send bitcoins.
Smartphones with NFC chips (e.g., some Apple iPhones or Samsung Galaxy S phones) can be used to facilitate transactions. This allows users to simply tap their phone against a reader to send bitcoins. Similar to Android Pay, Samsung Pay or Apple Pay, this process is also possible.
Hardware wallets
Although you can think of desktop computers and mobile phones as ‘hardware, there are many electronic products that can be used to store your public and private keys. These are often referred to as “hardware wallets” and can sometimes be used to facilitate payments.
Although hardware wallets may look similar to USB drives, this can vary from one brand to the next.
Hardware wallets are typically equipped with both an ‘online and offline’ component. An investor can use an online wallet to store their public address, and signal which transactions will be signed. Users will need to connect their USB-enabled hardware wallet to a computer to complete a transaction. A signature will then be created, sent to the wallet and then entered into the Bitcoin Blockchain.
Some hardware wallets provide users with the option to store a user’s private keys in a protected area on the device. This means that the private key cannot be separated or used without the device.
Many hardware wallets provide a backup service that allows users to retrieve their private keys, bitcoin balance, and transaction history if the device fails, becomes lost, or is damaged. These backups can be secured by a PIN, which is either linked to the device or can easily be set by the user.
Many users find the advantage of hardware wallets not falling prey to malware that could target software wallets. These devices can be corrupted, stolen, or damaged.
Paper Wallets
The ‘paper wallet’ is one of the cheapest ways to secure bitcoin.
A paper wallet is basically a paper copy of two QR codes. One is the public address that one receives bitcoins and the other is where one signs on to outgoing transactions. A paper wallet can be used by a person who scans the QR codes or invites another party to do so.
Paper wallets reduce some of the risks of keeping one’s private keys online. Investors would need to trust the place where the key is kept. Paper wallets are not vulnerable to cyber attacks and other malicious actions that might allow hackers to steal bitcoins online.
Paper wallets have their weaknesses, however. Paper wallets are vulnerable to theft and damage, just like hardware wallets. Additionally, the paper can also degrade over time. Users should be careful with how they store their paper wallet and avoid using it for extended periods.
Are Bitcoin Wallets Secure?
Each type of Bitcoin wallet has its strengths and weaknesses. It is up to the user to secure their accounts and choose the most convenient and affordable option.
Online or mobile wallets offer convenience and quick access to the internet, but they are also a prime target of hackers looking to steal bitcoin and other cryptocurrencies.
However, physical storage like hardware and paper wallets can be easily stolen or damaged. They can also degrade over time.
One rule of thumb that works well is to use multiple wallets. This ensures that your bitcoin allocation does not depend on just one wallet.
You can also take additional steps to protect your account. Two-factor authentication is available to online wallet users. This means that they don’t have to sign in with a username or password. They can also input a code from any device that they choose that will act as a second layer of security.