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Remember your first wallet or purse? It was a thrilling moment, a signal that you might eventually fill said item with cash and finally participate in some real consumer behavior. In the cryptocurrency world, wallets serve the same purpose. It’s one thing to receive or spend Bitcoin, but perhaps more importantly is where will you house your Bitcoin?
Before diving into how a Bitcoin wallet works, let’s cover some basics. All cryptocurrencies possess two keys an encrypted key and a decrypted key. The former is the “public-facing” key, shared with the public to accept payments. The decrypted key is the private key, used to access Bitcoin and cryptocurrencies, and private by nature. Cryptocurrencies like Bitcoin are open-source and can be modified by developers accordingly. The distributed ledger technology (DLT) then verifies and records transactions and ensures that the entire process is transparent.
A Bitcoin wallet incorporates the two previously mentioned keys. The public key enables other wallets to process payments to a specific wallet’s address, while the private key permits the spending from the selected wallet. At its core, this is a software program that manages coins and interacts with blockchains to provide “senders and receivers” a safe way to exchange digital currency. Because this is a personalized wallet, a personalized bank account number is understandably required. These numbers are shared with other users, or even one’s employer (if payment has been negotiated in Bitcoin, for example). For the receiver to then spend the coins, they must provide the private key that correlates with the public address the Bitcoin is assigned to. Once a match (public and private keys) is secured, the transaction is a success.
In the Bitcoin wallet world, no two wallets are alike. As such, one individual can create an innumerable amount of them. A wallet address is comprised of a combination of letters and numbers, lower- and uppercase or example, B70nYTR009pLKQWNbb4132oPP. Public and private keys have a similar composition and because blockchains are transparent it is easy to review the past transactions of a specific address. This might sound “too transparent,” but again, a blockchain is “pseudonymous,” which means a person’s real-world identity is never revealed. Rather, it is simply a random collection of numbers and letters.
Cryptocurrency wallets come in three distinct forms hardware, software, and paper-based. Hardware wallets are the most secure as they are only connected to the internet when a transaction needs to be processed. Private keys are stored offline and there are several reputable players in this sphere. Software wallets are the most popular and have been casually coined as a “Bitcoin application” as they are physically installed on the computer where the Bitcoin is subsequently accessed. The application creates a wallet.dat file where the data is stored, and within the larger software wallet category, there are desktop, mobile and online wallets.
Desktop wallets are downloaded and accessed from specific computers. These are understandably secure, but if anything goes wrong with the physical computer, the wallet software can be compromised. Mobile wallets provide more flexibility as they only run on smartphones via an app, while online wallets run on the cloud and can therefore be accessed from multiple devices. Lastly, paper wallets are useful but by far the least popular of the three. With a paper wallet, the user prints a QR code of the private and public keys to either send or receive currency.
In terms of protecting Bitcoin (or any currency) wallets, backing them up in the same way one would their computer (following regular time intervals) is the recommended route to take. If you have a desktop wallet, the file (wallet.dat) should be encrypted with multiple copies stored on secondary devices (computers, pen drives, etc.). Needless to say, it is imperative to create a strong password, change it regularly and even consider a multi-factor authentication for enhanced security. Bitcoin wallet software comes with regular updates and the latest security enhancements. But because this is currency, adding additional layers of security doesn’t hurt. There are a host of wallet service providers out there, but the good ones feature two-factor authentication, along with a pin code request each and every time the wallet is opened. Strong security policies are an absolute must with cryptocurrencies.
Now, before running out and choosing just any wallet, consider how much access (daily versus weekly) you’ll require, how many different currencies you’ll be holding, the costs, security protocols and the convenience. Most wallets are free, but some hardware wallets do require a minimal investment. If convenience is more important (as opposed to security), you’ll likely need to compromise a bit more on the security side. Mobility is essential if you are interested in accessing the wallet from any device, and if you’re dealing with more than one currency outside of, say, Bitcoin, larger wallets that support multiple currencies are your only choice.
Just as you would with a physical wallet, keeping a Bitcoin wallet safe and orderly is the ultimate objective. This is a great post to save or even print out and pin to your fridge. Heck, share it with friends and family the more Bitcoin and cryptocurrency users we can get, the better.
Hitesh Patel is a digital marketing strategist and entrepreneur with more than 15 years of experience in digital marketing, startups, branding and customer acquisition strategies. Hitesh is the CEO and founder of Reposition Group, which specializes in digital growth strategies for companies in the cryptocurrency market, such as Bitcoin wallet Bitamp.com.
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Disclaimer: Opinions expressed at The Daily Hodl are not investment advice. Investors should do their due diligence before making any high-risk investments in Bitcoin, cryptocurrency or digital assets. Please be advised that your transfers and trades are at your own risk, and any loses you may incur are your responsibility. The Daily Hodl does not recommend the buying or selling of any cryptocurrencies or digital assets, nor is The Daily Hodl an investment advisor. Please note that The Daily Hodl participates in affiliate marketing.
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