What is a Bitcoin Wallet?
If you’re someone who was recently introduced to the concept of Bitcoin wallets, you are probably asking yourself: “What is a Bitcoin Wallet?”. Bitcoin aren’t physical but can still be stored using software, that us Bitcoiners call wallets.
Bitcoin wallets act just like a regular wallets do, with 3 key differences:
- Bitcoin wallets only store Bitcoin
- Bitcoin wallets are stored using software
- Bitcoin wallets offer an interface to interact with the rest of the network
Bitcoin wallets store data. The data that they store are private keys which are a way of proving your Bitcoin holdings to the network. Most people prefer to compare Bitcoin wallets to modern bank accounts. You can digitally store money, and are mostly given the tools to send and receive that money over the Internet.
Now that you have a better idea on how wallets work, you should start looking at which wallet to use. Here’s a comprehensive list of popular wallets, with their pros and cons. We’ll be categorizing the wallets into three groups: web wallets, software wallets and hardware wallets.
New Bitcoin users tend to prefer web wallets as they don’t require any executable downloads, they’re available anywhere with an internet connection and they have one of the simplest user interfaces. Those are all great features, but unfortunately when it comes to cryptocurrency, security is the number one priority.
We’ve picked out some of the most popular web wallets for you to use, but please know that hardware wallets will always be the most secure option.
Coinbase is one of the biggest cryptocurrency exchanges and provides its users with an online wallet where they can leave their funds. This is convenient, but when storing cryptocurrency on an exchange, you do not hold the private keys to your coins. In the event that Coinbase or another exchange is hacked, you would most likely lose your Bitcoins.
Coinbase comes with many benefits for newcomers. Most notably, the service is very well known and supported. You can register within a couple seconds and get started without any hassle at all.
Blockchain.info was one of the first web wallets to capture a significant share of the market. With the emergence of Coinbase, however, Blockchain has been dwindling over time. Either way, it’s fair to say that Blockchain provides a straightforward service that can be used reliably enough for users of different experience levels.
Counterwallet is used by many people for Counterparty – a service built on top of the Bitcoin blockchain that allows non-technical users to create and trade any type of Bitcoin-based token. Either way, Counter Wallet has a plain user interface that supports multiple Bitcoin wallets. What stands out, is a fee dial that lets the users decide how much they want to spend on transaction fees – a rare feature for web wallets. All in all, Counterwallet does everything you need it to do while looking a bit staler than the average online wallet.
BTC.com stands out in terms of its optimized user interface. It feel as simple as Counterwallet while looking as good as Coinbase. At the same time, you can get started super fast, are forced to back up your private key (to guarantee recovery in case of emergency), and have the ability to download mobile wallets for Android and iOS. One slight drawback is the lack of custom transaction fees, but all in all, BTC.com serves all the needs of a newcomer.
Software wallets include a large group of different wallet types, and can therefore be considered rather ambiguous. For example, software wallets can be wallets that you run on your desktop or laptop. They could also be an app on your smartphone. In some ways a web wallet is also a software wallet, because at the end of the day a website is also just a piece of software. Either way, what most people mean when they use the term ‘Software Wallet’ is an application that you run either on your computer or your smartphone.
The most important software wallet that you’ll find is the native Bitcoin software. It comes attached with a core node and gives you all the features that you could possibly desire. Bitcoin Core builds on the native client by giving the option of handling all your tasks through a graphics user interface (GUI). So really, this is the wallet for you if you’re seeking a balance between power and access.
Electrum is a python-based wallet that provides an array of useful power features, without the need to run on a full node. You can set transaction fees, use change addresses, create invoices, determine expirations, and much more. Electrum balances convenient installation and resource with power – which is a great way for the average user to delve into more detailed Bitcoin uses.
Phone Software Wallet
Software wallets for your phone let you handle Bitcoin transactions on-the-go. These are likely the least secure way of storing your Bitcoin, given how insecure smartphones are these days, so they’re usually used to store a small amount of Bitcoin – just enough to handle daily expenses, so that you don’t lose your life savings because of Google’s or Apple’s security issues. As you would expect, Phone software wallets fall into two categories: iPhone wallets and Android wallets.
Hearing of Coinbase’s iPhone app immediately makes you expect it to be one of the best options for iOS. Indeed, it comes with a satisfyingly clean design that sets a high bar for the user interface quality of touchscreen devices. On top of its aesthetic accessibility, it’s connecting directly with the online exchange features that Coinbase has to offer on its web platform. To buy Bitcoin with fiat directly from your phone is a wallet feature that most other phone software wallets do not have to offer.
Many iOS users sing high praise for Breadwallet – particularly because of its minimalism. You’ll find the ability to make transactions without incurring in extra fees from using the wallet. You can store your coins safely without having to know every detail about Bitcoin technology. You can even buy Bitcoin with fiat just like you would over Coinbase directly from the app. But most importantly, it’s the slick implementation of a mobile Bitcoin wallet that sets Breadwallet apart from the competition – which makes it the perfect wallet for Bitcoin newcomers.
The Electrum app for Android gets the job done, albeit in a rough an aesthetically displeasing way. All the core functionalities that you’ll find in the Electrum desktop application can also be found on in the Electrum android app. However, when it comes to specifying settings for your fees, and monitoring your change addresses, it becomes much easier to lose oversight on the Android app because the user interface looks unpolished.
Browsing the web for the best Android wallet options invariable points you to Mycelium. Mostly, users like the ability to have an visually pleasing power wallet, like Electrum at the tip of their finger. But most importantly, Mycelium supports your Trezor wallet directly from your phone. Just use a microUSB to USB adapter and move funds from your hardware wallet directly with your phone. This feature sets Mycelium apart from other Android wallets by preventing you to pull out your laptop whenever you want to move funds out of your favorite cold storage options.
Hardware wallets solve a very specific problem. Since Bitcoin transactions require the Internet to take place, there has always been an inherent security risk connected to using Bitcoin. Even though there are plenty of security measures, like password protected wallets, to stop malicious hackers from stealing your Bitcoin, a computer with security flaws will consequently lead to an insecure Bitcoin wallet.
This sparked the desire for Hardware Wallets (often also called ‘cold storage’), where we store our Bitcoin on a device that is completely disconnected from the Internet. Like that we can rest assured that our wallet will not suddenly be empty the next day.
Analog Hardware Wallet
In a sense, everyone already owns a hardware wallet. Since Bitcoin value is denoted by a private key – a string of data – there are no limits, other than physics and stupidity, to how you decide to store that data. Let me elaborate what I mean by that.
You wallet address is denoted by a key pair (two long strings of somewhat random characters) that designate the money that you own on the Bitcoin blockchain. However, the only reason you own that Bitcoin is because you’re the only person on the globe who has one of those strings of data, namely, the more important one called the private key (sometimes also called ‘secret key’). So the physical comes into play in the sense that you can’t store your private key in thin air. You can write your private key on the wall of your living room though. That’s where the stupidity limit comes into play. If another person can see the string of data that denotes your private key, and take a picture, then that person will have access to your Bitcoin on the blockchain, can move it to another wallet that they created, leaving you out of money. So the smart thing to do is to write it on a piece of paper, and then store that piece of paper in a safe or a safe deposit box in a bank.
People call this process a ‘Paper Wallet’ because you’re physically storing the key to your Bitcoin funds on the blockchain on a piece of paper. In many ways this is the safest way to store your coins, especially if you generate your wallet while disconnected from the internet.
Digital Hardware Wallet
Digital hardware wallets make the process above significantly easier by automating laborious parts of the process. Digital hardware wallets essentially act like a self-contained mini computer that can communicate with your laptop/desktop via USB. This is convenient because you can move your Bitcoin from your software wallet to your hardware wallet, or directly to your hardware wallet address from your Bitcoin source. By doing so, you disconnect your private key from a digital device that is actively connected to the Internet, which significantly reduces the chance of a malicious hacker stealing control of your coins. At the same time, your Bitcoin access stays on a computer, so that if you choose to liquidate some of your funds, you don’t have to go to the bank to grab a piece of paper and enter the characters thereon into your computer to make a purchase.
The digital hardware wallet scene has two major players: Trezor and Ledger. Lucky for you, we have two lengthy reviews detailing everything you need to know about Trezor’s flagship wallet and the Ledger Nano S.