If you’re venturing forth into the magical world of cryptocurrency, welcome! The markets have blown up exponentially in recent months, with 4% of the world’s population owning one of the many cryptocurrencies out there.
So whether you’re looking to safely store your first profits or wondering how to keep them safe when the time is right to invest, then read on.
Here’s everything you should know about Bitcoin wallets.
What Are Bitcoin Wallets?
A Bitcoin wallet is a piece of software that stores Bitcoin securely and safely. These crypto coins are stored offline with enhanced safety using encryption technology. They are also used to send payments between users online and between exchanges.
How Do They Work?
Bitcoin wallets work by storing an encrypted digital key that allows access to bitcoins. They comprise a public Bitcoin address and a private key that is a secret number to access those coins (think of it as a password).
Thus you can access a wallet through a user’s computer only after entering this information. Note we’re only referring here to a wallet – that’s different from a user account, which we’ll discuss later on. Once logged in, one has full control over all transactions made within the platform.
And since no one else can view this information without knowing the correct decryption keys, there is no way hackers could steal funds by breaking the cryptography.
If hackers ever gain access to coins, it’s almost always the result of phishing scams that mislead the user into sending currency elsewhere. Hackers use traditional phishing scams like redirected websites and keyloggers to view your passwords so they can gain access.
For this reason, many wallets also force you to set up 2-Factor Authentication, which allows you to use another device that’s in your presence to avoid hacking.
How to Use a Bitcoin Wallet
Bitcoin wallets come in several formats. And which one you use depends on the reasons why you’re using that wallet. Here are some of the main ones:
A hot wallet is a term used for any wallet that involves a connection to the internet. These are the most convenient and less secure than other types as they’re open to hacking while online. If you do find you lose your Bitcoin, you’ll need to hire a local Bitcoin recovery expert.
Examples include centralized exchanges such as Coinbase and Binance (though these operate slightly differently), multi-wallet websites and phone apps, and desktop programs.
Hot wallets combat security issues of being online by offering extra security measures. That said, it doesn’t stop a hacker from installing a keylogger on your computer and doing it that way. As a result, most experienced traders only use hot wallets for small, emergency trades or spending purposes.
Mobile apps make the perfect gateway for payment transactions. These are available across Android and iOS platforms.
Try and avoid transferring large sums of BTC over mobile apps for security reasons. That said, their portability and ease of use are what make them stand out.
Online Wallet Services
Many services allow you to buy bitcoins without needing to create a new account. Some examples include Coinbase, Circle Internet Financial Ltd., and Bitpay. Online wallets make trading easy by allowing you to buy Bitcoins through websites.
Many exchanges also accept fiat currency deposits so that you can withdraw cash. That’s not always suitable for day-to-day purchases. But they are useful for larger investments where you might need to move funds at speed.
They also need stringent verification checks. These checks adhere to Know Your Customer (KYC) and Anti-Money Laundering (AML)
The opposite of hot wallets, cold wallets are offline wallets with special technology built into only transact offline. You can do this with a connection in some cases, but you have to press physical buttons on the device. In that way, a hacker can’t activate those pushbuttons unless the hacker is in the same room as you!
Examples of cold hardware wallets include devices such as Ledger Nano X, Trezor Model T, and Keepkey. There are many more, but these are the most popular for their security, reputation, and vast range of currencies.
Both hot and cold wallets generate their keys (the secret codes) offline. It allows maximum privacy and security from hackers.
However, they are traditionally less convenient than other types of wallets. But there are ways around this. One example would be hardware wallets.
Another cold wallet is a good old pen and paper wallet, which are pieces of paper containing digital information. They look like normal banknotes, though they contain unique numbers instead of names. They work in similar ways to cold wallets in that they must stay offline.
We’ve included them here for reference. But in February 2021, it was reported that paper wallets are unsafe thanks to a loophole in the offline generator BitcoinPaperWallet.com, so stick to a hardware wallet instead.
Bitcoin Wallets for Every Occasion
As you can see, there’s an advantage to using a blend of Bitcoin wallets. Use your exchanges for converting from FIAT money (e.g., US Dollars). Then, you can send most of these coins out to the hardware wallet of your choice.
Suppose your exchange doesn’t allow spends from within. You can withdraw a sensible amount to a mobile wallet for everyday spends.
That said, some bank accounts are now taking crypto. So look into this and see what works best for you. And remember, never invest what you can’t afford to lose.
For more top crypto tips, keep checking back on our blog – let’s fly to the moon together.