Sending Bitcoin from one address to another is somewhat similar to sending emails. Just like we need email providers to manage our emails, we need Bitcoin wallets to manage our Bitcoins. However, Bitcoin addresses look a bit more complex as they are made of a long string of letters and numbers (e.g. 16NsGhJdc7s8XJyRGsQV6msSJRpMZJCGFf).
It is, basically, a combination of keys (Public Key and Private Key) that keeps our Bitcoin stored. The aforementioned bitcoin address – or Public Address (PA) – is the address you share with others when you want to receive Bitcoins (it is safe to share your Public Address just like sharing you email address). On the other hand, the Private Key (PK) is like the password to access your email account and it is used to unlock and move (or spend) the coins stored in the public address (you should never share your Private Keys). Each Bitcoin address results in a unique combination of a Public and Private Key, so anyone that possesses the Private Key of a corresponding Public Key (address) controls the coins stored in it.
- Public Address (PA): 16NsGhJdc7s8XJyRGsQV6msSJRpMZJCGFf.
- Private Key (PK): L3Ta7x3US7jfK4Qx9vyui4TNCe9L1qjMAbcpeYjbCYxK89WWEBHP
Instead of using the Private Key complex combination of letters and numbers, some wallets make use of mnemonic seeds (or phrases), which work in a very similar way. This technique removes the need of dealing directly with the Private Key, making it more user-friendly. The seed phrase is as unique as the Private Key it represents, thus also exclusive to each Public Address. Mnemonic seeds are basically Private Keys made better looking.
A Bitcoin wallet is a program (software) that interfaces with the Bitcoin network (Bitcoin blockchain) and is used to send, receive and store Bitcoins. In other words, wallets monitor Bitcoin addresses on the blockchain and update their own balance after each transaction. There are many different types of Bitcoin wallets, such as: Web, Mobile, Desktop, Paper and Hardware Wallets. Each type of wallet has particular mechanisms and its own way of storing the Private Keys.
Any wallet that is connected somehow to the internet or that generates Private Keys while being online is considered a Hot Wallet. On the other hand, Cold Wallets are wallets that generate and store your Private Keys offline. Cold storage is the safest way to store your Bitcoins, but unfortunately most people choose the convenience of Hot Wallets.
A Web wallet is an online Bitcoin wallet that stores your Private Keys online and can only be accessed with a user-set password. The wallet provider generates a Public Key (Address) for you to deposit/send your bitcoins to. They will store your Bitcoins and hold the Private Keys for you. In this case, you do not have direct access to your Bitcoins anymore since you do not have the Private Keys (held by the service provider). In other words, you do not have control over your Bitcoins and every time you want to use your coins you will need to rely on the wallet provider and submit a Bitcoin Withdrawal request that usually takes a while and requires you to log in and provide your user-set password (defined by you when you first create a Web wallet address). For that reason, the Web wallets are considered the least secure option and should only be used for small value storage/transfer while trying to minimize the the total number of transfers you make on them(if the service provider gets hacked or goes offline, you won’t be able to recover your Bitcoins). On the other hand, Web Wallets are highly convenient for quick transactions and trades. The more competent Web wallet services provide Multi Factor Authentication options to ensure higher security levels (e.g. Google Authenticator App).
Examples of Web wallets: Green Address; Blockchain.info. The Web wallets are also used by exchanges and all users need to deposit their coins into the Exchange wallet before using their services (e.g. Coinbase, Bittrex, Binance).
A Desktop wallet is a software you download and install on your computer that may be used to access previously generated Bitcoin addresses or to generate new ones. When generating a new Bitcoin Address, users are able to set a password for their newly generated wallet and to keep control of their Private Keys (only you have access to your Bitcoins; no need to trust third-party services). In case the user already has a Bitcoin address, he can access his wallet by using the previous set password. However, it is important to make sure there are no malwares or security weaknesses on your computer, since the Private Keys are stored locally and may be vulnerable to attacks. As long as your computer is clean and safe, your coins are safe.
Examples of Desktop wallets: Electrum, Exodus, Bitcoin Core Wallet
The Mobile wallets are very similar to Desktop wallets but designed for smartphones. They may be very convenient for quick transfers, but since the Private Keys are stored on your mobile phone, these wallets offer low security and low privacy – given the potential association of your Bitcoin wallet with your phone number and location. It is strongly advised that you create a Private Key backup and keep your Mobile wallet protected with a strong password and Multi Factor Authentication processes. Many Desktop wallet providers also provide Mobile versions of their wallet.
Paper Wallet. Source: CryptoCompare.
The Paper wallets are considered one of the most secure wallets available. The process of generating new addresses and keys can be done online using BitAddress or any other Paper wallet provider. However, it is recommended that you download their webpage and generate the addresses offline. After generating the Public and Private Keys, the user may write down the keys on a piece of paper or simply print and store in a secure place. By keeping your keys on a piece of paper, only someone that has physical access to this piece of paper can possibly steal your Bitcoins. As paper wallets may be physically destroyed or lost, it is advised that you create multiple copies.
Besides being a very good choice of Cold Storage, Paper wallets require some technical knowledge and present some risks. You can receive as many coins as you want on your paper wallet, but when you want to spend your Bitcoins, you need to import your keys into a digital wallet, such as Electrum or other Desktop Wallet. It is very important to keep in mind that when sending coins from your Paper Wallet to another address, you should always send the entire balance at once (all coins), since you cannot access the remaining coins after the transaction is done. That means you need first to move all your coins to another address (e.g. your Electrum wallet address) and only after that can you safely send fractions of it to another person. After the process is completed, you may create a new paper wallet and move your funds to it. It is not recommended to use the same paper wallet more than once.
Recommended Paper wallet generator: BitAddress.
Hardware wallets are physical devices especially designed to safely store your Private Keys. They are considered the safest way of storing cryptocurrencies. Even if your device gets compromised by malware, your keys will remain safe, which makes it possible to be used in any computer (even infected ones). Most hardware wallet companies provide a seed backup in case your device is lost or stolen. The only downside to this kind of storage, is that you need to have your device with you in case you want to send your Bitcoins.
There are many kinds of wallets that may be suitable for different needs. The most convenient ones are usually the least secure, whereas the safest ones tend to be less convenient. For storing larger amounts of coins, Cold Storage (i.e. Paper or Hardware wallets) are recommended. On the other hand, small values can be more conveniently stored on Hot Wallets (i.e. Desktop, Mobile and Web wallets).
It is also important to keep in mind that your bitcoins can be lost forever if you don’t have a backup plan for your peers and family to access your coins in case something happens to you. If your wallets and private keys are not known by anyone when you are gone, there is no way to recover the funds.
This guide focused on Bitcoin wallets, but the mechanisms are very similar for any other cryptocurrency (just make sure to check which wallets supports the coin you are interested in).
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