In this chapter you will learn how to choose the best Bitcoin wallet for your needs
The first step we’re going to want to do before even buying any amount of Bitcoins is to obtain a Bitcoin wallet. The reason?
Bitcoins need to be stored inside a Bitcoin wallet. So when you buy them from an exchange it is highly recommended (like super highly recommended) that you move them from the exchange into your own personal wallet. If you fail to do so you are at risk that someone may hack the exchange or even that the exchange will close shop and you won’t be able to get your money out (hey, it’s happened before).
There are more than 20 types of known Bitcoin wallets you can use and it can get a bit overwhelming trying to compare all of these Bitcoin wallets. But hey, that’s why this guide is for isn’t it? So let’s take a look at the options you have at hand.
Types of Bitcoin wallets:
A Bitcoin wallet is a piece of software or a website that helps you send and receive Bitcoins. There are several wallets you can choose from:
Independent Bitcoin wallets
An independent wallet means that you are the sole owner of your Bitcoins and that you are not putting your Bitcoins in the hand of a 3rd party. There are many types of independent wallets. For example, the first Bitcoin wallet ever to be produced was the Bitcoin Core.
Even though using an independent wallet is considered to be more secure, it also means that you are the only one responsible for your coins’ security, so you need to take the appropriate measures (but we’ll go over that as well).
Another thing to take into account is that independent wallets usually are harder to set up then 3rd party wallets. Also, if you lose your wallet, you lose your coins. No one will be able to get them back to you (ask this poor fellow).
But just like more and more people are storing their computer files on the cloud and not on their own computer, Bitcoin storage is also moving in that direction. Which brings us to our next type of wallet…
3rd Party Bitcoin wallets
Like their name suggests, 3rd party wallets are controlled by someone else other than you. This will usually be some sort of company (e.g. Coinbase, Circle). Using these types of wallets will usually be easier since they are more geared toward beginners, but you’re also putting the fate of your coins in the hands of someone else. That’s why it’s important to only use trusted 3rd party wallet providers.
The good thing about these wallets is that you can usually access them from anywhere you are using the web and that they are not connected to one specific physical device.
However, the company that is supplying you with the wallet has some amount of control over your Bitcoins (the amount of control varies depending on the wallet). Also, since they are accessible through the web they are more prone to being hacked.
Most 3rd party wallet companies today take sufficient security measures in order to ensure that no one hacks your account. One of these measures is called 2 Factor Authentication (or 2FA in short).
Using 2FA helps the wallet verify your identity by asking you not only to enter your username and password but also enter an access code which is sent to a different device than the one you’re using to log on. For example, when you log in to Coinbase you’ll be asked to enter a code which will be sent to you in a text message.
Multi-user Bitcoin wallets
A multi-user wallet (also known as a multisig wallet) is a wallet that has more than one owner, and the coins inside that wallet can only be accessed if a pre-set number of owners agree to it.
For example, let’s say a company opened a multisig wallet with 3 owners – The CEO and two other managers. They set the rules for this specific wallet so that it takes at least two owners to authorize a transaction. If the CEO wants to send Bitcoins to someone from this wallet he needs to get at least one other manager onboard to agree.
Multisig wallets are considered more secure since even if one of the keys to the wallet is stolen there’s still no way to drain the wallet’s funds without the other owners. A good use of a multisig wallet would be to give two keys to yourself and one to a 3rd party so if one key gets stolen, your Bitcoins are still safe and can still be accessed. Copay is an example of a multisig wallet.
Paper and other physical wallets
In the end, everything a Bitcoin wallet is comes down to a set of letters and numbers, and if you write it down on paper you can create what is known as a “Paper wallet”. If you want to dive deeper into this matter take a look here.
I won’t elaborate about these types of wallets in this guide since they are much more advanced and require a certain degree of technical orientation. I just want you to know that these wallets exist, and that they are all part of the independent wallets group.
To sum things up, Bitcoin wallets boil down to who has power over your Bitcoins – You alone (software and physical wallets), you and another company (web wallets) or you and other owners of the wallet (multisig wallets).
Choosing the right wallet
Now let’s choose our wallet. Choosing the right wallet depends on several factors. Keep in mind that it’s pretty easy to switch between wallets, so it’s not a life or death question. Here are the factors I would take into account when choosing my wallet:
Frequency of use
How often are you planning on sending out Bitcoins? Notice that I ask only about sending Bitcoins since receiving Bitcoins is pretty much the same for all types of wallets.
If you think you’re going to be a heavy Bitcoin user I suggest using a wallet that is easily accessible on your mobile phone so that it will always be available.
However, if you’re just buying Bitcoins for a long term investment I suggest finding an independent wallet so you know your Bitcoins are in your hands alone.
How many Bitcoins you plan on owning
If you’re just going to buy a small amount of Bitcoins then it doesn’t really matter which wallet you use since the risk isn’t that big. If however you are planning to spend a considerable amount of money on your newly purchased Bitcoins you may want to consider using a multisig wallet or even an independent hardware wallet which are considered to be safer in general.
How easy is it to access the wallet, send Bitcoins and receive funds? Some wallets have a great user interface while others tend to lag behind with an interface that will scare any new Bitcoiner away.
Personal paranoia and anonymity preferences
How paranoid are you about someone stealing your Bitcoins? This of course varies from one person to the other, but many people in the Bitcoin ecosystem don’t trust anyone but themselves. Also, certain 3rd party wallets require that you sign up with you name and email you give away your anonymity by choosing this wallet.
Here are my top picks depending on the various factors I’ve just covered:
Coinbase – 3rd party wallet. Very user friendly, easy to set up and you also get a $5 bonus when signing up. Coinbase offers a mobile and a web interface for their wallet. The company is very reputable in the Bitcoin space. Using this wallet is great if you’re a newbie who isn’t planning on storing a lot of money in his wallet and don’t care that much about staying anonymous.
Blockchain.info – 3rd party wallet. A semi user-friendly wallet which has a mobile and web interface. It’s a bit harder to get around than Coinbase but it’s much more secure as the company doesn’t have direct access to your Bitcoins. Anonymity is still compromised but at least you have more control over your coins.
TREZOR – Independent wallet. If you’re planning on holding large amounts of money you should use TREZOR. This is a hardware wallet which is almost as secure as you can get with your coins. Anonymity is completely maintained, the only issue is that since it’s an actual product it will cost you money. However, considering the fact that it protects your investment, it may be worth it. I would go with TREZOR if I needed to store a large amount of coins which I will rarely spend.
GreenAddress – Independent wallet. Green address is a semi user-friendly multisig wallet that has a mobile and web ve rsion. Security and privacy are completely maintained and it has become a very favorable wallet throughout the Bitcoin community. This is a great alternative for using Blockchain.info.
You can also choose to distribute your coins between several wallets, this way if something goes wrong you don’t have all of your eggs in one basket. But if you’re reading this guide my guess is that you’re new to Bitcoin and aren’t planning on buying a large amount of coins to begin with. If that is indeed the case, any of the wallets mentioned above will do the job nicely.
Go ahead and choose your wallet – install its app on your mobile phone or create an account through the relevant website. It’s now time to decide on a payment method.