What is a Bitcoin Wallet – Bitcoin Whiteboard Tuesday

Last updated on September 21st, 2017 at 09:34 am

Hello guys and gals, my name is Nate, and welcome to Bitcoin Whiteboard Tuesday!

Every few weeks we’re going to send you a cool new video, just like this one, explaining some basic concepts around Bitcoin. This way you can learn about Bitcoin yourself or forward these videos to friends or family members who have questions.

Today’s video is all about Bitcoin wallets and how to choose the best one. We’re going to cover a lot of topics like mobile wallets, web wallets, desktop wallets, paper wallets, brain wallets, HD wallets, multisig wallets and of course hardware wallets.

So even though we’ve got a lot to talk about, don’t worry, we’ll simplify it for you, and in the end we’ll also help you choose the best wallet for your needs.

Let’s get started.

What is a Bitcoin wallet?

A Bitcoin wallet is a program to send and receive Bitcoins, store Bitcoins and monitor Bitcoin balances. Just like you need an email program like Outlook or Gmail to manage your emails, you need a Bitcoin wallet to manage your Bitcoins.

Wallets interface with the Bitcoin blockchain; that global ledger of bitcoin transactions that we talked about in our last video. Wallets monitor Bitcoin addresses on the blockchain and update their own balance with each transaction.

Now here’s one of the most important things to remember about a wallet: What defines a wallet is where its private key is stored.

A Private key? What does that mean?

Well, a private key is just a very long string of numbers and letters that acts as the password to your Bitcoin wallet. It’s from this number that your wallet gets its power to send your Bitcoins to other people. You can also think of it like the secret coordinates for locating your Bitcoins. In other words, whoever knows your private key has control over your Bitcoins.

The private key is also used to generate your Bitcoin address – this is just like your email address. It’s something you give out to people who want to send you Bitcoins. However, even though the Bitcoin address is generated through the private key, there’s no way figure out what the private key is just by examining a Bitcoin address.

To sum it up,  the wallet’s core function is the creation, storage and use of the private key. In other words it automates Bitcoin’s complex cryptography for you.  

As Bitcoin wallets evolved HD wallets, or hierarchical deterministic wallets, were created. HD wallets generate an initial phrase known as a seed or mnemonic phrase. This seed is a string of common words which you can memorize instead of the long confusing private key.

Later on, if your wallet gets destroyed or stolen, you can enter these words in order to reconstruct the private key. Additionally, an HD wallet can create many Bitcoin addresses from the same seed. All of the transactions sent to addresses created by the same seed will be part of the same wallet.  

Because these private keys and seeds  have complete power over your Bitcoins they must be kept secret and safe. If you fail to protect your wallet’s private key or seed, the bitcoins it controls could be irretrievably lost.

A standard Bitcoin wallet will create a wallet.dat file containing its private key. This file should be backup by copying it to a safe location like an encrypted drive on your computer, an external flash drive or even copying to a piece of paper and hiding it away.

An HD wallet on the other hand will supply you with a seed phrase with up to 24 word that you should write down in a safe place.

Types of Bitcoin wallets

Some wallets hold a full copy of the Blockchain in order to validate each and every transaction – these are also called full nodes. Other wallets, also known as SPV wallets or lite wallets, don’t hold a full copy of the Blockchain. They rely on full nodes that they are connected to in order to validate transactions.

SPV stands for Simple Payment Verification, these wallets are faster and consume less disk space. Since the blockchain today is becoming increasingly big in size many wallets offer an SPV solution for limited capacity devices such as mobile phones, tablets and desktops.

Moving on to hot wallets. A Hot wallet refers to any form of Bitcoin wallet that is connected in some way to the Internet. This can be a wallet that is connected to a web service, a wallet installed on a computer connected to the Internet or even a wallet installed on your mobile phone, assuming you have data transfer to and from your phone.

Hot wallets, although the most popular, are also the least secure since they allow access to their inner workings through Internet connections.

Types of hot Bitcoin wallets

Markets, exchanges, betting sites and other Bitcoin services frequently require you to deposit funds into their online wallets in order to conduct your business. These web wallets are the least secure option for storing Bitcoins since you don’t have any access to your private keys. You’re basically asking someone else to hold your coins for you.

Such wallets are also more vulnerable to hackers since they have many loopholes along the way. For example,  the website in question, the device you’re using to connect to the website or the Internet connection can be monitored to steal your Bitcoins.

This forces you to rely upon both the site operator’s honesty and their security practices. In the event of internal fraud or external hacking, your bitcoins will likely be irretrievably lost. On the other hand, web wallets are highly convenient as they allow you to buy, sell and send Bitcoins at a moment’s notice.

More competent web wallet services will provide Multi-Factor Authentication options like validating every account login with a text message, to guard against external hackers. Even so, for storing any significant amount of coins, web wallets are not worth the risk. That’s why we advise that you avoid the #1 newbie mistake and never to keep your Bitcoins in an exchange wallet.

Now let’s talk about desktop wallets. These type of hot wallets store your private key on your computer. So as long as your computer is free of malware or any security weaknesses your Bitcoins are safe. However, we all know that’s not the case for most of us. Today it’s hard to be 100% protected and this makes desktop wallets that are connected to the Internet a valuable target for hackers.

Moving on to mobile wallets – these are wallets that store your private key on your mobile phone. Although many wallets are accessible via mobile apps, doing so presents the worst possible scenario for security.

Mobile wallets offer low security and terrible privacy, given the potential association of your Bitcoin wallet, phone number and geo- location. As phones are frequently lost, broken or stolen, it’s strongly advised that you enable multi factor authentication, password-protect your wallet and create a private key backup.

Mobile wallets are highly convenient and designed to provide as much security as possible in an insecure environment. Nonetheless, substantial sums should not be stored on a mobile wallet unless used in tandem with a hardware wallet which we will discuss in a minute.

Cold Storage Bitcoin wallets

Now let’s talk about the most secure form of Bitcoin wallets, cold storage wallets. Cold storage refers to any type of wallet that is independent of any Internet connection and therefore cannot be hacked remotely. Some examples of cold storage wallets are hardware wallets, paper wallets and brain wallets. Let’s go over them now.

Paper wallets are just pieces of paper with the private key or seed written on them. By keeping your private key on a piece of paper, only someone who can physically access that paper can steal your Bitcoins. However paper wallets are easily destroyed and therefore it’s advisable to created multiple copies so that if one is lost your Bitcoins can still be retrieved.

Another thing to consider is that to send the Bitcoins you have on your paper wallet to someone else you will have to import the private key into some form of digital Bitcoin wallet. This is easily explained in one of the many tutorials we have on the site.

The next form of cold storage is hardware wallets. These are physical devices which safely stores your private key such that it cannot be hacked even if your device is compromised by malware. You can even use them with a public computer that you don’t trust. Most hardware wallets provide a seed backup in the event that the device itself is lost or stolen.

To send your Bitcoins to someone with a hardware wallet you’ll need to have your hardware wallet connected to a computer and use some sort of web page that allows control over the wallet.

Hardware wallets offer the optimal mix between security and ease of use. Their only limitation is that you need to keep your hardware wallet on you at all times in order to send the coins.

Lastly we come to brain wallets. Brain wallets are just a way to create a private key out of a predetermined text or set of words. So instead of getting a randomly generated seed you decide for yourself on a passphrase and use some basic algorithms to generate a private key from that passphrase.

However Brain Wallets have a significant disadvantage, they have a higher probability of being hacked. This is because people are usually very predictable in what to use as passwords or supposedly random text and hackers have a way of knowing that.

Some tests have been done where simple passwords have been used for brain wallets and deposited with funds – they have been quickly stolen. Also one Bitcoin user lost 4 Bitcoins from his wallet after using a brain wallet private key generated from an unknown Afrikaans poem. This proves that even if you think you’ve found some obscure text for a passphrase you’re still in danger of being hacked.

Multisig wallets

Now before I show you exactly how you should choose a Bitcoin wallet I want to talk about one more important feature some Bitcoin wallets have – Multisig.

Multisig stands for multisignature, a wallet that allows sending of Bitcoins only with the approval of enough private keys, out of a set of predefined keys. Don’t worry…I’ll explain.

Let’s say that Alice, Bob and Charlie all want to open a business together and invest some of their Bitcoins – but none of them actually want only one person to have the private keys to this money. So they each get one key and use a multisig wallet that requires two out of three of those keys. This way none of them can run away with the money alone, but they also don’t need all three of them to pay the expense. For example, if Alice wants to run with the money, she can’t because she only has one key. But if Bob is missing and Alice and Charlie want to pay an expense, they can do it with their two keys.

Multisig doesn’t have to be only two out of three – it can be almost any combination. For example, a  couple wants to have a shared account and decide that only if both of them agree they can spend the money, or a Company’s board of directors that allows payments only by vote of majority.

Multisig is often used for escrow services where 2 parties decide on a transaction that requires 2 out of 3 keys. If the seller and buyer don’t agree, a trusted 3rd party will arbitrate and release the funds.

How to choose the best Bitcoin wallet?

You did it!

Now you know all there is to know about Bitcoin wallets, so let’s see how to choose the best wallet for your needs.

The first thing you need to know is that different people will use different Bitcoin wallets for different purposes. For example, if I need to store a large amount of Bitcoin safely I will use a different wallet than if I just want to have some small Bitcoin change to pay for a cup of coffee.

Usually wallets vary on a scale of security vs convenience and you need to decide where you want to be on that scale. Some of the questions you should ask yourself include:

  • How many Bitcoins will I be storing?
  • How frequently will I use the wallet?
  • Can I afford to pay for a hardware wallet?
  • Do I need to carry the wallet around with me?
  • Do I need to share the wallet with someone else?
  • Am I tech savvy?
  • How much do I value my privacy?
  • Do I trust myself to safeguard my wallet or do I want to give some 3rd party the task of doing so?

Depending on the answers to these questions it should be easier for you to choose a wallet. Most of the popular Bitcoin wallets are listed on our Bitcoin wallets page on the site, so now it’s just a matter of choosing the best wallet for your needs.

Before we conclude keep in mind that you may want to use more than one wallet. For example, you can use a hardware wallet for large sums of Bitcoins and also have a mobile wallet with a small balance on it for daily payments. This way even if your mobile phone breaks or gets stolen you’re not risking a lot of money.

So I hope you’ve enjoyed today’s lesson of Bitcoin Whiteboard Tuesday and I can’t wait to see you in our next video. If you still have any questions or comments on the video feel free to leave them in the comment section below and I’ll see you…in a bit.

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98 Comments on "What is a Bitcoin Wallet – Bitcoin Whiteboard Tuesday"

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Bill Wilson
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Bill Wilson
Ok, so I’m new and an idiot at this, but I need help – I’m up and running on Coinbase. I learned how to move BTC to Binance to buy other cryptos. I learned that I can avoid Coinbase’s exhorbitant fees by using GDAX. What I CANNOT get into my head, after all this reading, is the wallet issue. Do I need to get, or should I, a separate one from wherever Coinbase and Binance are keeping my money, or just leave it there? And if the former what would someone recommend, and then how do I use my own… Read more »
Jim
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Jim

At https://www.cryptopia.co.nz/Exchange/?market=ABY_BTC the coin ABY price under BTC and LTC is 0.00000160, but on the DOGE its 2.87642451 a giant difference?
How could this be possible?

Steven Hay
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Steven Hay
Hey Jim, Well, it’s simple. The ABY/BTC price is 0.00000147 BTC, the ABY/LTC price is 0.00010464 and the ABY/DOGE price is 2.61904756. This is because Bitcoin is worth $16,843, Litecoin is worth $255 and Doge is worth $0.011. ABY’s current price in USD is $0.024168. (These figures were accurate at the time of writing) So in other words, one can buy an ABY for very little Bitcoin because Bitcoin is worth a lot. One can buy an ABY for some LTC because Litecoin’s worth a fair amount. And because Doge is worth about 1/3 of ABY, so it costs nearly… Read more »
Jim
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Jim

HI, I got wallet from my bank and not sure if I should consider it a web service wallet and not secure but only for small amounts. Also, applications like Ledger Wallet Bitcoin, how do I know if they are secure apps or fraud? I mean do we just download the apps that interact with a hardware wallet directly from the exchange we are buying from or is there a trusted list? Thanks

Jim
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Jim
HI, I got a Wallet from my bank and not certain which category it fits into. (1) should I consider it like a Web service, or like it is totally secure to save my bitcoins on if I can save them there? Review: I pay with my wallet and can pay directly to the buyer thru exchange and get an address. I am not certain if I save my coins in my bank wallet, save them to the web service, or offline hardware then send thru exchange to address? (2) Also, if I save to hardware like the app Ledger… Read more »
Steven Hay
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Steven Hay
Hi Jim, OK, I’ve never heard of a bank which offers a Bitcoin wallet. It’s more usual for a Bitcoin exchange or similar service to offer you a wallet. Please check that it is indeed a Bitcoin wallet which your bank has given you. 1) Until I know which bank it is and which wallet they gave you, I can’t comment on its safety. I’m not too clear on the rest of your question… Could you please rephrase it. Your coins will be saved in whichever address you send them to. This address will be controlled by a particular wallet…… Read more »
Jim
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Jim

Steve, I have a PNC bank wallet.The girl didn’t seem too knowledgable but she said she though I could buy Bitcoins. I got the impression that web service was something like Coinbase etc., and that they had their own software not the open source Ledger and Trezor and if they did was it secure.

Steven Hay
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Steven Hay
Hey Jim, OK, I see now, it seems you’re referring to this PNC bank facility: https://www.pnc.com/en/personal-banking/banking/checking/virtual-wallet.html which is known as a “virtual wallet” (but is, I think, just a bank account linked to an app). MY confusion came from the fact that the software or hardware device used for storing Bitcoin is also known as a wallet… I thought you were talking about a bank account which also let you store Bitcoin, which is still a long time away (probably!). Anyway, I get it now. I believe you can use that account to BUY Bitcoin, yes. However, you may run… Read more »
Jim
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Jim

So I should get a webservice wallet or harddrive storage to save the coins I buy correct?

Steven Hay
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Steven Hay

Hi Jim,

That’s right, yes. We usually recommend downloading a personal wallet to your own hard drive. This is safer than trusting a web service with the storage of your coins. I recommend that you take time to understand the basics of how the wallet functions, the documentation is a good start. Remember to make secure backups of your private key or seed phrase!

Bruno
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Bruno

Hi, Good videos, although, why you didn’t touch the subject on which wallets can be used for specific coins. I’m new to this and it’s rather confusing… I read somewhere exodus is one of the better wallets available. I download it and seems that substratum (which i’m Interested in) is not supported. Thanks for your help

Steven Hay
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Steven Hay
Hi Bruno, While there are some multiwallets which support a variety of altcoins – and while the 2 main hardware wallets which we recommend both support around 10 coins – there are currently over 1300+ altcoins out there. It’s simply not possible for multi or hardware wallet devs to address so many coins. The fact is, it’s the job of every altcoin developer to release their own functional and tested wallets. Some do better than others at this job, but just about every official altcoin website will provide links to download wallets for major operating systems. These are the wallets… Read more »
Michael
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Michael
O.K., so. I’m old and not getting this whole concept. Just WTF IS a crypto currency? Can I sell it/them for cash? Or am I just buying something that will NEVER be an actual currency used to purchase goods and services? Everything I read about this concept just talks about security and gobbledy gook that has no application to the real world… folks claim having bought Bitcoin @ $30 U.S. way back when and now “own” millions of dollars worth of the stuff, but WHAT CAN THEY DO WITH IT? Other than brag about having a high score on a… Read more »
Steven Hay
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Steven Hay
Hi Michael, Cryptocurrency is a broad and deep subject and it takes a while to get your head around it. It’s not easily compared to regular forms of money and it involves some pretty advanced computer science, networking, cryptography and other fields. I’d say the best and easiest way to get a good working knowledge of crypto is to follow our daily video series. If you sign up for it, you’ll get a new video emailed to you each day which will walk you through the basics in a logical sequence. Here’s the link for it (it’s free): Subscribe to… Read more »
Mike
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Mike

Hi, I cannot sign up with a co.uk address – says not a valid email. Don’t you like Brits?

Julie
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Julie
Hello. I am not tech savvy at all and am 70 and a female idealist. I am aghast by federal banks being privately owned and just how wealth (eg Rothschilds) were initiated and instigated to form the wealth generators, the social and industrial military giants of centuries ago to the monoliths and oligarchs of ‘today’. So, I would like to know just how one first buys Bitcoin? How expensive is it? Do i have to provide my bank account details? Just what is the cost to me to start buying Bitcoin and to maintain a small practice in using it,… Read more »
Steven Hay
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Steven Hay
Hi Julie, I think a lot of early adopters got into Bitcoin for similar reasons. Many were libertarians with knowledge of the financial system who wished to opt out, and support something more honest. However, there aren’t any shortcuts. The truth is that Bitcoin is pretty complicated, especially if you’re not familiar with computing, networks, cryptography and the like. It’s best to take it slow and “eat the elephant one bite at a time.” I suggest signing up for our explainer video in the Need Help? section on the right side of the menu bar. That’s a good, easy to… Read more »
kyle
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kyle
Thanks for the video. I have a few questions about secret keys. First, let’s say I have 3 bitcoins. Do I have three private keys? Second, then let’s say I pay someone an amount that comes to 2% of a bitcoin. Does the 2% that is being transferred to the other person get it’s own private key? How does this transfer of the 2% happen, or how is this new private key generated so that the purchaser knows the key but the seller doesn’t? Obviously, you don’t just give someone your private key, because that would give them your whole… Read more »
Alex
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Alex

Nice video about the type of wallets but how do I use the wallet? I got a ledger Nano S and have no idea how to use it to buy coins (I have configured it and have the 24 words but websites that i looked at don’t have an option “connect your hardwhere wallet”…

Steven Hay
Member
Member
Steven Hay

Hi Alex,

The Ledger wallet is just for storing, receiving and sending coins. You can’t directly use it to buy coins. Instead you must buy or earn coins which are sent to a receiving address associated with the wallet. To buy bitcoins, check out our Buy Bitcoin or Buying Guides sections.