What is a Bitcoin Wallet – Bitcoin Whiteboard Tuesday Episode #3

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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.

Ofir Beigel

Owner at 99 Coins ltd.
Blogger and owner of 99Bitcoins. I've been dealing with Bitcoin since the beginning of 2013 and it taught me a lesson in finance that I couldn't get anywhere else on the planet. I'm not a techie, I don't understand "Hashes" and "Protocols", I designed this website with people like myself in mind. My expertise is online marketing and I've dedicated a large portion of 99Bitcoins to Bitcoin marketing.

54 Comments

  1. hi is there a type of paper Wallet where by scanning its qr code will reveal its balance but without the risk of losing your bitcoin? i’m just curious because if it is possible then we can practically use this physical paper as form of payment isn’t it?

  2. Russell Wallace on

    Everybody seems to generalise the Exchange wallets as high risk as you are relying on a 3rd party. You say this is a typical newbie risk. The point is that newcomers to Bitcoin are more likely to screw up a privately operated wallet than they are to lose their coins on an Exchange. I just wish people would clarify this a bit more. I think there have been more people losing Bitcoins on hard drives, phones etc etc than what have lost money through an exchange. Please clarify the risks evenly.

    • Ofir Beigel on

      I see what you’re saying Russell. Perhaps we’re not clarifying enough the risks of losing the password to your wallet or your wallet’s backup. Point taken.

  3. I am thinking of using crypto-currency as an investment. Since the value of bitcoin has gone way too high I am thinking of buying ether instead and holding it for a few months to a year or two. For this would it be possible to store it in a bit coin wallet since I presume ethereum wallets are different and may be not as secure as bit coin hardware wallet or bit coin paper wallet ?

  4. Rob Kading on

    Thanks for the videos. Just a small typo here “Additionally, an HD wallet can many Bitcoin addresses from the same seed. All of the transaction”

  5. Hi,
    Good info, but incomplete.
    Can I, as an individual, set up a multi-sig account with separate keys? Nobody else will be involved, only myself. This would entertain the possibility of having a “double set” (or triple set, or etc) of keys, known only to me, that would require multiple signatures (all from me) to access the account. It seems like this would be a standard security measure for single persons or those who may have separate property interests.
    I will also state that my questions relating to other videos on this site (both questions from earlier tonight) have been deleted. So I ask with no expectation of any answer. I am losing faith in your site by the minute.
    ???
    Thanks,
    Henry.

    • Ofir Beigel on

      Yes you can Henry, and it will indeed be safer that way.
      Also, I’m not sure your questions were deleted since I go over all of the comments. My guess is that they just didn’t go through moderation yet.
      We approve each and every comment individually so it can take sometimes up to 24 hours.

      • Hi Ofir,
        My apologies. I wrote the questions and saw them online, but when I looked later they were gone. I checked several times. Today I see the answers. Perhaps I was too eager to understand how this all works. You have responded to all my posts. Thanks for your time and all of the info. Your site came recommended and I will recommend it in turn should anyone ask.
        Thanks again,
        Henry.

  6. Hello, your blog is very helpful

    I am thinking of buying an Antminer S9, will i need any software or hardward to run it such a laptop?

    How easy is it to convert bitcoin in cash.

    Thank you.

  7. Thanks so much for the insights I got from the video, pls I want to know if is good to invest in goldcoin cryptocurrency.as well as is good to invest in bitcoin.

  8. Benjamin Lewis on

    Usually how long does it take to verify documents and I’m only want a little amount that the documents page said was fine just not up to $10k/

    So sorry to come across like an a hole but a need the cash to pay for my wife’s broken leg

  9. Philip Sinclair on

    Hi Ofir

    Great lessons thank you very much for your insights.

    I started with bitcoins in 2014 but have not done much since and am just starting to re-track my steps and take this seriously, I got involved with an mlm scheme which has now dissolved, and created a wallet, but not sure where that wallet is.

    I used bitstamp as an exchange at the time to invest some money in bitcoin and still have some bitcoin placed in the account,, should I move this out an place it in a wallet? I also have a wallet and have the password and phrase to unlock the wallet but do not have an address for the wallet, where would I find this please?

    Once again thank you for the lessons and wonderful insights in to this fascinating subject and I look forward to more information.

    Regards

    Phil

    • Zsofia - 99Bitcoins support on

      Hi Philip, first of all, thanks for your feedback on the site and the lessons. Storing Bitcoins on an exchange is not very safe as these platforms are exposed to hacking attacks. In order to send Bitcoins, you will need both the private key and the public key (Bitcoin address) so try to find those. This article can be also useful for you: https://99bitcoins.com/bitcoin-private-key-safe-how-use/

  10. Great work you do mate,thankyou we all appriciate the advice. Iv just got my trezor thru and will get a new laptop later then start buying,i opened a coinbase wallet(,2 factor verify). Is that safe to keep for long term or should it go to trezor everytime i buy more? also got mylocal bitcoin wallet,if i buy from them isit best to move it to coinbase or can i put onto trezor immediately?also,lol,sorry, how many different wallets can trezor store? Im going to try to read anything youve written but im stuck with this at the moment. thankyou and keep up the good work. Very informative and all helps great

    • Zsofia - 99Bitcoins support on

      Hi Craig, thanks for the feedback! Regarding to your questions, it is always safer to keep your Bitcoins on the long term in a hardware wallet as exchanges like can be exposed to hacker’s attacks. But you also need coins on the exchange to trade with. Just decide how much you need for trading immidiately and keep the rest in the hardware wallet. You can manage multiple Bitcoin accounts with Trezor, you can read more about this here: https://doc.satoshilabs.com/trezor-user/advanced_features.html

  11. Hi, I got a week to get all this info and got a good surprise when I saw it all in a 13 min video, congratulation.. just fantastic!

    Just one question, If I have a multisg wallet in Bitcoin, can I transfer that wallet to a Armory wallet?

    • Zsofia - 99Bitcoins support on

      Hi Marcelo, thanks for the feedback, we are glad you find the video useful. Armory wallet is a multisig wallet, so you can certainly transfer the coins between that and another your Coinbase wallet.

  12. Julien Cohen on

    I am on a broker that have the 2 factor authentification included. The key is on my phone.
    If I lose my phone, do I totally lose access to the broker even if Iknow my account/password?

    • Ofir Beigel on

      Hey Julien,
      usually the exchanges have a process of verifying your identity if you loose your 2fa device. I suggest submitting this question to the specific exchange you want to work with.

      • I love your articles and I’m gradually learning.
        Just a few quick questions I’d like to sort out:

        1.) Do I have to create anything myself in terms of a private key or wallet or import an existing key/wallet into a hardware wallet? For instance, if I currently have coins on blockchain.info and I buy a Ledger or Trezor, do I just setup the Trezor and then send the coins to a new receive address that my Trezor provides me?

        2.) The 12 – 24 private phrase/seed – if my hardware wallet is lost, destroyed, or Trezor’s servers go down in a nuclear attack (drastic exaggeration for point), am I still able to retrieve my private key/wallet/bitcoins from knowing this phrase? Where does one go with this phrase to retrieve their bitcoin?

  13. Very useful & easy to understand information. But you said firstly, “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.” & then you said “Later on, if your wallet gets destroyed or stolen, you can enter these words in order to reconstruct the private key. ” when you were talking about HD wallets. I am confused. Please help.

    • Ofir Beigel on

      Hi Swanand, can you explain a bit more what confused you?
      These are 2 different types of wallets – one has a private key, the other has a seed phrase instead of a private key. Both private key or seed (depending on your wallet) can be used to recover your Bitcoins.

  14. Thanks for the courses and the cool website. Nice work!

    Regarding cold storage and hardware wallets, how often should one update the balances in the hard wallet and I assume during that process, the hard wallet becomes a desktop wallet for the duration of that on line update, right? Are there any special security software or dedicated firewall for that specific process? Or, does one fall back to the conventional Norton or McAfee home firewall protection?

    Thank you.
    US

  15. Hi, I want to start using Bitcoin and Bitcoin wallets. After extensive research I am completely lost in where to start. I want a wallet that gives the possibility to have multiple solutions at once. So, one where I can open a hot wallet, possibly a mobile one (and/or desktop wallet), but also provides the possibility to transfer my Bitcoins from this one to a more secure wallet. I would also like to have a debit or credit card (I don’t need an actual physical card). Where do I go to get all of this in one place?

    • Ofir Beigel on

      Hey,
      I don’t think there’s a one solution fits all, however I suggest trying to start with either Jaxx or Blockchain.info. If you’re really serious about storing coins then buy a hardware wallet. Personally I use a TREZOR for the large amounts and Blockchain.info for the small amounts. The debit card isn’t related to the wallet, it’s a different company. You can read my review about debit cards here: https://99bitcoins.com/bitcoin-debit-card-compared-reviewed/

  16. Mehmet Gumusay on

    Hello. I want to trade bitcoin to make extra money. I have a wallet on blockchain.info but I can’t sell my bitcoints nor buy them. There are many exchange websites (like cex.io). Do these websites have their own wallet system? Can I trust them and keep my bitcoins there? If I have a more secure cold wallets then I have to transfer in and out my bitcoins when I want to buy or sell. But this method will couse me a lot of transaction fees and lower my profit. Do you think I should afford the transaction fees for security or I should trust the exchange websites and keep my bitcoins there for convenience and higher profits.
    My target exchange amount = 0.5-1 BTC
    Payment method=credit card
    Currencies=Btc, Ether, litecoin, usd

    • Zsofia - 99Bitcoins support on

      Hi Mehmet, here is an article about exchange review, it shows you the pros and cons for each one of them: https://99bitcoins.com/how-to-buy-bitcoin-with-a-credit-card/ If you want to buy and sell Bitcoins frequently indeed keeping the coins on the exchange is cheaper due to the transactions fee but less secure. For long term it is definitely better to hold Bitcoins in a cold wallet.

  17. Love the videos.
    I recently started looking into cryptocurrency’s , and am very excited about the future of bitcoin and other currencies like it. One concern thou , is security and accessibility . From the video above it seems like most options except the hardware wallet can be hacked, cracked either with malware, spyware ,keyloggers ,virus , trojans.
    And we are not really sure if the key or file on the hardware wallet can be breached by some new virus/malware.

    In the future , I presume everyone will have access to internet, and as per first video these cryptocurency’s will most likely be the way to pay for stuff in country’s like “Kenya”. However I live in South Africa and currently our internet is not affordable, for every one, and definitely not reliable enough for us to start using bitcoin like a currency.

    So Bitcoin is indeed and investment, but how , do I get my bit coin value in a trad able currency without internet, keeping in mind that there are days , sometimes months, and for some never internet available.

    • Zsofia - 99Bitcoins support on

      Hi Kraai, thanks for your feedback. Indeed, currently Bitoin is very much dependent on internet, but I guess we all are in the Western countries.

  18. Great course lectures. EZ to understand. Q: is it true that bitcoin value can be manipulated by currency manipulators in much the same way as they can do for any fait currency?

  19. Thank you for these well done educational videos. Few questions:
    Could Bit Coin be effected in value the same way that national currency can be, by international events?
    What is to stop groups or countries for that matter from not recognizing bitCoin? Say for political or social reasons?

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