Bitcoin offers a decentralized and secure way to transact globally, but having a trusted method to store and manage digital assets is crucial.
Bitcoin wallets provide the essential tools for keeping Bitcoin safe, making transactions, and tracking balances.
This guide covers the basics of Bitcoin wallets, their functionality, and the types available, helping you choose the best fit for managing your Bitcoin holdings.
What is a Bitcoin Wallet?
A Bitcoin wallet is an application or device that allows users to manage, store, and transact with Bitcoin. Setting up a Bitcoin wallet is the first step in engaging with this virtual currency.
Unlike traditional digital wallets like Apple Wallet or Google Wallet, which facilitate contactless payments through banks or credit cards, Bitcoin wallets operate on blockchain technology.
They act as personal interfaces to the Bitcoin network, similar to how online banking apps connect users to their bank accounts.
Bitcoin wallets come in many forms, each with unique features and security measures. Security is a top priority, as assets are vulnerable to various digital threats like scams, hacks, and malware attacks.
Ease of use is also important, especially for those new to Bitcoin. Selecting the right wallet type helps balance security and convenience, meeting individual needs for managing digital assets.
How Bitcoin Wallets Work
The core of Bitcoin’s cryptography relies on two keys: a public key and a private key. Each Bitcoin transaction requires a private key and a Bitcoin address derived from a public key.
- Bitcoin Address: A Bitcoin address is an alphanumeric identifier that can be shared to receive Bitcoin (BTC). It is a hashed, more user-friendly version of the public key and functions similarly to an account number on the blockchain. An example Bitcoin address might look like 1A1zP1eP5QGefi2DMPTfTL5SLmv7DivfNa.
- Public Key: The public key is a long string of characters generated from the private key using a one-way cryptographic function, making it nearly impossible to reverse-engineer. It is used as the basis for generating the Bitcoin address.
- Private Key: The private key is essentially the password of the wallet, allowing access and management of BTC funds. Private keys are generated from a seed phrase (a random set of words) and are used to sign transactions, proving authorization by the wallet owner.
When users wish to send BTC, they enter the recipient’s Bitcoin address and state the amount. The wallet signs the transaction using the private key and broadcasts it to the Bitcoin network, where it is verified and then added to the blockchain through the mining process.
For receiving Bitcoin, users provide their Bitcoin wallet’s receive address, similar to sharing an email address. Using a new Bitcoin address for each transaction is recommended for privacy, as addresses are visible on the blockchain.
Types of Bitcoin Wallets
Several types of Bitcoin wallets are available, each with unique features and functions. Users can opt for a single wallet or combine multiple types to handle various accounts securely.
Hot vs. Cold Wallets
- Hot Wallets: Hot wallets are online wallets that remain connected to the internet, often integrated with centralized exchanges. These wallets allow users to buy, sell, and trade Bitcoin quickly. Types of hot wallets include mobile, desktop, and web wallets. However, as they are online, they are more vulnerable to hacking, phishing, and malware attacks. Choosing a secure hot wallet from a reputable provider is essential.
- Cold Wallets: Cold wallets are offline wallets that remain disconnected from the internet except when signing transactions. Cold wallets are suitable for long-term storage of large Bitcoin holdings. Examples of cold wallets include hardware wallets, paper wallets, and offline software wallets installed on a permanently offline device. While cold wallets offer enhanced security, they are less convenient for frequent transactions as they require a connection to an online device for fund transfers.
Hardware vs. Software Wallets
- Hardware Wallets: Hardware wallets are physical devices that work offline, making them a form of cold wallet. They resemble USB drives and connect to a device via a USB port. Hardware wallets can be used with various software interfaces to manage digital assets. They offer a layer of security similar to two-factor authentication (2FA) by requiring physical confirmation for transactions. However, hardware wallets carry a risk of losing access to funds if the device is lost, stolen, or damaged.
- Software Wallets: Software wallets are applications that store Bitcoin private keys on a device, like a computer or mobile phone. They are convenient and can be accessed from any device with the wallet application installed. However, as most software wallets need an active internet connection, they are more susceptible to online threats. For example, macOS malware has been known to replace legitimate wallet applications with infected versions to steal private keys and seed phrases.
Other Types of Bitcoin Wallets
- Web Wallets: Web wallets can be accessed through browsers from any internet-connected device, making them convenient for quick transactions. However, they carry a higher risk of cyberattacks as they can be accessed remotely. Web wallets also require trust in the service provider to serve the correct code and keep assets secure.
- Desktop Wallets: Desktop wallets are applications installed on desktop or laptop computers. They are generally more secure than web wallets, as updates and changes usually require user approval. However, desktop wallets are still vulnerable to malware if the computer is compromised. Additionally, access may be limited to the device where the wallet is installed unless private key export options are available.
- Mobile Wallets: Mobile wallets are smartphone apps that facilitate on-the-go transactions. Some mobile wallets offer features like QR code scanning for easier transactions. However, they are exposed to online threats, and security relies on the smartphone’s safeguards. Mobile devices are also at risk of being lost, stolen, or damaged.
- Paper Wallets: Paper wallets are physical printouts of public and private keys, often including QR codes for easier scanning. They are completely offline, providing strong security. Users can store paper wallets in safes or deposit boxes for extra protection. However, paper wallets are troublesome for recurrent transactions and need vigilant. To avert theft, loss, or damage.
- Brain Wallets: Brain wallets involve remembering a seed phrase and passphrase, which generates the wallet’s private key. There is no physical or digital record, but losing the seed phrase results in losing access to funds. Brain wallets are useful in high-risk scenarios, like crossing borders where physical possessions may be seized. Similar to paper wallets, brain wallets still need a trusted wallet interface to make transactions.
Custodial vs. Non-Custodial Wallets
- Custodial Wallets: In custodial wallets, a third-party service, like a centralized exchange (CEX), holds the Bitcoin on behalf of the user. Custodial wallets are popular among beginners as they offer customer support and recovery mechanisms like password reset.
However, users don’t have full control over their funds, and there are downsides:- CEXs are frequent hacking targets, potentially leading to the loss of funds.
- If the CEX goes bankrupt, users may lose assets. For instance, the exchange Mt. Gox was hacked, leading to the loss of hundreds of thousands of BTC. Similarly, in 2024, Coinbase reported that assets held in custody could be claimed in bankruptcy proceedings. Celsius Network’s 2022 bankruptcy is another example, where customers are still awaiting repayments.
- CEXs must comply with regulations, including Know Your Customer (KYC) and Anti-Money Laundering (AML) laws, reducing transaction privacy.
- Non-Custodial Wallets: A non-custodial (self-custodial) wallet gives users full ownership of their Bitcoin. Unlike custodial wallets, which are managed by CEXs, non-custodial wallets prevent third parties from accessing, freezing, or controlling funds.
Advantages of non-custodial wallets include:- More privacy for transactions, as users avoid KYC processes.
- Reduced risk of losing funds due to CEX hacking, failure, or bankruptcy. However, the responsibility of securing the wallet falls entirely on the user.
Securing Your Bitcoin with Proton Wallet
Proton Wallet was designed to address the challenges of traditional finance by offering a self-custodial wallet with the benefits of software wallets. Proton Wallet employs end-to-end encryption, ensuring users have full control over their Bitcoin.
The wallet’s encryption keys and recovery seed phrase belong solely to the user, so if Proton ceased to exist, users would still have access to their Bitcoin.
Proton Wallet offers unique features that combine security and convenience, including mobile and web apps for accessing Bitcoin from any internet-connected device.
A standout feature is Bitcoin via Email, allowing users to send Bitcoin as easily as sending an email.
Proton Sentinel, the wallet’s advanced security program, uses AI and human expertise to detect and block malicious takeover attempts, protecting assets from cyberattacks.
By choosing Proton Wallet, users not only secure their digital assets but also support a mission toward a safer, more private internet.