In simple terms, a Bitcoin wallet – or, generally, a cryptocurrency wallet – is a tool used to store your public and private keys which, in turn, can be used to send and receive cryptocurrencies.
Bitcoin is a virtual currency, meaning that you can’t simply get your tokens and store them in your pocket – you must have your own wallet.
How does a Bitcoin wallet work?
Unlike physical wallets, Bitcoin wallets do not have any actual assets stored on them, but they can generate the information necessary to send and receive cryptocurrencies via blockchain transactions. In order to complete any transaction, you need two keys, private and public, and both these things are what your wallet consists of.
Firstly, let’s explain the terms. A private key is a random sequence of numbers and letters and is used to manage cryptocurrencies.
It is related to your Bitcoin wallet address and public key mathematically, but there is no need to worry as strong encryption makes it impossible to reverse hashing used to generate them.
It is essential to store your private key in a safe place or device since if you lose it there is no way to recover it. No private key, no access to your crypts.
A public key is a single-use string of letters and numbers and is derived from your private key, but it is used only to receive Bitcoins and identify both sender and receiver.
You can also use the International Payment Gateways which are accepting cryptocurrencies, as nowadays many payment gateways are started accepting cryptocurrencies.
So, what does the actual transaction look like? As was mentioned before, Bitcoins – and all other cryptocurrencies – do not exist physically, they are records of transactions that are stored in a blockchain, and a wallet interacts with the blockchain to manage cryptocurrencies.
In order to transfer your crypts, you need to provide matching keys – by entering your private key you prove that you are the owner of specific cryptocurrencies and can transfer them further to another person by using their public key.
Bitcoin wallet types
Obviously, there is more than one method of storing cryptocurrencies, and neither of them is perfect.
Choosing the one wallet that suits your needs might be a difficult task, so now we will outline the three major categories of wallets.
- Paper Bitcoin wallet
A paper cryptocurrency wallet, also called a cold wallet, is basically an offline method of storing crypts. To put it simply, it is a printed piece of paper with your keys or QR codes on it.
This method used to be highly popular as it was seen as the most secure way of storing Bitcoins. Printed keys cannot be hacked; however, paper wallets are now starting to be seen as outdated as it is easy to lose or destroy a single piece of paper accidentally.
Ink can fade or get blurred, it can be damaged by water or fire, the paper can get stolen or simply taken a photo of – there are so many risks that as new security measures are being developed people tend to switch to more modern methods.
- Hardware Bitcoin wallet
This kind of wallet uses an actual device that safely stores your keys inside of it. As computers and all types of online storage can be hacked into, having a hardware wallet for your cryptocurrencies is much more secure.
Moreover, most of these wallets require an additional PIN to be accessed, increasing the security of this method even further.
Of course, there are risks of the device being destroyed, and the software used to create the wallet can have bugs that might lead to exploitation of your keys.
- Online Bitcoin wallet
Using an online wallet (also called a hot wallet) to store your cryptocurrencies surely is convenient, but it is also the riskiest method.
It can be easily accessed by a device connected to the Internet, such as a mobile phone or a computer, and ensures quickens and simplifies the entire process, but it has to be remembered that since online wallets are, well, online, they can be hacked – the site you are using might get attacked or your device can be infected by malicious software that can steal your keys.
