What Are Bitcoin Wallets? (Every Type of Wallet Explained)

Even though Bitcoin only exists digitally, you still have to keep it somewhere whether you’re buying goods or services with it today or investing it for the long term.

That’s why when you start buying Bitcoin, you’ll need to begin using a crypto wallet.

Luckily, crypto wallets usually work just like physical wallets and they keep up with your cryptos and store the information proving ownership of any tokens you hold in it.

What Is a Bitcoin Wallet?

A Bitcoin wallet (and any crypto wallet, for that matter) is a digital wallet that stores cryptocurrency.

It’s a digital wallet, so you can’t use one at the grocery store. A digital wallet allows you to store, send and receive different cryptocurrencies.

Some just support basic transactions while others include additional features, like built-in access to blockchain-based decentralized applications, commonly referred to as dapps.

Among other things, these may allow you to loan out your cryptocurrencies to earn interest on your holdings.

How Does a Bitcoin Wallet Work?

The best way to think about Bitcoin wallets is like email. They represent your private keys to the Bitcoin blockchain. In other words, they’re how you control your money.

Your Bitcoin wallet stores a set of secret numbers, or private keys, corresponding to your blockchain address book. The most basic form of securing your cryptocurrency wallet is to keep the private keys to your wallet offline.

This means keeping a backup with you or storing it on a hardware device such as a USB thumb drive. It is also important to make sure that the keys are stored on a secure place and not written down somewhere.

It’s because a lot of cryptocurrency wallets are decentralized and cryptographically secured, meaning there’s no centralized customer support number for you to call to prove your ownership and identity and reset your password.

A total of about 20 percent of all Bitcoin circulating right now, worth billions of dollars, is lost in digital wallets that users can’t access.

Types of Bitcoin Wallets

A tradeoff between convenient access and security against theft is offered by the different styles of Bitcoin wallets.

1. Mobile Bitcoin Wallets

Mobile wallets aren’t the best for security. They are more convenient, but because you have to input your secret seed (the same password that you use to access your hardware wallet) into the mobile wallet, it’s the least secure way to store crypto.

With a mobile wallet, if someone steals your mobile device, they may be able to steal all your bitcoin.

2. Web-Based Bitcoin Wallets

You can store your coins in a web-based wallet through an online third party. The most common web-based wallets are Coinbase, Webull, and Robinhood.

You can use any device that allows you to connect to the internet to gain access to your coins and make transactions.

Most of the time, these web-based wallets are associated with the same exchanges that allow you to trade and store all of your money in one place.

Because they are connected to the internet, web-based wallets can be hacked, which is the same risk as a mobile wallet.

You may not want to take this risk with your money, even though this is a rare occurrence and stolen funds have generally been reloaded through insurance.

There have been times when exchanges have shut down, and people have lost their coins in their web wallet. 

3. Desktop Bitcoin Wallets

Bitcoin desktop wallets are applications you can download to your computer to keep your bitcoins safe.

This adds an extra layer of security compared to web or mobile apps because you aren’t depending on third party services to hold your bitcoins.

Still, hackers can still get in if they manage to install some malware on your computer, which is possible since your computer is still connected to the Internet.

Many desktop wallet applications encrypt your coins, requiring a password to view them. If you keep your password somewhere completely offline and not connected to your computer, this adds an air gap, a key cybersecurity principle used to keep information safe.

Some of the most popular desktop wallets include Atomic Wallet, Electrum and Exodus.

4. Hardware Bitcoin Wallets

A hardware wallet is a physical device that is not connected to the internet.

To make transactions, you need to connect the hardware wallet to the internet, either through the wallet itself or through another device with internet access.

One of the benefits of having another password is that it increases the security of the connection, but also raises the risk that you will lose the password if you misplace it.

Hardware wallets are designed to make transacting coins more cumbersome.

Users have to connect their device to the internet to make transactions.

This makes them useful for those who want to hold onto their coins for a long time and are wary about leaving them on an exchange.

5. Paper Bitcoin Wallets

In a paper wallet, you print out your private key on paper and store that paper securely. Then you need to keep the paper secure, and if it’s lost, the bitcoins are gone forever.

Paper wallets are rarely used anymore, as they probably pose the highest risk of getting lost, destroyed or stolen.

6. Hot Storage Bitcoin Wallets

A hot storage wallet is one that is directly connected to the internet, such as a phone app, a desktop software program, or an online provider.

All of these services are free, but since they are connected to the internet, they are still vulnerable to online theft.

The truth is that exchanges and digital wallet providers seem to be getting better at preventing the theft of cryptocurrencies, but it’s always a rare possibility.

Despite the growing popularity of cryptocurrencies, there was a decrease in their theft in 2020, according to a study. Just like your wallet in your pocket, always remember that the digital cash in your digital wallet is the target for would-be thieves.

It is important to keep it safe. Cold storage or cold wallet is a type of hardware-based and paper-based bitcoin wallet.

Do You Need a Wallet?

You don’t have to keep your coins in cold storage or download a hot wallet program for your computer to store your bitcoins, some people leave their cryptocurrencies on the exchange instead.

People store their bitcoins on an exchange like CoinBase because they don’t fully understand the technical aspects of bitcoin and don’t feel confident using a hardware or desktop wallet.

Is it okay to keep your bitcoin in the exchange?

If you don’t have a good understanding of public and private keys, hot and cold storage, and other security topics, then it’s okay to leave your coins on the exchange until you learn how to use a wallet.

The goal is to eventually move your bitcoin onto your own form of storage such as a desktop or hardware wallet.

Hot wallets are just as secure as your bank account. They generally have the same security measures, and also often have insurance to back up their security in case of an attack.

But the tradeoff is that you have less control over your own cryptocurrency than you would if you used a cold wallet.

How Secure are Crypto Exchanges?

Exchanges like Coinbase and Robinhood have taken steps to protect their clients’ assets, and as they continue to grow in popularity, more and more of the best exchanges are adopting these standards.

Your cryptocurrency isn’t protected by any regulatory body like cash in a bank is, but in addition to security measures, many reputable exchanges offer insurance coverage on crypto holdings and even use cold storage methods themselves.

In the event your crypto was stolen by hackers or the exchange failed, that’s another added protection for your investment.

This incident shows the risk any online trading platform can carry — just like traditional financial institutions.

This is why it should be your goal to put your bitcoin onto a cold wallet solution such as a desktop wallet or a hardware wallet once you understand the technicalities of it.

What to Consider When Picking a Bitcoin Wallet

Buying the best Bitcoin wallet for you isn’t easy. You should weigh your needs and choose the best one for your situation.

Every solution has a trade-off. Using an exchange is easy, can be accessed anywhere, but lacks the security of a desktop wallet. Desktop wallets can be inconvenient if you plan on making purchases regularly.

You can combine several features to get the best possible solution, such as keeping a small amount of coins in a mobile wallet and keeping the bulk in a more secure wallet.

1. Think About How You Plan on Using Bitcoin

For those who often trade and spend cryptocurrency, you should use a mobile app or web wallet that is connected directly to an exchange, like Coinbase.

This allows you to buy and sell quickly and easily without having to wait for approval from the exchange, which may be more inconvenient than the more secure cold storage option.

But remember, whenever you move funds off of an exchange and into your wallet, you may have to pay a withdrawal fee.

2. Choose a Reputable Wallet

It doesn’t matter which cryptocurrency wallet you choose to buy your first coins – you’re not tied to any one brand or type.

Read reviews, watch video tutorials and check out the best wallet apps for your needs.

If an exchange or wallet solution has been hacked in the past, it’s may be a good idea to avoid that solution in future since security is such an important factor in picking a wallet. 

3. Research Wallet Backup Options

There are two ways you can back up your wallet; either online or on a physical device.

This means that if your computer or mobile device crashes, you can still access your coins. And for people who plan on buying a lot of crypto, backing up your wallet is a priority.

If you want to back up your coins on a physical device, there are some wallets that allow that. If you plan on owning a lot of coins, you may want to look for a wallet that will allow you to back up your data.

4. Pay Attention to Key Management

With some wallets, your private key is stored at the company. You may be able to regain access to your wallet if you lose your private key.

Some wallets, however, are entirely in your hands. If you store your coins on a desktop or hardware wallet, there is no 3rd party company that knows the private key for your wallet, so you will be unable to regain access if you lose your keys.

If you’re concerned about losing access to your Bitcoin, you may focus on those crypto wallets that retain custody of your private key.

However, if the lack of centrality of crypto is what appeals to you, you may choose a crypto wallet that lets you keep complete control of your private key, and, by extension, your bitcoins.

Do I Need a Bitcoin Wallet to Trade Bitcoin?

Yes. In order to purchase bitcoin or other cryptocurrencies, you must first get a wallet address, which will give you access to the digital currency.

Some exchanges offer cryptocurrency wallets, and most of the wallets are protected with a password and other security features, like two-factor authentication for added security.

Leave a Comment