Bitcoin Wallets for Beginners: Everything You Need to Know

Why you need a Bitcoin wallet

Bitcoin, unlike most traditional currencies, is a digital currency. Thus, the approach to this kind of currency is completely different, particularly when it comes to acquiring and storing it. As Bitcoins don’t exist in any physical shape or form, they can’t technically be stored anywhere. Instead, it’s the private keys used to access your public Bitcoin address and sign for transactions that need to be securely stored. A combination of the recipient’s public key and your private key is what makes a Bitcoin transaction possible.

There are several different forms of Bitcoin wallet, catering for different requirements and varying in terms of safety and security, convenience, accessibility and so on.

Types of wallets

Paper

A paper wallet is essentially a document which contains a public address that can be used to receive Bitcoins and a private key, which allows you to spend or transfer Bitcoins stored at that address. Those are often printed in a form of QR-codes so that you can quickly scan them and add the keys to a software wallet to make a transaction. A paper wallet can be generated using services like BitAddress or Bitcoinpaperwallet that allow users to create a completely random Bitcoin address and a private key to it. The generated document can then be printed, with some services offering a tamper-resistant design or even an option of ordering holographic labels, and it is ready for use.

The main advantage of a paper wallet is that the keys are not stored digitally anywhere, which makes it completely immune to hacker attacks, malware that can log the user’s keystrokes and basically any form of digital theft. However, some precautions when creating a wallet still need to be taken. Obviously, before generating a paper wallet you need to make sure that no one is watching you do it. To rule out the risk of any spyware monitoring your activities, it is recommended to use a clean operating system, such as Ubuntu, running from a USB flash drive or DVD. Furthermore, once the paper wallet is set up, the website code should be able to run offline, which allows you to disconnect from the Internet before actually generating the keys. Finally, use a printer that is not connected to a network.

Moreover, it’s important to understand that you are printing valuable private information on a piece of paper. So, you need to take certain measures to protect that piece of paper. For instance, it is recommended to keep it in a sealed plastic bag to protect it from water, damp and general wear and tear. Some people prefer laminating it and storing it in a safe, a deposit box or entrusting it with a solicitor.

Physical Bitcoin

Physical Bitcoin is usually pre-loaded with a fixed amount of BTC, and the intention is that its value cannot be spent as long as the private key remains hidden. This is normally achieved through implementation of a tamper-evident seal.

The first of its kind, Bitbill was shaped like a credit card, but most alternatives that followed were shaped as a round medal. Mike Cadwell, a cryptocurrency enthusiast nicknamed ‘Casascius’ created the first of the popular Casascius physical Bitcoins in 2011. Private keys were hidden under a peelable hologram, when removed it left a tamper-evident pattern. When redeemed, the coin lost its digital worth. Since then, there have been several new coin manufacturers.

Physical Bitcoins are a very convenient way of storing your funds more safely and can be extremely useful when trading offline. On top of that, they’ve recently become a prized collector’s item. The main disadvantage, however, is a serious one. In November of 2013, Mike Cadwell was asked to cease operations by the Financial Crimes Enforcement Network, as his work was considered a money transmitter. The regulations for this activity were unbearable, so he was forced to stop the sales of items containing digital Bitcoins. As BTC is still a legal grey area in a lot of countries, such items might even be considered counterfeit money by authorities.

Mobile

For those actively using Bitcoins on a daily basis, paying for goods in shops or trading them face-to-face, a mobile BTC wallet is an essential tool. It runs as an app on your smartphone, storing your private keys and allowing you to pay for things directly from your phone. Moreover, some apps enable users to use their smartphones’ near-field communication feature, which means they can simply tap their phone against the reader, without having to provide any information at all.

Any full Bitcoin client requires access to the entire Blockchain ledger, which is constantly growing and requires several gigabytes of storage. Hence why, mobile wallets take advantage of simplified payment verification (SPV) technology. They only work with very small subsets of the Blockchain, relying on trusted nodes in the Bitcoin network to ensure that they have the correct information.

Despite being a convenient on-the-go solution for Bitcoin storage, mobile wallets are very prone to hacker attacks. Moreover, you can lose control of your wallet if someone simply gains access to your mobile device. There’s a big variety of Bitcoin wallet apps for devices running on Android. Apple banned Bitcoin wallets from the AppStore in February 2014, but reversed its decision several months later.

Web

Web wallets store your private keys on a server of a company providing such services. The server is constantly online and is controlled by someone else. Different services offer different features, with some of them linking to mobile and desktop wallets, replicating your addresses across the devices you own.

Much like mobile wallets, e-wallets enable their users to access their funds on-the-go from any device connected to the Internet. But unless implemented correctly, the organizations running the website might gain access to your private keys, thus getting total control of your funds. Moreover, some e-wallets are operating on the base of exchanges, and there have been instances of exchanges shutting down and running away with their users’ funds.

Desktop

Desktop wallets are downloaded and installed on your computer, storing your private keys on your hard drive. By definition, they are more secure than online and mobile wallets, as they don’t rely on third parties for their data and are harder to steal. They are still connected to the Internet, which makes them inherently insecure. However, desktop wallets are a great solution for those trading small amount of Bitcoin from their computers.

There is a variety of different options of desktop wallets that cater for different needs. Some focus on security, some on anonymity and so on.

Hardware

A hardware wallet is a rather unique type of Bitcoin wallet that stores the user’s private keys in a secure hardware device. It is the most secure way of storing any amount of Bitcoins, there have been no verifiable incidents of money being stolen from a hardware wallet. Unlike paper wallets, which must be imported to software at some point, hardware wallets can be used securely and interactively. Moreover, they are immune to computer viruses, the funds stored cannot be transferred out of the device in plaintext and in most instances their software is open source.

Some hardware wallets even have screens, which add another layer of security, as they can be used to verify and display important wallet details. For instance, a screen can be used to generate a recovery phrase and to confirm the amount and address of the payment you wish to make. So, as long as you invest in an authentic device made by a trustworthy and competent manufacturer with a good reputation, your funds will be safe and secure.

Bank

Rainer Michael Preiss, an executive director at Taurus Wealth Advisors, has recently stated that all large US banks are most probably afraid of Blockchain, Bitcoin and other cryptocurrencies. He also mentioned, that given the uncertainty from banking’s lack of transparency, cryptocurrencies can present investors with a viable alternative (CNBC). Indeed, the vast majority of banks do not accept Bitcoin as a currency, some of them even refuse to manage funds obtained through operations with cryptocurrency.

In the light of banks’ reluctance to accept Bitcoin as a viable currency, a Bitcoin Crypto Bank was recently established. First of its kind, it is a privately owned company operating on the Bitcoin trade market. They accept and manage Bitcoin deposits, stating that they know the market through and through. On their website they claim to be a no-risk, secure and certified platform for investment, with high chances of making huge profits.

Bitcoin wallets and security

Possible problems

• Catching malware. Malicious software can scan your disk and find your private keys. Seconds later, all your Bitcoins can be gone.
• A trojan can encrypt all the files on your hard drive. Afterwards, it might find all links to your wallets, realize how much money you own and demand that exact amount of Bitcoins to decrypt your hard drive.
• A virtual exchange can run away with your money.
• You can lose your laptop or your phone with your wallets installed on them.

Pieces of advice

• Avoid using any kinds of wallets that require Internet connection; use cold storage options instead.
• Always be cautious and double-check everything. For instance, you could receive an email made to look like it’s from BlockWallet, but it is actually from BlokcWallet. If you authorize it, your Bitcoins will disappear immediately.

cointelegraph.com