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Bitcoin Wallets Guide for Beginners

Bitcoin Wallets Guide for Beginners

You’ve probably heard of Bitcoin Wallets by now, but although newbies to cryptocurrency may understand that a wallet holds or store your crypto, in the article below we answer the most important questions when choosing which type is best to secure your investments.

What is a Bitcoin Wallet?

A Bitcoin wallet is where you store your funds. You can think of it like a bank account that can be completely owned and controlled by you and not the bank. In concept, it is very similar to a traditional wallet in your back pocket but in digital format.

Bitcoin wallets come in various formats and designs but generally all provide the same functions of sending, receiving and storing your money. However, each format has its own different levels of security.

There are various ways you can run a wallet, some people use exchanges which have secure wallet facilities over the internet others keep them on their own hardware. They come in all different shapes and sizes so what is the difference and which is best for you? And why do you even need one?

Coinbase Logo Blue

Coinbase is a popular choice for new entrants to crypto to buy their Bitcoin and store it, however you’ll want to use a hardware wallet which will keep your cryptocurrency extra safe. 

Why Do You Need a Bitcoin Wallet?

Without a wallet in some shape or form, you will not be able to use Bitcoin. To simply receive Bitcoin from someone you will need a receiving address for the transaction to be processed on the blockchain. To put it simply, if someone wants to give you Bitcoin they need somewhere to send it.

Of course, to send Bitcoin you will need to own some funds which will be stored in a wallet. Many Bitcoin exchanges or easy buy companies will provide you with a wallet as a part of their service – one such example is Coinbase where you can buy Bitcoin and then store it in the wallet provided.

However, this isn’t totally secure as you are at the mercy of their security systems. While Coinbase may have great security, it’s not worth taking the risk after the infamous hacks to exchanges such as Mt Gox and Bitfinex.

What are Public and Private Keys?

As mentioned above, your private key is the single most important thing about Bitcoin and your wallet stores the key. It is literally a long set of letters and numbers that only you should be able to access.

The public key is available for everyone to see and is publically accessible on the blockchain which is a digital ledger.

The two keys make up a cryptographic encryption that can only be read by the holder of both pieces of the code. The private and public keys are mathematically fated to each other. One cannot function without the other.

The code also creates a digital signature. In terms of Bitcoin it allows the sender and receiver to confirm where the transaction has come from and that it has not been modified.

With these cryptographical methods it ensures that only the owner of their private key can send their Bitcoins. Likewise, only the receiver can access the funds that now correspond to his or her private and public keys.

The Two Main Categories of Bitcoin Wallets: Hot Wallets and Cold Storage

We have mentioned the various formats you might find a Bitcoin wallet but there are only two major factors to consider. That is a hot wallet and a cold wallet.

Hot wallets are online wallets that tend to be more active, ready to send and trade Bitcoins. Hot wallets are generally found on trading exchange platforms (such as Coinbase, Local Bitcoins or Poloniex) where users need to move funds in and out of the wallet quickly. The added functionality comes with higher security risks and it is unwise to store large amounts in a hot wallet for extended periods of time. This is because your private key will be sitting online. Despite, security methods and strong passwords it is still susceptible to hackers finding a way into your online account.

You wouldn’t want anyone to access your online banking and, the same applies to Bitcoin if not more so. Funds can be removed from a wallet anonymously and there will be no bank to reimburse your losses.

Cold storage wallets, such as the Ledger Nano S and TREZOR, are seen as the most secure way to store your funds. Having your keys stored offline completely stops any hackers finding their way to your private keys. You can keep a hardware wallet similar to a USB stick or a paper wallet somewhere safe until you need to make a transaction. This limits the time you connect a wallet to the internet and even requires you to authorise a transaction via a button on the hardware wallet. This does make it a little more tricky to use your Bitcoin, you will still be able to send money to another wallet but you may need another hot wallet to trade on an exchange.

Handily, any wallet hot or cold can always receive Bitcoins whether it is online, offline or tucked away in your sock drawer.

The Ledger Nano S is another of the most popular Bitcoin Hardware Wallets on the market.

The 4 Main Types of Bitcoin Wallets

Cold Storage – Hardware Wallet (Low Risk)

Hardware wallets tend to provide a neat solution that sits on the side of security. The two biggest companies in this market are currently Ledger and TREZOR. Hardware wallets can be used for your personal accounts and many large Bitcoin companies store the bulk of their funds on offline servers. There is quite a nice balance to be struck with a hardware wallet. You can store your private keys on a device similar to a USB stick and sleep easy at night knowing it’s completely untouchable.

To use your Bitcoin you can simply plug it into a computer and make a transaction. You do of course need to physically have the wallet with you to make a transaction but then so does a hacker!

Pros:

  • Very secure.
  • Wallet is only online when manually connected.
  • Transactions must be authorized in person, providing added security.

Cons:

  • Wallet must be in your possession to use.
  • You’ll need to utilise a hot wallet if you’re going to be for trading.

 

Cold Storage – Paper Wallet (Low Risk)

Paper wallets are the super secure option that never ever go online because it is literally a piece of paper. They are great for storing a lot of funds for a long time. There’s no way for a hacker to get to your private keys through the internet.

However,  functionality suffers dramatically as it is tricky to use the Bitcoins. The wallet has a one time use and while you can always receive Bitcoins to a paper wallet, funds must be deposited all at once. Plus, you might want to keep it in a fireproof box. It’s kind of like keeping stacks of cash under your mattress.

Pros:

  • Completely unhackable and you can still receive Bitcoins.

Cons:

  • Low functionality.
  • You can’t send bits of Bitcoins as you must deposit full amount to use.

 

Hot Wallet – Online Storage (Higher risk)

Online hot wallets are the super functional option. They make trading Bitcoins easy and are usually found on trading exchange websites. They are seen as a risky way to hold funds for long periods of time. Your private keys are always online which is what the hackers want. They will have ample time to get into your account.

You may also find that you lose control of private keys to the company who is hosting the wallet. Bitcoin is all about taking back control and removing the need to trust 3rd parties. Many hot wallets are actually controlled by the companies, not the user.

Pros:

  • Increased functionality.
  • Particularly good for regular low fee trading.

Cons:

  • Most insecure way to store funds.
  • You rely on trusting a 3rd party others for security.

Hot wallet – Via Software (Higher risk)

Software wallets can provide a nice middle ground for people who do not feel the need to go full cold storage. This wallet option allows you to run software on your computer that holds the data. You can send and receive from the wallet while remaining in control of your private keys. Sounds like a pretty good system. There is still a security risk if a hacker finds a way into your computer so maybe watch closely what you are downloading. You could expose your wallet every time you are online.

Pros:

  • You control private keys while running transactions directly from your computer.

Cons:

  • Increased security risks as. Hackers look to gain access to the software via your computer.
TREZOR Pin User Interface

The TREZOR is another market leader and one of the best rated Bitcoin wallets.

Which is the Best Bitcoin Wallet?

Many people have more than one wallet option. Your needs may change as you acquire more Bitcoin and as it becomes more popular. It might all sound a bit daunting if you’re just starting out.

First-Time Buyers

If you’re just new to crypto you might want to start with a neat all in one solution. Companies like Coinbase and Xapo make it easy to buy coins directly from them and deposit into their ready-made wallets. It’s simple and straightforward plus they are known to store client funds offline until you need to use them. The only problem is that they control your private keys so they rely on a trustworthy reputation.

Those with More than a Just Budding Interest in Bitcoin and Crypto

More experienced users who want to combine functionality with security should look at hardware wallets like Ledger Nano S or TREZOR. They are the industry leaders and make the transition almost painless. Their price point at under $120/£100 /E90 makes them incredibly popular and the ability to store multiple cryptocurrencies on one secure device is a big selling point.

Traders and Large Investors

Traders might want to go one step further with the Ledger Blue hardware wallet. The big brother to the Ledger Nano S. The Blue is a bigger device that includes a touch screen for ease of use. Life is slicker and there is more memory to store a large portfolio of cryptocurrencies.

Summary

Bitcoin wallets are an integral part to the functionality of Bitcoin and cryptocurrencies as a whole. They are simply a place to store your funds. Just like traditional fiat currency, it can be stored with another provider or stuffed under your bed.

The major bonus is having a wallet which you can fully control. Having the data on your own software or hardware effectively turns means you are your own bank. Sending and receiving funds on a truly peer-to-peer basis with no middle man.

After all, isn’t that what cryptocurrency is meant to be about?

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Neal

Neal

Interested and invested in Bitcoin since 2016. Sports trader and matched bettor since 2014. Loves the new, developing financial world. This is our second chance.


Tags assigned to this article:
bitcoin walletshardware walletsledgerTREZOR

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