If you want to send and receive Bitcoin, you need a wallet. But how does the technology behind it work and what types of wallets are there? In this article we explain everything you need to know in a compact and beginner-friendly way and give practical tips for the first steps with your own wallet.
What is a Bitcoin (Crypto) Wallet?
If you start to be interested in Bitcoin, you will be confronted with the term Bitcoin Wallet early on . This is the digital wallet in which Bitcoin can be stored, received and sent.
Especially because there are a large number of different wallets, it is worthwhile to deal with them a little more intensively right from the start. Although the basic functions described are the same for every wallet, there are very big differences in terms of security and convenience.
Why do I need a Bitcoin wallet?
Bitcoin enables every user to be their own bank. Only those who have control over their wallet also have control over their Bitcoin deposits. It happens very often that large exchanges are robbed or defrauded.
If you have kept your Bitcoins in your own wallet and you know how to secure your wallet, then you are protected from such attacks. Therefore, a wallet is primarily the basis for interacting with the Bitcoin blockchain and, secondly, important for the self-protection of your own assets.
From a technical point of view, the bitcoins are not stored in the wallet. Instead, a wallet contains a secret key, similar to a password, to signal on the blockchain that you control a certain address.
Private Keys und Public Keys
And that brings us to the technical part. The key mentioned above is divided into two pairs that are always connected to each other. Namely the public key and the associated private key.
What is a public key?
As the name suggests, the public key is the key that is publicly known. It is the actual Bitcoin address to which Bitcoin can be sent or received. Therefore, public keys act as receiving addresses for Bitcoin.
A Bitcoin receiving address begins either with the number 1, 3 or the abbreviation bc1. The differences are explained by the respective address format, whereby all addresses are compatible with each other and Bitcoin can be sent and received between the different address formats. Here are three examples:
- Legacy Adresse: 1Mpf72Q2xwi1okJL1RCaQeVRPKDhEWRtXt
- Bech32 Adresse: bc1qar0srrr7xfkvy5l643lydnw9re59gtzzwf5mdq
- SegWit Address: 392PTfCzykHSyteg6umCCvbrofRSoJb96i
On the surface, it is an account number that anyone who knows it can send Bitcoin to. Unlike with bank data, however, when using a Bitcoin address, you are initially protected by the pseudonym of the address. It should be noted here that contrary to popular belief, you cannot automatically carry out anonymous transactions. This either requires a Bitcoin mixer or special software such as Wasabi.
What is a private key?
The private key is the counterpart to the public key. The two always exist as a couple. With the private key you can tell the Bitcoin network that you control a certain public key.
It is much longer than a PIN and is therefore incredibly difficult to guess. Thus, no one can accidentally gain control by trying to guess a key.
Here is an example of a private key:
A key pair is created for each receiving address and the wallet manages these pairs. A wallet stores this information in a certain way so that you don’t have to keep endless lists of key pairs. Depending on how this administrative work is technically solved, there are differences in the security and convenience of a wallet.
IMPORTANT: The private key is the centerpiece, be careful with it! If a stranger obtains this secret, he always has control over the corresponding assets on the associated public key.
Different types of Bitcoin wallets
In order to meet the different needs of the users, some variants have been established over time that best serve their purpose. In the end, the variants presented below have proven themselves for the respective application.
For most users, a hardware wallet is recommended because this is the safest option. Backing up the backups is very easy and because the private keys are stored on the device, you can be relatively sure that an attacker would have to overcome many hurdles in order to gain access to your own Bitcoin assets.
The Ledger Nano S is one of the most popular devices. If you are willing to spend a little more money, the Ledger Nano X even gives you the option to use your hardware wallet with your smartphone.
A hardware wallet therefore always needs a PC or smartphone as an interface. However, the transactions must be confirmed by pressing a button on the device. This physical separation ultimately ensures increased security.
Another advantage is that the manufacturers of the hardware wallets integrate all common crypto currencies into the wallet. Therefore, they are not only suitable for storing Bitcoin.
IMPORTANT: A hardware wallet should be purchased either from the manufacturer or an official reseller. Under no circumstances may such a wallet be preconfigured. The so-called seed must always be created by the buyer himself, otherwise third parties could have access to the bitcoins. If the parcel has been tampered with while it is being dispatched, extreme caution is also required. If in doubt, always contact the manufacturer directly.
A desktop wallet is software that is mostly used under the Windows, MacOS or Linux operating systems. For Bitcoin, the so-called Bitcoin Core Wallet is the reference software. Desktop wallets can have a very different range of functions and are suitable for both beginners and advanced users.
If you use such a wallet, you have to be careful that your own computer always remains virus-free. Otherwise the software could be attacked relatively easily. You also need a lot of storage space, because the Bitcoin blockchain has to be downloaded completely, depending on the selected wallet, and it is also getting bigger and bigger.
If you also want to use other crypto currencies, you can quickly get a few hundred gigabytes that you have to reserve for your wallets. Alternatively, you can also choose a desktop wallet, which instead connects to a manufacturer’s server. But then you synchronize the blockchain via this node, which means that you have to trust the operator. In return, you only need a few megabytes of hard disk space and syncronize faster if you haven’t opened the wallet for a while.
A smartphone wallet is the mobile version and here, too, various solutions are available. Most wallets in the mobile sector are thin clients, so they do not download a full copy of the blockchain, but communicate with appropriate servers in order to synchronize.
One of the few exceptions is the HTC Exodus , which has an extra memory card to start a mobile full node. Again, you have to think carefully about how to secure your wallet. In particular, a loss of the smartphone is relatively likely
In return, smartphone wallets are very convenient, especially because you can use them to scan QR codes very easily, which makes paying with Bitcoin a lot easier. Should crypto currencies ever find their way into cash register systems, then this should become the most common application alongside NFC.
In principle, an online wallet is always present if you trust a third party to manage your key pairs. This also includes the wallets of exchanges and brokers that are set up for their customers.
The disadvantage here is the lack of control by the user. This means that you have access with login, but not the private key. If the provider switches off the site or denies access, you have effectively locked yourself out.
However, in order to trade on the stock exchanges, its use is indispensable. It is therefore advisable to only store the amounts on such a wallet that are immediately needed there. However, long-term storage is not advisable.
A paper wallet is logically an offline variant and is suitable as so-called cold storage. Because it is no longer connected to a computer after creation, there is at least no attack vector here.
On the other hand, this piece of paper needs a lot of protection and attention. Once it is destroyed, the property is gone. A paper wallet can still be useful. Because there are also variants in which the data is engraved in metal to ensure greater durability.
This is what a paper wallet can look like. Left the public key, right the private key.
A particular problem always arises when creating such a wallet. Because the person who creates the key pair could make transactions later. Do you want to entrust such important information to a company? Even if you create the keys yourself, you always have to ask yourself whether the desired environment is really safe. In addition, there is the fact that it is very difficult to initiate transactions with a paper wallet.
Therefore, for most users, this form of wallet only remains a practical offline storage device.