Editor’s Note: Forbes Advisor may earn a commission on sales made through affiliate links on this page, but this does not affect the opinions or ratings of our editors.
Even if Bitcoin only exists digitally, you still have to keep it somewhere, regardless of whether you want to buy goods or services with it today or invest in the long term.
This is the reason why you need to use a bitcoin wallet when buying bitcoin. Fortunately, crypto wallets generally work the same way physical bills do – they keep up with your cryptocurrencies and store the information that proves possession of any tokens you hold in them.
What is a Bitcoin Wallet?
“A Bitcoin wallet (and any crypto wallet) is a digital wallet that stores the encryption material that enables access to a public Bitcoin address and enables transactions,” said Alexandre Kech, CEO of Onchain Custodian, a digital custody service Financial assets. Bitcoin wallets not only contain your digital coins, but also secure them with a unique private key that ensures that only you and anyone you give the code to can open your Bitcoin wallet. Think of it like a password for an online bank account.
With a crypto wallet you can store, send and receive various coins and tokens. Some only support basic transactions, while others include additional features, such as integrated access to blockchain-based decentralized applications, commonly known as dapps. These can, among other things, allow you to borrow your cryptocurrency to earn interest on your holdings.
How does a Bitcoin wallet work?
Because Bitcoin is on a secure digital ledger called. is working blockchain, using a Bitcoin wallet is not as easy as opening a leather flap. Because of this, it can be helpful to think of a bitcoin wallet like email, says Sarah Shtylman, fintech and blockchain advisor at Perkins Coie.
To send an email, you’ll need to log into your account with your password, enter a recipient’s address, and then click Send. To send Bitcoin, you also need your encoded key, essentially your password, to access your cryptocurrency. You will then need the Bitcoin wallet address of your intended recipient, similar to an email address, in order to send him the cryptocurrency.
“In the Bitcoin network, the public address is an identifier that points to a specific ledger entry (i.e. a bitcoin credit) on the blockchain, and the private key enables its owner to make changes to the associated ledger entry (i.e., to transfer the bitcoin to another address), “says Shtylman.
It is important that you keep an eye on the key of your Bitcoin wallet. If someone else has it, they can hack into your wallet and send it to their own wallet. And if you lose your key, you can lose access to your cryptocurrency. That’s because many cryptocurrency wallets are decentralized and cryptographically secured, which means there is no central customer support number that you can call to prove your possession, identity and reset your password. An estimated 20% of all billions of dollars worth of bitcoins currently in circulation are lost in digital wallets that users do not have access to.
Types of Bitcoin Wallets
As with physical wallets, Bitcoin wallets come in a number of styles, each offering a compromise between convenient access and security against theft.
Cell phone, mobile phone
Mobile wallets like Mycelium and Edge are those that run as apps on phones, tablets, and other mobile devices. “The transaction is easy as funds can be sent to other wallet addresses represented by QR codes,” notes Adrian Przelozny, CEO of Independent Reserve, an Asia and Pacific crypto exchange. “While they’re great for portability and convenience, they’re also the least secure.” Not only can the crypto wallet itself be hacked, but if someone steals your device, they could take your coins with them too.
Web-based wallets such as Coinbase and Blockchain.com store your coins via an online third-party provider. You can access your coins and conduct transactions from any device that can be connected to the internet. These web-based wallets are often used with. connected Crypto exchanges which allow you to trade and store crypto in one place.
While web-based wallets are convenient, they still have many of the same risks as mobile wallets, namely that they can be hacked because they are connected to the internet. While this is rare, and stolen funds have generally been replenished by insurance, you may not want to take this risk with your money. Additionally, there have been times when the exchanges closed and people lost the coins in their web wallets.
Desktop wallets like Atomic Wallet, Electrum, and Exodus are programs that you can download onto a computer to store coins on your hard drive. This adds an extra layer of security over web and mobile apps as you don’t rely on third party services to hold your coins. However, hacks are possible because your computer is connected to the internet.
Hardware wallets are physical devices like a USB drive that are not connected to the internet. In order to carry out transactions, you must first connect the hardware wallet to the internet, either via the wallet itself or via another device with an internet connection. Usually another password is required to establish the connection, which increases security, but also increases the risk of being able to lock yourself out of your crypto if you lose the password.
Hardware-based crypto wallets are also known as cold storage or cold wallets. (In contrast, wallets that are connected to the Internet are called “hot wallets”.)
“Hardware wallets make transactions more cumbersome because users have to connect their device to the Internet in order to sign an outbound transaction,” says Przelozny. “As such, they are useful for those who invest long-term and are careful about keeping their coins on an exchange.”
In a paper wallet, you print out your key, usually a QR code, on a paper document. This makes it impossible for a hacker to access the password online and steal it, but then you have to protect the physical document. “Paper wallets are rarely used anymore because they are likely to pose the greatest risk of destruction, loss or theft of the private key,” notes Kech.
What to consider when choosing a Bitcoin wallet
Choosing the best crypto wallet for you can be a tedious process, so here are some things to keep in mind when evaluating your options.
You are not tied to a particular type forever; You can have multiple bitcoin wallets. They combine the best features of each, such as: For example, keeping a small amount in a mobile wallet for transactions while keeping the majority of your inventory in a more secure hardware wallet.
1. Think about how you want to use crypto
“Usually the trade-off is between safety and speed. In other words, security versus comfort, ”says Przelozny. For someone who trades and spends a lot of tokens, the best crypto wallet may be a more convenient mobile or web option connected directly to an exchange, while someone who holds a lot of crypto as a long-term investment may be better off to use a cold store wallet.
Keep in mind, however, that every time you remove crypto from the exchange and the wallet you bought it on, you may have to pay a withdrawal fee to move it to your wallet of choice.
2. Research the reputation of a wallet
Generally, when you buy cryptocurrency you are not tied to any particular brand or type of wallet. Take the time to read reviews about user experience, additional features, and of course, security. Be careful if a wallet has ever been hacked and avoid those that have experienced serious security breaches in the past.
3. Look for wallet backup options
Some wallets allow you to secure your data using another method, either online or on a physical device. This way, if your computer or mobile device crashes, you can regain access to your coins. If you plan to own a lot of crypto, you can prioritize wallets that can be used to thoroughly secure your data.
4. Pay attention to the key management
Different wallets have different settings for who is responsible for managing private keys, which has a big impact on you, notes Shtylman. For some wallets, the wallet’s service provider manages the wallet keys. This means that if you lose your key by contacting them, you may be able to regain access.
However, other wallets are completely user-dependent. Even the manufacturer may not know the private key that secures the wallet. In these cases, you may not be able to access a wallet whose key you have lost.
If you have concerns about being locked out of your Bitcoin wallet, you can focus on the providers who hold your key. However, if you address the lack of centrality of crypto, you can opt for a crypto wallet that gives you complete control over your key – and therefore your coins as well.