Even though Bitcoin only exists digitally, you’ve got to keep it somewhere, whether you’re hoping to use it to buy goods or services today or invest it for the long term.
You’ll also need to begin using a Bitcoin wallet when you start buying Bitcoin. Luckily, crypto wallets generally work like physical billfolds—they keep up with your cryptocurrencies and store the information proving ownership of any tokens you hold.
What Is a Bitcoin Wallet?
A Bitcoin wallet is a digital wallet that can hold Bitcoin and other cryptocurrencies, like Ethereum or Ripple (XRP).
“A Bitcoin wallet (and any crypto wallet, for that matter) is a digital wallet storing the encryption material giving access to a Bitcoin public address and enabling transactions,” says Alexandre Kech, CEO of Onchain Custodian, a custody service for digital assets. Bitcoin wallets hold digital coins and secure them with a unique private key that ensures that only you and anyone you give the code can open your Bitcoin wallet. Think of it like a password on an online bank account.
With a crypto wallet, you can store, send and receive different coins and tokens. Some support basic transactions, while others include additional features, like built-in access to blockchain-based decentralized applications commonly known as Dapps. These may allow you to loan out your cryptocurrency to earn interest on your holdings.
How Does a Bitcoin Wallet Work?
Because Bitcoin operates on a secure digital ledger called blockchain, using a Bitcoin wallet isn’t as simple as opening a leather flap. For that reason, it may be helpful to think of a Bitcoin wallet like email, says Sarah Shtylman, fintech and blockchain counsel with Perkins Coie.
To send an email, you must use your password to log into your account, input a recipient’s address, and then hit send. To send Bitcoin, you need your coded key, essentially your password, to access your cryptocurrency. You then need your intended recipient’s Bitcoin wallet address, similar to an email address, to send the cryptocurrency to them.
“On the Bitcoin network, the public address is an identifier that points to a particular ledger entry (i.e., a Bitcoin balance) on the blockchain, and the private key is what enables its holder to make changes to the associated ledger entry (i.e., to transfer the Bitcoin to a different address),” says Shtylman.
You must keep track of your Bitcoin wallet’s key. If someone else has it, they can hack into your wallet and send it to their wallet. And, if you lose your key, you could lose access to your cryptocurrency. That’s because many cryptocurrency wallets are decentralized and cryptographically secured, meaning there’s no central customer support number to call to prove your ownership and identity and reset your password. An estimated 20% of all Bitcoin in circulation, worth billions of dollars, is lost in digital wallets that users can’t access.
Types of Bitcoin Wallets
As with physical wallets, Bitcoin wallets come in various styles, each offering a tradeoff between convenient access and security against theft.
Mobile
Mobile wallets, like Mycelium and Edge, run as apps on phones, tablets, and other mobile devices. “Transacting is easy as funds can be sent to other wallet addresses represented by QR codes,” notes Adrian Przelozny, CEO of Independent Reserve, a crypto exchange in Asia and the Pacific. “While they are great for portability and convenience, they are also the least secure.” Not only can the crypto wallet get hacked, but if someone steals your device, they could also take your coins.
Web
Web-based wallets, like Coinbase and Blockchain.com, store your coins through an online third party. You can access your coins and make transactions through any device that lets you connect to the internet. These web-based wallets are frequently associated with crypto exchanges that allow you to trade and store crypto in one place.
While convenient, web-based wallets still hold many of the same risks as mobile wallets: because they’re connected to the internet, they can be hacked. Though this is rare and stolen funds have generally been replenished through insurance, you may not want to take this risk with your money. In addition, there have been times when exchanges have shut down, and people lost the coins in their web wallets.
Desktop
Desktop wallets, like Atomic Wallet, Electrum, and Exodus, are programs you can download onto a computer to store coins on your hard drive. This adds an extra layer of security versus web and mobile apps because you aren’t relying on third-party services to hold your cash. Still, hacks are possible because your computer is connected to the internet.
Hardware
Hardware wallets are physical devices, like a USB drive, that are not connected to the web. To make transactions, you first need to connect the hardware wallet to the internet through the wallet or another device with internet connectivity. There is typically another password involved to make the connection, which increases security but also raises the risk you may lock yourself out of your crypto if you lose the password.
Hardware-based crypto wallets are also known as cold storage or cold wallets. (Wallets connected to the internet, in contrast, are called “hot wallets.”)
“By design, hardware wallets make transacting more cumbersome as users must connect their device to the internet to sign an outgoing transaction,” says Przelozny. “As such, they are useful for investing long-term and wary about leaving their coins on an exchange.”
Paper Wallets
In a paper wallet, you print your key on a paper document, typically a QR code. This makes it impossible for a hacker to access and steal the password online, but you must protect the physical document. “Paper wallets are rarely used anymore as they probably pose the highest risk in terms of destruction, loss or theft of private key,” notes Kech.
What to Consider When Picking a Bitcoin Wallet
Picking the best crypto wallet for you can be arduous, so here’s what you should keep in mind as you evaluate your options.
You aren’t tied to any particular type forever; you can have multiple Bitcoin wallets. You combine the best features of each, such as keeping a small amount in a mobile wallet for transactions but maintaining the bulk of your holdings in a more secure hardware wallet.
1. Think About How You Plan on Using Crypto
“Usually, the tradeoff will come down to safety versus speed. In other words, security versus convenience,” says Przelozny. For someone who frequently trades and spends tokens, the best crypto wallet might be a more convenient mobile or web option connected directly to an exchange. In contrast, someone who holds a lot of crypto as a long-term investment may be better off using a cold storage wallet.
However, remember that any time you move crypto off the exchange and wallet you purchased it on, you may have to pay a withdrawal fee to move it into your wallet of choice.
2. Research a Wallet’s Reputation
When you buy cryptocurrency, you generally aren’t tethered to any one wallet brand or type. Take time to read reviews about user experience, extra features, and, of course, security. Pay attention if a wallet has ever been hacked, and avoid those that have faced severe breaches.
3. Research Wallet Backup Options
Some wallets allow you to back up your data using another method, either online or on a physical device. If your computer or mobile device crashes, you can regain access to your coins. If you plan on owning a lot of cryptos, you may prioritize wallets that allow you to back up your data thoroughly.
4. Pay Attention to Key Management
Wallets have different setups for who is in charge of maintaining private keys, which has significant implications for you, notes Shtylman. With some wallets, the wallet’s service provider manages the wallet keys. This means you may be able to regain access if you lose your key by contacting them.
Other wallets, however, are entirely reliant on the user. Even the manufacturer may not know the private key securing the wallet. In these cases, it may be impossible to regain access to a wallet whose key you lose.
If you’re concerned about getting locked out of your Bitcoin wallet, you may focus on those providers who retain custody of your key. However, if crypto’s lack of centrality appeals to you, you may opt for a crypto wallet where you have complete control of your key—and, by extension, your coins.
