Bitcoin Wallets: What are they and how do they work?

Decided to buy Bitcoin? Then, inevitably, you’re going to need to get involved with a Bitcoin wallet. This is because the wallet is a tool that allows you to make transfers and store your coins as securely as possible.

However, as we transition from the physical world, where we use leather wallets, to the digital world where wallets are software, things can get a bit confusing, and we might feel a bit lost on the subject. But don’t worry! With that in mind, we’ve put together a comprehensive article with everything you need to know to fully understand bitcoin wallets.

Check it out and don’t forget to share it with your friends!

What is a Bitcoin wallet?

A Bitcoin wallet is software that can run on your PC or mobile device and is used to send, receive, and store bitcoin and digital assets.

These software tools are completely focused on security. After all, they are responsible for storing access to bitcoin balances, so they use cryptographic technology.

Think of a bitcoin wallet like a bank account, through which you can access the products and services of your financial institution. However, unlike bank accounts, where the bank holds onto your money, most encrypted wallets allow you to keep full control over your funds. That is, without intermediaries!

What types of wallets are available?

Now that you know what a bitcoin wallet is, it’s important to understand that there are two types of wallets, hot wallets and cold wallets.

Hot Wallets

Hot wallets are known for always being connected to the internet, so we can include desktop and mobile wallets here.

Cold Wallets

On the other hand, cold wallets are wallets that remain offline, like hardware wallets and paper wallets.

The most recommended for those who want to invest and store Bitcoin for the long term are hardware wallets.

How do wallets work?

They basically work like this:

When you start setting up a wallet, the first thing that happens is the creation of the seed, which are those 12 or 24 words. From this, a private key and a public key are generated.

Private Key

The private key serves to ‘unlock’ the wallet owner’s right to spend the associated bitcoin.

As the name suggests, it’s private and you shouldn’t show it to other people, because with your private key, anyone could transfer or move your balance pretending to be you.

Public Key

The public key, on the other hand, is the wallet address and since it’s public, you can share it with anyone without worry.

A single wallet can have several Bitcoin wallets, each with its own private and public key, as well as multiple addresses.

What is a bitcoin wallet used for?

The main uses of a bitcoin wallet are:

• Keeping Bitcoin and digital assets secure;
• Receiving Bitcoin from external wallets;
• Sending Bitcoin to other addresses;
• Paying for products and services at merchants using bitcoin directly from your wallet;
• Some wallets allow operations such as buying and selling directly from the app.

Is the Bitcoin stored inside the wallet?

Here’s the answer to one of the biggest questions when we talk about bitcoin storage.

Many people think that the coins are stored inside a wallet, but in reality, that’s not exactly the case.

What happens is that the wallet only stores and protects your private keys, which give access to your bitcoin balance on the blockchain, and that’s why they continue to fluctuate in price according to market variations.

What is a seed?

Even more important than understanding private keys is knowing what a seed is.

Essentially, a seed is those 12 or 24 words, in other words, it’s your wallet’s recovery password.

The seed represents your “master access key” transformed into simple, easy-to-remember words.

If you lose access to the wallet, device, or mobile phone where you installed it, you can use these words to back it up on another device and recover all your accounts, addresses, and balances.

Do you see now why we always emphasize that the seed is the most important thing in your life?

Because anyone with your seed in hand can access your balance and steal from you without even needing your mobile phone or device. And if by chance you lose these recovery words, you’ll lose the possibility of backing up your wallet.

Unfortunately, this is how about 20% of the mined bitcoins have already been lost.

Custodial wallets vs non-custodial wallets

Now that you understand what Bitcoin wallets are, you see that their operation is basically this. However, there’s an exception.

There are wallets that do not have the 12 or 24 words, so they do not give you control and custody of your Bitcoin, which is why they are called custodial wallets.

Custodial Wallets

Custodial wallets store your private keys under the custody of the service provider company. In other words, they have control and access over your funds. Exchanges are an example of custodial wallets. Notice that when you open an account with a brokerage, you don’t note down the 12 or 24 words.

That’s why there’s so much talk about choosing a secure brokerage, because by leaving your coins with the brokerage, you have to trust them, trust that they’re managing your funds properly, without the risk of losing your assets due to fraud, bankruptcy, or hacker attacks.

Non-Custodial Wallets

On the other hand, non-custodial wallets offer full control over your private keys and your funds, which is why they show the seed during setup.

One characteristic of this type of wallet is that you can configure the transaction fees, either to speed up or to reduce costs. In this case, you become the only person responsible for your funds. So, if you lose your passwords, there’s no one to complain to.

However, this gives you full control over your finances. Nobody can touch your Bitcoin, because only you will have the passwords that provide access to it.

Why shouldn’t you leave your Bitcoin in the exchange?

With bitcoin, you can withdraw your coins to your own wallet, just like you do with your paper money where you go to the bank and withdraw what’s in your account. When you withdraw from the bank account, the money is in your possession and no longer with the banking company.

Bitcoin exchanges also allow this withdrawal. Not only is it permitted, but it is also recommended.

There’s a saying among bitcoiners: “not your keys, not your coins“, meaning, without your keys, you have no coins.

Therefore, if you don’t have the private keys, you don’t possess your coins. Going back to the bank example, if the money is in your bank account, you’re a creditor of the bank. Therefore, the money isn’t yours; it’s in the possession of the financial institution.

The culture of ‘not your keys not your coins‘ became strong in 2013 when the largest exchange at the time, Mt Gox, was hacked.

The scammers managed to steal 740,000 bitcoins from customers and 100,000 BTC from the company. At the time, it was about $460 million.

After this event, the culture of not leaving your digital assets on the exchange strengthened, and each person sought to learn and take better care of their own keys.

This is the most sovereign and independent way to store your bitcoin or any valuable asset.

Therefore, when you have possession of your coins, only you have access and can move your Satoshis.

Does custodizing Bitcoin yourself carry risks?

The same fear that many people have about leaving their bitcoin on the exchange because they believe it could be hacked should also be considered when you custodize your own bitcoin.

The risk of losing access to your satoshis due to carelessness exists. Many people have had problems because they didn’t take good care of their keys, lost them somewhere, didn’t write them down properly, the dog ate them, threw them away, and so on.

But the fact is that if you’ve started buying Bitcoin, learning to custodize it yourself is part of the game.

Having your own cold wallet to custody your coins is part of every Bitcoin investor’s journey, and from the moment you enter with the mentality of accumulating for the long term, you need to include this acquisition in your plans.

Safety is key when we talk about wallets, but it’s not just on the developers’ side of these applications that things get tricky. Therefore, you also have to take care of their security to ensure your funds are protected as they deserve.

Recommendations

Write down the seed words and store them in a safe place. Make several copies and store them in different places. Don’t save them on your computer, because if a virus enters or you get robbed, the seeds go along.

Create strong passwords with uppercase and lowercase letters, dots, and numbers. Update your wallet regularly to the latest version, so you protect your device or app from security vulnerabilities. Activate advanced security options such as PINs, biometrics, 2-FA, and multisig.

When is the best time to invest in a cold wallet?

If your goal is to hodl, do it with the greatest autonomy and security possible.

The moment you decide to accumulate Bitcoin for the long term, you need to plan the purchase of a cold wallet.

It doesn’t matter how much you’ve already bought, whether it was 100 dollars or more, regardless of the amount you have, you should have custody of your coins. Besides, these 100 dollars may seem small today, but in the future, they could be worth a lot.

How to choose a wallet to store your bitcoin?

Today, there are various hardware device options for you to choose from, so here are some tips to help you make this decision:

Security:

The security of your funds should be your priority. Look to see if the wallet has advanced security features such as 2-FA, multisig, and biometrics.

You should also check if the solution is a hot or cold wallet and whether you are the one who controls the private keys.

User Experience:

While some don’t mind complex applications, others prefer Bitcoin wallets with clean interfaces that offer users an easy experience.

Take a look to see if the wallet you want is easy to use, as this will greatly facilitate your life.

Reputation:

To ensure the safety of your funds, research who the wallet developers are, how long it’s been around, and what user reviews say.

Privacy:

This is very important! That’s because there are wallets where you don’t need to send your documents, you don’t need to do the KYC or know your customer.

No data, more privacy!

Your financial sovereignty is very important

We’ve spent a lifetime accustomed to leaving our money in the custody of third parties like banking companies. But now, Bitcoin brings us back to the possibility of being 100% in control of our money.

I hope I’ve helped you understand the importance of storing your Bitcoin with you and clarified your ideas about this.

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