Bitcoin wallets are where private keys for bitcoins are stored.
Your crypto wallet can be digital or on paper, either way, they should always be backed up in different locations. There are five main types of wallets that are currently being used: desktop, mobile, web, paper, and hardware.
Bitcoin Core, or other bitcoin clients have desktop wallets that you may already be using. These services send transactions to the network, and let you create a bitcoin address for sending and receiving bitcoin, and storing its private keys.
Other desktop wallets include MultiBit, which runs on Windows, Mac OSX, and Linux. Hive is an OS X-based wallet with features like an app store that connects directly to bitcoin services. Other desktop wallets have enhanced security, such as one called Armory. DarkWallet has plug-ins for services like coin ‘mixing,’ where users’ coins are exchanged for others’ to prevent people from tracking them.
Armory is the most complete, feature packed Bitcoin wallet, however it can be technologically intimidating for beginners. Whether you are an individual storing $1,000 or institution storing $1,000,000,000, this is the most secure option available. Users are in complete control of all Bitcoin private keys and can setup a secure offline-signing process in Armory.
Bitcoin Core is the “official” Bitcoin client and wallet, though it isn’t used by many due to slow speeds and a lack of features. Bitcoin Core, however, is a full node, meaning it helps verify and transmit other Bitcoin transactions across the network and stores a copy of the entire blockchain. This offers better privacy since Core doesn’t have to rely on data from external servers or other peers on the network. Bitcoin Core routed through Tor is considered one of the best ways to use Bitcoin privately.
Electrum may be the most popular desktop wallet, due to its speed and ease of use. Electrum can also be used as cold storage if you have an extra computer that can be used offline. Electrum also offers other features like connecting through Tor, multisignature wallets, integration with hardware wallets, and more.
> Read more on Hardware Wallets in a previous article
Running as an app on your smartphone, mobile wallets can store private keys for your bitcoin addresses, and let you pay for items using your smartphone. Some mobile wallets will use your smartphone’s near-field communication (NFC) feature, to pay for items using a reader at a retailer.
It’s important to remember that mobile wallets are not full bitcoin clients. A full bitcoin client has to download the entire bitcoin blockchain, which can include multiple gigabytes and is always changing, so be aware that could mean high data fees from your mobile service provider. Many phones don’t even have enough memory to store that amount of data.
For that reason, mobile clients are often designed for simplified payment verification (SPV), this way a small subset of a blockchain is downloaded, and trusted nodes in the bitcoin network are used to make sure the correct information is used.
Mobile wallets include Android-based Bitcoin wallet, Mycelium, Xapo, and Blockchain (which keeps your bitcoin keys encrypted on your phone, and backed up on a web-based server).
Coinbase had its mobile wallet app pulled from the Apple app store in November 2013, and this was followed in February 2014 by removal of Blockchain’s iOS app. However, in July 2014, bitcoin wallet apps began to reappear on the iOS store, and now all of the major bitcoin wallet providers have released new editions of their previous apps.
Other mobile wallets are browser-based CoinPunk, and Aegis Bitcoin Wallet, which supports Android smartwatches.
Web-based wallets store your private keys online, on a computer controlled by someone else and connected to the Internet. Several online services like this are available, and some of them link to mobile and desktop wallets, replicating your addresses between all of your devices.
One advantage of web-based wallets is that you can access them from anywhere, regardless of which device you are using. However, they also have one major disadvantage because unless they are used correctly, they can put the organization running the website in charge of your private keys, taking your bitcoins out of your control.
Coinbase, is an integrated wallet/bitcoin exchange which operates its online wallet worldwide for users in the U.S. and Europe.
Circle, offers users worldwide the chance to store, send, receive, and buy bitcoins. Currently only U.S. citizens are able to link bank accounts to deposit funds, but credit and debit cards are also an option for users in other countries.
Blockchain, also hosts a popular web-based wallet, and Strongcoin offers what it calls a hybrid wallet, which lets you encrypt your private address keys before sending them to its servers – and encryption is through browser.
Xapo, provides the convenience of a simple bitcoin wallet with the added security of a cold-storage vault.
Hardware wallets — dedicated devices that can hold private keys electronically and facilitate payments — are currently limited.
A smartcard based hardware wallet. Private keys are generated and signed offline in the smartcard’s secure environment and the Nano is setup using the Ledger Chrome Application. A random 24-word seed is generated upon setup and backed up offline by writing it down on a piece of paper. In case of theft, damage or loss, the entire wallet can be recreated with the seed. A user selected PIN is also assigned to the device to protect against physical theft or hacking.
Trezor hardware wallet
This is targeted at bitcoiners who want a substantial stash of coins, but do not want to rely on third-party bitcoin storage services or impractical paper storage.
Ledger USB wallet
This compact wallet uses smartcard security and is available for a reasonable price.
One of the most popular and cheapest options for keeping your bitcoins safe is using a paper wallet and there are several sites offering paper bitcoin wallet services. These will generate a bitcoin address for you and create an image containing two QR codes: one is the public address that you can use to receive bitcoins; the other is the private key, which you can use to spend bitcoins stored at that address.
A paper wallet is useful because private keys are not stored digitally, and are not subject to standard cyber-attacks or hardware failures.
Paper wallets were the standard method of cold storage before hardware wallets were built. The main problem with paper wallets is that they are inconvenient to create. However, it’s possible to bulk print paper wallets to save time and eliminate address reuse.
Hot wallets are Bitcoin wallets used on internet-connected devices like phones, computers, or tablets, which means there is always a risk of theft. You shouldn’t store any significant amount of bitcoins in a hot wallet, just as you would not walk around with your savings account as cash.
If only used with small amounts, hot wallets should be used for your everyday Bitcoin needs. One may, for example, want to keep $200 worth of bitcoins in a hot wallet for spending, with $10,000 in cold storage.
Safety of bitcoin wallets
Private keys stored in your wallet are the only way to access the transaction data stored in a bitcoin address. That means if you lose the address, you lose your bitcoins. That means they are only safe as long as no one can access them, and they don’t get lost.
Are bitcoin wallets anonymous?
A bitcoin is anonymous but it is also transparent and trackable. Features such as merge avoidance, stealth addresses, and coin mixing have been implemented to help combat this.
The alpha version of Dark Wallet – a crowdfunded bitcoin wallet – went live in May 2014. Created by Amir Taaki and Cody Wilson, Dark Wallet was designed to provide new tools for financial privacy, including coin mixing and stealth wallet addresses. Wallets and services like Dark Wallet mean greater anonymity for bitcoin.
How can I secure my wallet?
Using a strong password makes it difficult to access your wallet, but not impossible because if your computer is compromised by malware, thieves could log your keystrokes to find your password.
Back it up
If private keys are stored in only one wallet, if you lose that, you will lose your keys. Backing up your wallet makes a copy of your private keys, but it’s important to backup your whole wallet because some addresses that are used to store change from transactions may not show up as the default view.
Multi-signature addresses allow more than one person access to an address with a public key. That means that when someone wants to spend bitcoins, they need another person to sign their transaction. The required number of signatures is agreed at the start when people create the address. Since multiple signatures are needed before funds can be spent, the additional signatures could come from a business partner, your significant other, or a second device which you own, to add a second factor to spending your coins.
Armory has a Lockbox feature that requires any amount of up to seven co-signers to approve shared transactions. A Lockbox is created by one party who adds public keys as co-signers. Armory’s fragmented backups is another useful feature. Instead of requiring multiple signatures for each transaction, fragmented backups require multiple signatures only for backups. A fragmented backup splits your Armory backup into multiple pieces, which decreases the risk of physical theft of your wallet. Without a fragmented backup, discovery of your backup would allow for immediate theft. With fragmented backup, multiple backup locations would need to be accessed.
Take it offline
If you don’t want to store your bitcoins digitally, you can use ‘cold storage.’ These wallets store private bitcoin keys offline, so that they can’t be stolen by someone else on the Internet. You may want to keep the majority in cold storage and transfer just a small amount to separate bitcoin addresses, ready to spend. That way, even if your mobile phone is lost, or the hot wallet on your notebook or PC is erased during a hard drive crash, only a small amount of bitcoin cash will be at risk.
Control your private keys
Services like Coinbase and Circle offer “Bitcoin wallets”, but it’s best to use a wallet where you control your private keys. This is the only way to have full control of your funds and not have to rely on third parties for security. Customers private keys are held by these third party services, meaning users don’t really have control of their money.
Protect your privacy
Each time you request blockchain data from a wallet, the server may view your IP address and connect it to the address data requested. Each wallet handles data requests differently. If privacy is important to you, use a wallet that downloads the whole blockchain like Bitcoin Core or Armory. Tor can be used with other wallets to shield your IP address, but this doesn’t prevent a server from tying a group of addresses to one identity. For more information, check out the Open Bitcoin Privacy Project for wallet rankings based on privacy.
Don’t reuse addresses
Most Bitcoin wallets automatically create a new address for each transaction. Since all Bitcoin transactions are public, reusing addresses makes it easier for others to group transactions and understand which payments are connected to the same identity.
Use different wallets for different amounts of money
You may want to use secure wallets like paper wallets or hardware wallets for “savings” wallets, with mobile, web, and desktop wallets treated like your spending wallet.