Understanding Bitcoin Wallets

You need a place to store the Bitcoins you own. This is typically accomplished via the use of something called a Bitcoin wallet.

What a Bitcoin Wallet Does

Now, before we get any further, remember that Bitcoins are the virtual currency, so there’s nothing physical to store. In fact, you don’t even store the Bitcoins themselves; instead, you store the private keys used to secure individual Bitcoin transactions. So a Bitcoin wallet is a piece of computer software, a mobile app, or a web-based service that stores the private keys you need in order to access Bitcoin addresses and make further transactions.

Of course, most Bitcoin wallets do more than just store this cryptographic data. Depending on the wallet, you might be able to use it to receive Bitcoins from other owners, send your Bitcoins to other entities, or use your Bitcoins to pay for purchases at accepting merchants.

Transactions made from a Bitcoin wallet are typically peer-to-peer in nature, in that your wallet directly communicates with another wallet to make the transfer. When you’re transacting from your Bitcoin wallet, you don’t have to go through a Bitcoin exchange—although you can use a Bitcoin wallet to send Bitcoin to and from an exchange, if you like.

Types of Bitcoin Wallets

As noted, there are three types of Bitcoin wallets today:

  • Software walletsThese wallets are computer software applications that you install on your desktop or notebook PC. Most software wallets offer more features and functionality than other types of wallets and can be more secure—especially if you don’t always leave that PC connected to the Internet. Obviously, you can secure against loss by backing up your wallet to another device on a regular basis.
  • Mobile walletsThis type of wallet is actually an app that runs on your smartphone or tablet. Most mobile wallets let you not only store Bitcoin and make peer-to-peer transactions, but also use your phone to make payments to those bricks-and-mortar businesses that accept Bitcoin. Obviously, if your phone is stolen and your account hacked, your Bitcoin can be stolen, too.
  • Web walletsA web wallet is actually a web-based service that you access over the Internet via any web browser. Because all your data is stored in the cloud, not on your local PC, you’re protected if your computer crashes or gets stolen. However, you’re at the mercy of the wallet service; if they go down or go out of business, you could lose your Bitcoin.

It depends on how you manage your bitcoins. The private keys stored in your wallet are the only way to access the transaction data stored in a bitcoin address. If you lose them, you lose your bitcoins. So they are safe only insofar as no one else can access them and they don’t get lost.

Bitcoin Clients

Some Bitcoin software wallets require you to also be running a separate Bitcoin client application. A Bitcoin client is a software program that facilitates private key generation and security and enables you to send payments to other clients. Most wallets have this buying and selling functionality built in, but some outsource the functionality and thus require you to run a Bitcoin client alongside the wallet.

The original Bitcoin client—alternatively known as Bitcoin-Qt, the Bitcoin Core, or the Satoshi Client—should do the trick. You can download this Bitcoin client free from sourceforge.net/projects/bitcoin/files/Bitcoin/. You can also use this client to do Bitcoin trading independent of your wallet if you want.

Know, however, Bitcoin-Qt isn’t quite as user-friendly as some of the newer wallets, and certainly not as user-friendly as trading on Coinbase or similar exchanges. It is extremely versatile because it downloads the entire Bitcoin blockchain to your PC, and even lets you participate in Bitcoin mining if that’s your thing. For casual users, however, you’re better off with an easier-to-use solution, at least in my opinion.

Examining Different Types of Bitcoin Wallets

As noted, there are three primary types of Bitcoin wallets—software wallets that you install on your desktop or notebook PC, mobile wallets that are apps that run on your smartphone, and web wallets that you access over the Internet. Let’s look at some of the more popular wallets in each of these three categories.

Software Wallets

To use a software wallet, you must first download and install the wallet software on your computer. A software wallet is probably the most versatile of the three types of wallets, and maybe the easiest to use too. Most software wallets not only let you store your Bitcoin but also send and receive Bitcoin from and to your wallet.

When you use a software wallet, it’s advisable to keep your password secret (of course), but also to back up your wallet to an external device. This way if your primary wallet file gets deleted or your computer crashes or goes missing, you can restore your wallet from the backup data.

Table 1 describes some of the more popular software wallets for Bitcoin.

Software Wallets

Table 1 Software Wallets

The MultiBit software wallet.

The MultiBit software wallet.

Mobile Wallets

As more and more local merchants are accepting Bitcoin, you might want to carry your Bitcoin with you when you’re shopping. You can do this by installing a mobile Bitcoin wallet app on your smartphone. This type of app lets you pay locally in BTC, typically by scanning a QR code at the store or using Near Field Communication (NFC). You can also use a mobile wallet to manage your Bitcoin buys and sells when you’re on the go.

By the way, mobile wallets differ from most software wallets in that they don’t download the entire Bitcoin blockchain with every transaction. (Many software wallets do, interestingly.) Because the blockchain is a file several gigabytes in size, this would eat up a ton of mobile bandwidth and probably cause your mobile provider to either enact overage charges or just plain cancel your account. In addition, your mobile phone probably doesn’t have enough onboard storage to host the entire blockchain.

For these reasons, mobile wallet apps don’t download the entire blockchain. Instead, they require you to download only a small subset of the blockchain—just enough to handle your transactions.

So what are some of the more popular mobile wallet apps? They’re listed in Table 2.

Mobile Wallets

Table 2 Mobile Wallets

Coinbase’s Bitcoin Wallet app on an Android phone.

Coinbase’s Bitcoin Wallet app on an Android phone.

And, let us remember, you can access any web-based Bitcoin wallet from your smartphone’s web browser. Read on to learn more about web wallets.

Web Wallets

The latest thing in Bitcoin wallets is web wallets—digital wallets stored on the Internet that you access from any web browser (including mobile browsers, of course). Web wallets store the private keys for your Bitcoins online; you access your account via secure password.

As you might suspect, the chief advantage of web wallets is that you can access them from anywhere, from any computer or smartphone. The primary downside is that you’re not in control of your Bitcoin; if the web wallet service is hacked, you could lose everything.

Table 3 details some of the more popular web wallet services.

Web Wallets

Table 3 Web Wallets

Blockchain.info’s My Wallet web wallet.

Blockchain.info’s My Wallet web wallet.

Paper Wallets

In addition to software, mobile, and web wallets, you can also store your Bitcoin in old-fashioned paper wallets. A paper wallet is nothing more than a physical printout of a private key (each key being 51 characters in length) and its corresponding public key. You use the keys to prove your right to spend the Bitcoin you own.

The nice thing about paper wallets is that, because they’re not digital or stored online or on any device, they can’t really be hacked. (Of course, the piece of paper could be stolen or photographed or otherwise purloined, but not electronically hacked.) The downside is that they’re darned inconvenient. Still, for some people safety trumps convenience.

There are HTML-based applications out there that make it fairly easy to generate paper wallets. You can run these apps from a USB stick (instead of over the Web) to reduce the chances of spyware picking up your keys. You can then print the paper wallet and store it someplace safe.

3 thoughts on “Understanding Bitcoin Wallets”

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