Exploring the ins and outs of Bitcoin Wallets: An In-depth Review
Introduction
Dealing with any sort of currency, be it fiat or crypto, comes with several basic obligations users have to contend with. The paramount obligation being a place to store the funds safely and securely. Cryptocurrencies like Bitcoin also need a secure storage location, but since they are digital in nature, they can only be held in an electronic wallet.
Whether one is hoping to use their cryptocurrency to purchase goods or services right away or they are planning on investing it for the long term, a secure electronic location is needed to store the funds. This is why a Bitcoin wallet is needed and luckily, they function in an almost similar manner to physical billfolds; they update the quantity of cryptocurrency stored and securely store the information proving ownership of the coins held within them.
How Bitcoin Wallets Work
Dealing with any sort of currency, be it fiat or crypto, comes with several basic obligations users have to contend with. The paramount obligation being a place to store the funds safely and securely. Cryptocurrencies like Bitcoin also need a secure storage location, but since they are digital in nature, they can only be held in an electronic wallet.
Whether one is hoping to use their cryptocurrency to purchase goods or services right away or they are planning on investing it for the long term, a secure electronic location is needed to store the funds. This is why a Bitcoin wallet is needed and luckily, they function in an almost similar manner to physical billfolds; they update the quantity of cryptocurrency stored and securely store the information proving ownership of the coins held within them.
Public Key
In the simplest terms, a public key is a cryptographic code that enhances the facilitation of transactions between users. It allows users to receive cryptocurrencies in their accounts/wallets. With the public key, users can verify the transaction’s digital signature, which is a proof of ownership of the private key.
Private Key
One might think that these wallets’ sole purpose is to store Bitcoin, however, the wallet itself is a representation of cryptographic control over a blockchain address. After initiating a transaction, users receive a set of secret numbers known as private keys, which correspond to their blockchain address book. The private keys are used to sign Bitcoin transactions which gives the user control of the coins in that address.
Users are encouraged to secure their private keys and public keys as much as they can out of reach from attackers because these can be used to move the Bitcoins from their addresses to the attacker’s wallet. It ought to be treated like a password to an online banking account that should not be shared.
Picking a Bitcoin Wallet
Hot and Cold Wallets
Hot wallets are tools that allow Bitcoin owners to store, receive, and send coins. Unlike a cold wallet, a hot wallet is connected to the internet. The hot wallets are linked to the public and private keys mentioned above to help facilitate transactions. Since they have an internet connection, these types of wallets are somewhat vulnerable to hacks. However, most users prefer using hot wallets for convenience rather than security.
Cold wallets, on the other hand, focus on a ‘cold storage’ method for storing a user’s Bitcoin and they have no internet connection. These wallets come in the form of hardware wallets, paper wallets, or a USB stick. They are more secure from outside infiltration because their protocol is completely offline.
Custodial or Non-custodial Wallets
For a non-custodial wallet, users get to enjoy full control of their funds but they have to hold on to and own their private key. Users have to hold the keys in encrypted storage and take full responsibility of their funds. The non-custodial wallets can be hardware devices like USB drives disconnected from the internet, web and mobile wallets that can be accessed on any device using a private key login, and desktop wallets that are strictly found on the user’s preferred computer’s desktop. Non-custodial wallets require users to enter an alphanumeric code each time they want to access their funds.
Custodial wallets bring in an air of convenience to those joining the crypto scene because the first time a user purchases crypto, their funds will get deposited in a custodial exchange crypto wallet. The exchange where the funds will end up is the custodian of your funds; they hold your keys and are responsible for providing the security of your funds. Compared to non-custodial wallets, the custodial wallet is the most preferred one in the crypto ecosystem because users do not have to contend with a lot of responsibility, plus they are more convenient. Users are encouraged to use reputable custodial wallets; a good place to start would be looking into the major U.S. crypto exchanges offering these services.
Types of Wallets
There are multiple software wallets to choose from when one wants to find a location for storing their cryptocurrency. Software wallets are connected to the internet and simply put, it is a wallet that one can download on a smartphone or on the desktop of their computer. As it was mentioned earlier, newcomers to the crypto sphere should conduct proper research on the reputable crypto exchanges in the U.S. and choose one that works for them (the U.S. places strict regulations on the crypto ecosystem so it would be hard to find an exchange out to abscond with user funds).
One simple and reliable Bitcoin software wallet is HODL Wallet. Simplicity and reliability are good features to look out for, but the best-selling feature for HODL Wallet is their security. The HODL Wallet application is available on Google Play and Apple App Store for download and this guide serves as a stepping stone to getting started on securing your coins.
The old crypto custodial adage goes ‘Not your keys, not your crypto.’ This is the phrase that best explains the hardware wallet scene. They are physical devices like thumb drives that store a user’s private keys and they are secure enough to use with a device you do not trust. The transaction validation process takes place within this physical device and not the computer, this is because the private key never leaves the hardware wallet.
A good example of a hardware wallet is Trezor, Bitcoin’s first legitimate and secure physical wallet built by SatoshiLabs. With Trezor One and Trezor Model T already out, the company pioneered the development of an isolated environment for offline transaction signing when crypto was in its infancy stages. This hardware wallet also stands out because it minimizes the risk of private key discovery even when the device being used is infected by malware.
The Safety of Bitcoin Wallets
It goes without saying that hardware wallets are the safest, first because they are disconnected from the internet and it gives a user sole responsibility to take all the precautions they can to protect their funds without involving a third party. Non-custodial hardware wallets are tough to infiltrate because users have to remember a long word seed phrase (usually 12 to 24 words) composed of random words before accessing their account. With such a recovery method in place, attacks are almost impossible, unless one shares their backup recovery seed phrase with an outside party. The safety of one’s account is literally in their hands, and it is up to the user to keep their funds safe.
Conclusion
The Bitcoin wallet environment has come a long way, from hard-to-use days to the seamless transaction speeds enjoyed today. The ecosystem is going even further with the incoming smart Bitcoin wallets that are poised to offer better crypto storage experience while granting users full control over their assets just like hardware wallets do. Custodial wallets are popular but just like any other crypto feature, users always demand for more control over their digital assets, just like decentralization requires. Non-custodial wallet providers should now look into ways of revamping the antiquated alphanumeric address and seed phrase process.