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Guide to Bitcoin Wallets: How to Choose and Use Your Bitcoin Wallet

Started by Bitcoin, Oct 11, 2022, 02:02 am

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Guide to Bitcoin Wallets: How to Choose and Use Your Bitcoin Wallet

Guide to Bitcoin Wallets: How to Choose and Use Your Bitcoin Wallet

A Bitcoin wallet is an application or device used to interact with the blockchain, send or receive transactions and manage your crypto holdings. There are many types of wallets out there, and although they all perform essentially the same function, each kind has potential benefits and drawbacks, depending on your needs.

Read on for an in-depth guide to Bitcoin wallets, how they work, and what kind works best for your situation.

How Bitcoin wallets work

Despite the name, your cryptocurrency is not actually stored in your Bitcoin wallet. The wallet is the intermediary between a cryptocurrency holder and your funds, which “live” on the blockchain.

Wallets are used to store, swap, receive, send or spend Bitcoin and other cryptocurrency. They exist in multiple forms, from digital software-based wallets to physical hardware wallets, even paper wallets.

When a wallet is created, a pair of lengthy alphanumeric sequences called “keys” are generated, one public and one private. These keys are cryptographically linked, meaning your public key will be derived from your private key, though the process is impossible to reverse. The public key is like a bank account number you can share with anybody who wants to send you Bitcoin. Likewise, you would use someone else’s public key as the destination address if you wanted to send funds to them.

The private key, however, is like your PIN code and should be kept secret at all times. Anytime a request is made to transfer Bitcoin out of a wallet, the transaction must be “signed” using that private key. Anyone who has access to that private key will have access to your wallet, and therefore your funds. Let that underscore the importance of only using a wallet from a company you trust. The party responsible for keeping that private key safe will also change depending on the kind of wallet, so keep that in mind when deciding which wallet type to use.

Types of Bitcoin wallets

Before getting into the different subcategories of Bitcoin wallets, it’s important to know that nearly all crypto wallets fall into one of two distinct categories: Custodial or non-custodial. With a custodial wallet, a third party such as a cryptocurrency exchange is responsible for your private key. This means when you want to spend cryptocurrency the transaction will be signed on your behalf by the third party. Giving up control of private keys makes some users uncomfortable, since it requires a great deal of trust in the institution you transact with.

With non-custodial wallets, the security of a user’s private keys are their sole responsibility. On one hand this means the account holder will have complete control over their wallet and funds. However, this also means if a private key is lost or compromised, their account could be accessed illicitly or their funds rendered irretrievable.

There are several different types of Bitcoin wallets, which for the most part exist somewhere on a spectrum between convenience and security. How much you value both of these things, as well as your technical know-how, should factor into the type of wallet you choose.

Mobile wallets

Mobile wallets are apps that store a user’s private keys on their mobile device, and are firmly on the “convenience” side of the Bitcoin wallet spectrum. Mobile wallets employ security methods like two-factor authentication to keep accounts safe, but lost or stolen phones are commonplace, which could compromise your account. That said, there’s perhaps no easier way to manage and spend your Bitcoin than from a mobile wallet.

Desktop wallets

Desktop wallets are pieces of software that encrypt private keys and store them on a user’s hard drive. They’re ideal for users who regularly send or receive small amounts of cryptocurrency using their computer. Desktop wallets offer some security advantages over mobile wallets, but since they’re on a computer that’s connected to the internet they remain vulnerable to hackers. Of course, using a desktop wallet also requires a computer that is free of viruses and malware, which can be difficult to achieve with 100% certainty.

Web wallets

Web wallets are wallets provided by a third-party which store private keys on a server they control. These third parties are usually cryptocurrency exchanges, which are not immune from hackers or even going bankrupt and taking users’ funds down with the ship. However, web wallets are easy to use, which makes them a popular choice for crypto newcomers or those who want easy access to their funds for spending.

Hardware wallets

Hardware wallets are physical devices which securely store private keys, often resembling a USB thumb drive. Since they’re only online when connected to a computer or mobile device, hardware wallets are considered one of the most secure types of crypto wallet.

Paper Wallets

Paper Wallets have to some extent fallen out of favor, due in part to how easily paper can be lost, stolen or destroyed. But when it comes to a simple and low-tech solution, it’s tough to beat good old-fashioned paper and pen. Paper wallets involve writing down or printing private keys and safely storing the paper, either in a safety deposit box or other secure location.

“Hot” vs. “Cold” wallets

We covered custodial vs. non-custodial wallets, but there are two other important subcategories of Bitcoin wallets it’s important to know about: Hot and cold.

A hot wallet simply means any wallet that’s connected to the internet. This encompasses web wallets, desktop wallets and mobile wallets, which live on servers or devices that maintain an active internet connection. Anything on the internet is potentially vulnerable to hacking, so although hot wallets are the more popular of the two, as a general rule they are considered less secure.

Cold wallets, conversely, refer to any wallet that is not online, and therefore, cannot be accessed by hackers over the internet. A paper wallet is a form of cold wallet, as are many hardware wallets, which sign crypto transactions within the device itself and only go online to securely upload it to the blockchain.

How to choose a Bitcoin wallet

The trade-off to weigh when it comes to Bitcoin wallets is convenience vs. security. Mobile and web wallets are among the easiest to use when spending Bitcoin, but they’re also the most easily hacked. Hardware or cold wallets not connected to the internet are inaccessible to hackers, but spending from these wallets is a more involved process.

One thing to consider is how much Bitcoin you plan on keeping in your wallet. It is generally inadvisable to store large amounts of cryptocurrency in any online wallet. The most secure method of safeguarding your Bitcoin is to use a cold wallet or offline hardware wallet.

If you’re looking to regularly spend cryptocurrency like cash, the BitPay Wallet offers the security of a non-custodial wallet with the convenience of a mobile wallet, and might be the better option. You can load it up as often as you want with Bitcoin and a dozen other top cryptocurrencies and stablecoins.

Another thing to consider is your comfort level with technology, because the most secure methods are also the most technologically complex. The reason web and mobile wallets are so popular is because they’re easy to use, and many crypto users are comfortable outsourcing security to a third party.

Before you decide, evaluate your needs and how involved you want to be with the security of your account. It’s worth noting that you can have as many wallets as you’d like.

Using a Bitcoin wallet

Once you’ve chosen a Bitcoin wallet you’ve opened up the world of possibilities the blockchain and crypto offers. But how do you use your Bitcoin wallet now that you’ve selected it? We’ve outlined some of the most common actions you’ll likely want to take with your new Bitcoin wallet.

How to Get a Bitcoin Wallet

If you have an account with a cryptocurrency exchange like Coinbase or Kraken, you are already the proud owner of a web wallet. A hot, custodial web wallet to be precise. If you’re happy with how it works and aren’t overly concerned about the possible security ramifications of a third-party holding your private key, you are set to store and manage Bitcoin.

Mobile or desktop wallets are free, and can be found and downloaded with a few taps on your phone or with your mouse. But before you fire up your favorite app store and download the first wallet you see, it’s essential to do your due diligence. Read up on any custodial wallet provider, and be sure you understand things like how they secure your private keys, whether or not they’re regulated, and if they offer any sort of insurance. If you are searching for a non-custodial option, look out for things like security features, options  for key backups, SegWit support, which cryptocurrencies are supported and any additional features you may want.

Related article: BitPay Wallet vs Coinbsae vs BRD Wallet

Hardware wallets can be purchased at most major electronics retailers, from Amazon to Best Buy to Walmart. They usually range in price from around $30 on the low end to upwards of $200 on the high end.

Storing Bitcoin

You know your spending habits, and if you use Bitcoin or other cryptocurrencies for making small purchases on a regular basis, it’s considered a best security practice to only keep a small, spendable amount of crypto in your mobile wallet at a time. The wallet can easily be replenished as needed from a larger pool of your funds, which for security purposes is best kept in an offline or hardware wallet.

Swapping Bitcoin

Wallets allow users to do what is called swapping, exchanging one cryptocurrency

for an equal amount of another. For instance, you can swap your Bitcoin (BTC) for Ethereum (ETH). People swap their cryptos for all sorts of reasons, such as taking advantage of arbitrage opportunities for profit, portfolio diversification or passive income opportunities some assets provide via lending or staking. With most Bitcoin wallets swapping one token for another is as simple as inputting the asset you want to send and the one you want to receive and clicking send. Keep in mind that in order to swap for coins, your wallet will have to support the coin you are swapping and the coin you’d like to receive.

Sending, receiving and transferring Bitcoin between wallets

All that’s required to instantaneously send or receive Bitcoin between wallets is the public key of each. Simply input the recipient’s Bitcoin wallet address into your wallet of choice and hit send. It’s worth mentioning that there are usually fees involved anytime cryptocurrency is moved. This could include some combination of transaction fees, miner fees or gas fees if moving funds on Ethereum. You can read our primer on crypto fees and how to pay less of them here.

Spending Bitcoin from Your Wallet

As paying with Bitcoin and other cryptocurrencies has grown more popular, scores of companies have begun accepting direct crypto payments, from AMC Theaters to Dish TV to Microsoft and many more.

Depending on the company and transaction amount, you are able to pay straight from your wallet using a website’s checkout process or an invoice sent via email. To pay from your wallet on a website’s checkout experience, simply select BitPay as your payment method. Then choose your preferred wallet and the cryptocurrency you wish to pay with. An invoice will be generated that will include a scannable QR code and/or the merchants receiving wallet address. Scan the QR code with your wallet app or enter the receiving wallet’s address and complete the payment. Alternatively, you will follow a similar process if a Bitcoin invoice is sent to your email.

Loading Bitcoin onto a Bitcoin debit card

These days spending Bitcoin isn’t confined to our phones or computers. Crypto debit cards have emerged as a convenient solution for users who want the freedom to spend their crypto where and when they want. Bitcoin debit cards function like any other debit card. However, instead of pulling funds from a bank account, you load the card from a Bitcoin wallet. The BitPay Card gives users the flexibility to to spend Bitcoin like cash (+ other top cryptocurrencies) anywhere that Mastercard is accepted. Load straight from the BitPay Wallet or your Coinbase account. Use online, in-store or even at ATMs as easily as any other card in your (traditional) wallet. Learn more about the BitPay bitcoin card.

Keeping your Bitcoin wallet safe

Scammers are constantly looking for an easy way to steal Bitcoin. Keep your Bitcoin wallet safe with these recommendations.

  • Use lengthy, complex and hard-to-guess passwords for all of your online accounts. Even better, leverage a password manager like BitWarden.
  • Secure your wallet recovery seed phrase offline. This can be stored in several different locations like a fireproof safe or metal seed phrase wallet.
  • Don’t keep all of your Bitcoin in one wallet. Also, avoid keeping a large amount of crypto in a custodial service.
  • Leverage multisignature and/or two factor authentication security to minimize the chance of a hacker successfully gaining access to your wallet.
  • Never give out your wallet keys or login information to anyone. If using a web/hot wallet, always check URLs are coming from a legitimate source. Take caution when clicking links from an email, social post or other common phishing sources.

It’s a crowded landscape of wallet providers, but here are some we felt provide good security, ease of use and a range of handy features.

Best overall Bitcoin wallet: BitPay Wallet

We know what you’re thinking, but it’s the truth. BitPay is the one wallet provider that’s easy enough for beginners to quickly master while still including the features crypto veterans expect. BitPay offers secure, multisig storage with optional key encryption in its non-custodial wallet. It also offers end-to-end service, from buying and storing, to swapping, sending or receiving, always at competitive prices. With additional features like a built-in debit card, BitPay’s Payment Protocol, and gift cards you can buy with crypto straight in the app, it is also the only crypto app for spenders.

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Best custodial/web Bitcoin wallet: Coinbase

As a tried and true crypto exchange, Coinbase offers a user-friendly wallet interface that’s welcoming to newcomers. For those who don’t want to manage their own private keys, Coinbase relieves you of that burden offering custody with best-in-class security. And with over 150 coins available on the platform and more added all the time, Coinbase checks a lot of boxes as a custodial web wallet.

Bonus: While Coinbase recently rolled out its own crypto debit card, you can also connect your Coinbase account with the BitPay Card to spend crypto like cash almost anywhere.

Best hardware/cold Bitcoin wallet: Ledger Nano S

Priced at around $80, the bestselling Nano S from Ledger is an easy and inexpensive way to securely store your Bitcoin offline. Its simple interface offers simple navigation, and it supports over 5,000 cryptocurrencies and NFTs.

For an even longer list of Bitcoin wallets you can use to pay with crypto, click here.

Wrap up on Bitcoin wallets

The crypto community is a patchwork quilt of voices with disparate, often passionately expressed ideas about their token of choice. So it’s not surprising that opinions vary greatly when it comes to crypto wallets as well.

A Bitcoin wallet is a highly personal choice dependent on many factors, which all must be considered to make the most educated decision. What it boils down to is your needs. If you’re a Bitcoin hardcore who bought early and are sitting on a king’s ransom in BTC, an offline cold wallet is probably appropriate. But if you’re looking for a bit more flexibility and ease of use, a mobile, web or desktop wallet, loaded incrementally with a sensible amount of “spending money” crypto, is probably more your speed.

Source: Guide to Bitcoin Wallets: How to Choose and Use Your Bitcoin Wallet