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Bitcoin Wallets: A Beginner’s Guide to Storing BTC

Bitcoin Wallets: A Beginner’s Guide to Storing BTC

Bitcoin-Wallets-A-Beginners-Guide-to-Storing-BTC

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What is a Bitcoin Wallet?

It is now easier than ever to buy, sell and trade Bitcoin (BTC). Once you have acquired BTC, the next step is to make sure it is stored in a secure location. Maybe you are wondering how to store Bitcoin. (See more: What is Bitcoin?)

BTC is a digital currency that is stored in an electronic wallet that can be accessed using a private key. However, you don’t have to do this directly. A wallet app automatically uses a private key to sign outgoing transactions and generate wallet addresses for you.

A Bitcoin wallet is a digital wallet that allows you to send and receive Bitcoin. This is similar to having a physical wallet. So what is the point of a Bitcoin wallet? Instead of holding physical money, the wallet stores the cryptographic information needed to access Bitcoin addresses and send transactions. Other cryptocurrencies can be stored in some Bitcoin wallets.

The device that contains your Bitcoin wallet stores the private key, not the coins themselves. Your coins are stored on the Bitcoin blockchain and your private key is required to authorize transfers of those coins to someone else’s wallet.

Several different forms of Bitcoin wallets cater to different requirements and vary in terms of security, convenience, accessibility, and more. So how to choose a Bitcoin wallet?

There are two crucial steps in choosing the best Bitcoin wallet for you. You must first decide what type of crypto wallet you need and consider the individual wallets to discover the one that is ideal for you.

For example, full node wallets cater to decentralization and are compatible with the BTC network, and there are mobile Bitcoin wallets that offer integrated cryptocurrency exchanges and convenient quick response (QR) code readers, among other types of functionality. , depending on the wallet you choose. use. 

It’s important to make sure the wallet you choose is compatible with the coins you’re storing and meets your specific needs for security and usability. This article aims to guide its readers in the acquisition and use of Bitcoin wallets, as well as in the secure storage of Bitcoin.

How does a Bitcoin wallet work?

To send and receive Bitcoin, cryptographic key pairs are used. A key pair is made up of a private key and a corresponding public key. Sending Bitcoin requires the use of private keys that must be kept secret. Receiving Bitcoin requires public keys that can be shared with anyone. Public keys are created by deriving a private key from them.

A seed is generated when you create your Bitcoin wallet. Mnemonics are used to display seeds in the form of a sequence of words. This seed will be used to generate each Bitcoin key you will need to transmit and receive Bitcoin.

This design is called a Hierarchical Deterministic (HD) framework and is an industry-standard for Bitcoin key creation and management. When you want to accept Bitcoin, most wallets will automatically generate new public keys. 

The issue of public key or address reuse is no longer an issue. Anyone can easily track your entire payment history if you use the same public key every time you receive Bitcoin. Treating keys as single-use tokens significantly increases user privacy. A user can always restore their wallet as long as they know their recovery seed, which is often a list of 12 or 24 words initialized with their wallet.

So how much does a Bitcoin wallet cost? If you are just storing Bitcoin in the wallet, using a Bitcoin wallet costs nothing. However, if you are trying to complete a transaction, you will be charged different fees by the owner of the exchange or device that hosts your wallet, depending on what you are trying to do.

A wallet can cost anywhere from nothing to $200 or more. You will most likely pay a flat fee of a few dollars or a percentage of the total value of the transaction if you use a wallet as part of an exchange.

Read more: How To Mine Bitcoin: A Beginner’s Guide On How To Mine BTC

Types of Bitcoin Wallets

Mobile

For those who actively use Bitcoin to pay for goods in stores or do face-to-face transactions every day, a mobile cryptocurrency wallet is an essential tool. It runs as an app on your smartphone, stores private keys, and allows you to pay, exchange, and store crypto with your phone. 

Additionally, some apps make use of the smartphone’s near-field communication feature, or NFC, which means users can simply touch their phone to the terminal without having to provide any information.

Mobile wallets take advantage of simplified payment verification technology as they only work with small subsets of the blockchain that rely on trusted nodes in the Bitcoin network to ensure they have the correct information. 

The downside is that these trusted nodes have control over the coins and transactions, which counteracts the trustless philosophy of Bitcoin. However, these wallets are necessary for mobile phones due to their limited system resources, but this is a potential disadvantage of having easy access to funds.

Also, as another byproduct of being a convenient mobile solution for Bitcoin storage, mobile wallets are prone to malware and hacking. You can lose control of your wallet if someone simply gains access to your mobile device, especially if two-factor authentication is not enabled.

Two-factor authentication (2FA) is the second layer of protection where you enter a code in addition to your username and password to log in. A key difference between a 2FA code and a password is that the 2FA code is sent to your email or phone via SMS to help verify that it is you who is trying to log in. A more secure 2FA method is to use an authenticator app, such as Google Authenticator, FreeOTP, or Authy, as it is invulnerable to SIM swap attacks or email attacks.

It is recommended to deposit only the amount of Bitcoin you need in the mobile wallet and store larger holdings of Bitcoin in separate hardware or paper wallet.

There is a wide variety of Bitcoin wallet apps for devices running on Android and iOS. They are lightweight wallets that don’t download the entire blockchain to your phone or tablet but can still scan the blockchain to calculate your balance. Beware of scams and fake wallet apps as there are many that will steal your private keys.

Web (exchange wallets) 

Web wallets (a hot wallet form of Bitcoin) store your private keys on a server, which is constantly online and controlled by a third party. Different services offer different features, some of which can link to desktop and mobile wallets, and replicate your addresses across the devices you own.

Like mobile wallets, eWallets allow their users to access their funds on the go from any internet-connected device. The organizations that manage the website can gain access to your private keys, thus gaining full control of your funds.

Most e-wallets operate on exchanges, and there have been cases of exchanges going out of business and taking their users’ funds. Exchange wallets are also frequently targeted by hackers because they can only be accessed using your email address and password.

In some cases, exchange wallets offer some degree of protection against the loss of funds. For example, insurance or backup funds to pay users if the exchange is hacked.

The prevalence of leaked emails and passwords makes this an especially serious security risk because people often use the same email addresses and passwords across many different services. Remember that your email address is half of your login credentials.

Desktop wallets

are downloaded and installed on your computer, storing the private keys on your hard drive or solid-state drives (SSDs). By definition, they are more secure than online and mobile wallets, as they do not rely on third parties to obtain your data and are more difficult to steal. 

They are still connected to the Internet, which makes them inherently less secure. However, desktop wallets are a great solution for those who exchange small amounts of Bitcoin from their computers.

There are a variety of different desktop wallets to suit different needs. Some focus on security, others on anonymity, convenience, decentralization, and whatnot. Wallets running as full nodes download the entire blockchain to your computer. This requires hundreds of gigabytes of disk space and a fast Internet connection. However, they offer granular control over your transactions that you won’t find in most wallets. Some benefits of running such a wallet include

  • to: Override Fee Checkbox – This allows you to increase the transaction fee later if you wish to speed up your transaction.
  • An intuitive dropdown box with a transaction fee and speed control.
  • Performance – Transactions are streamed directly to the memory pool without going through a third-party node provider.
  • API and CLI – The command line interface (CLI) offered by full node wallets provide a wide range of controls that are not available in light wallet applications. The Application User Interface (API) gives application developers the ability to integrate Bitcoin-related features into their applications. This can also be used to create your wallet app.

Hardware wallet

is a fairly unique type of BTC wallet that stores private keys on a secure physical device. It is believed to be the safest way to store any amount of Bitcoin. Unlike paper wallets, which need to be imported into software at some point, hardware wallets can be used securely and interactively. They are immune to computer viruses as stored funds cannot be transferred out of the device in plain text and in most cases, their software is open source.

Most hardware wallets have screens that add another layer of security as they can be used to verify and display important wallet details. For example, a screen can generate a recovery phrase and confirm the amount and address of the payment you want to make. Therefore, as long as you invest in an authentic device made by a reliable and competent manufacturer, your funds will be safe and secure.

Never buy a hardware wallet at any flea market. There are fake hardware wallets out there that will steal funds from your Bitcoin account. Always buy hardware wallets from the manufacturer and check that it is on their official website. Please check the URL in your browser’s address bar to make sure it is correct.

Paper wallet

is a physical document that contains a public address to receive Bitcoin and a private key that allows you to spend or transfer Bitcoin stored at that address. Paper wallets are often printed in the form of QR codes so you can quickly scan them and add the keys to a software wallet or wallet app to complete a transaction. 

A paper wallet can be generated using services that allow users to create a random Bitcoin wallet address with their private key. The generated keys can then be printed with some services that offer a tamper-proof design or even the option to order holographic labels.

The main advantage of a paper wallet is that the keys are stored offline, making it highly resistant and completely immune to hacking attacks, including malware that logs keystrokes such as keyloggers. However, some precautions should still be taken when creating a wallet. You need to make sure no one is watching you create your wallet or can see where you are saving it.

To rule out the risk of spyware monitoring your activities, it is recommended that you use a clean operating system, such as Ubuntu, running from a USB flash drive or DVD. Once the paper wallet is set up, the website code should be able to run offline, allowing the user to disconnect from the internet before keys are generated. Finally, use a printer that is not connected to a network.

Also, it is important to understand that you are printing valuable private information on a piece of paper. Certain steps must be taken to protect that piece of paper. For example, it is recommended to keep it in a sealed plastic bag and store it in a safe, dry place to prevent water damage and general wear and tear. Some people prefer to laminate it and store it in a safe deposit box.

How to set up a Bitcoin wallet?

To set up a software wallet for Bitcoin, install a free software wallet client or application. For example, download desktop software wallets from their websites and follow the on-screen instructions to install them. 

Also, you can sign up for a Coinbase account to set up your Bitcoin web wallet. On the contrary, if you do not want to give your BTC wallet to a third party, buy a hardware wallet from your manufacturer. Because each wallet is unique, setting them up requires following the manufacturer’s instructions. 

Physical Bitcoin vs. Banks

Bitcoin

Physical Bitcoin coins tend to be preloaded with a fixed amount of BTC with the intention that their value cannot be spent as long as the private key remains hidden. This is usually accomplished through the use of a security seal.

The first of its kind, Bitbill, was in the shape of a credit card, but most of the alternatives that followed were in the shape of round medals. Mike Cadwell, a cryptocurrency enthusiast nicknamed “Casascius,” created the first of the popular Casascius physical Bitcoins in 2011. 

The private keys were hidden under a peelable hologram and, when removed, left a mark of tamper evidence. When it was redeemed, the coin lost its digital value. Since then, there have been several new coin manufacturers and some companies offer pre-loaded cards that contain a specific amount of cryptocurrency.

Physical Bitcoin is now primarily used as collectibles due to the inherent limitations of physical currency. One of Bitcoin’s key value propositions is to provide seamless transfers anywhere in the world; physical currencies make that impractical. 

Bank

Many banks stifle Bitcoin-related activities, including but not limited to wire transfers to cryptocurrency exchanges. Banks often cite money laundering as a reason for choosing not to offer this service, although they have an incentive to remove it to protect their business model. This is because Bitcoin is designed to reduce or eliminate the need for custodians like banks.

In recent years, mainstream financial institutions such as banks have begun to express interest in not only developing their cryptocurrencies but also providing custody services for existing cryptocurrencies such as Bitcoin. Regulators are also moving to allow banks to provide crypto custody services. 

Cryptocurrency banking could be considered redundant as Bitcoin stores coins and wallet information securely on its blockchain. Bitcoin also provides the ability to transact internationally without the need for bank approval or minimum balance fees. Nonetheless, banks have been trying to stay relevant as cryptocurrency grows.

There are also regulated crypto banks that can hold Bitcoin. They offer bank-like protections, such as account monitoring, and can intervene if suspicious activity is detected. These services also offer the possibility to sell your cryptocurrency and withdraw it to a conventional bank account. 

These services are helpful, especially if you don’t have crypto long-term. Their similarities to banks don’t end there, however, they can freeze your account or your funds could be seized. It would also be subject to withdrawal limits, Know Your Customer (KYC) requirements, and surveillance even though the overall experience of native crypto banks is more decentralized than that of the traditional banking system. Furthermore, there are only a handful of such banks that operate in a fully regulated manner.

Bitcoin Wallets and Security

The various security risks associated with Bitcoin wallets are as follows:

Protecting your Bitcoin from thieves

Now, the key question arises: Is the Bitcoin wallet secure? The most obvious answer is yes. But it all depends on the security approach selected by the user. Since cryptocurrencies are high-value targets for hackers, wallet security is critical and users should be aware of the following key points:

How to cash out your Bitcoin wallet?

You can’t convert Bitcoin to cash whenever you want, but you can sell your BTC anonymously on the blockchain for the fiat currency of your choice. A cryptocurrency exchange can handle the transaction and find a buyer on your behalf, allowing you to quickly convert the value of your Bitcoin into cash.

Restrictions and timeframes for moving your fiat currency into your bank account vary by wallet, but most can be completed within one to three days after the Bitcoin sale is complete.

What is the best way to store Bitcoin?

There are many ways to store Bitcoin, but the best way is up to your discretion. A USB drive wallet is ideal for casual investors who want to protect their Bitcoin or cryptocurrencies from theft. 

You can also store BTC in a MetaMask wallet by downloading the Ethereum Mist wallet from the MetaMask website using the Open browser. After clicking “Login with Metamask”, select “Use ETH wallet”. Then under “ETH Wallets”, you can access your BTC.

Trezor and Ledger wallets (Bitcoin cold wallets) also support Bitcoin and keep it offline on real USB-like devices. Binance and Coinbase wallets are alternatives to the options mentioned above if you want to allow third parties to hold your private keys.

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