Bitcoin is one of the most talked-about and debated topics in the world of finance and investments. It is a digital currency that uses a decentralized system, allowing people to buy and sell goods and services without the need for a centralized authority. However, to be able to transact using Bitcoin, you need a Bitcoin wallet.
A Bitcoin wallet is essentially a digital bank account that allows you to send, receive, and store Bitcoin. It is a combination of public and private key technology, with the public key indicating the amount payable or receivable and the private key establishing ownership. Without a Bitcoin wallet, you cannot send or receive Bitcoin payments.
Hot Wallets vs Cold Wallets
There are two main types of Bitcoin wallets: Hot Wallets and Cold Storage Wallets. Hot wallets are online storage wallets that are accessible from any web portal. However, they are not recommended as they are susceptible to hacking. Cold storage wallets, on the other hand, are stored offline and are not accessible to hackers.
There are four different types of Bitcoin wallets that you need to know about:
The software wallet
The first type is a Software Wallet, which requires applications to be downloaded on a computer to create and access a Bitcoin wallet. Software clients are available for both desktop and mobile platforms. However, some desktop clients such as Bitcoin Core require the entire Blockchain to be downloaded onto the computer, which can run into sizes upwards of 100 GB. On the other hand, MultiBit is a lighter software wallet that does not require the Blockchain to be downloaded. Among mobile-based software clients, MyCelium offers a robust software wallet for Android and iOS platforms, and Copay offers both mobile and desktop online wallets.
It is important to note that software wallets are only as secure as the computer or mobile device they are stored on. It is not impossible for malware to steal information, and desktop-based software wallets require technical know-how before you can operate them.
Online wallets are perhaps the easiest to use among all different types of Hot Wallets. Creating an online wallet is as simple as signing up for a new account on BlockChain. This wallet can be accessed from any computing device connected to the Internet. The online wallet is great for small, everyday transactions. However, it’s important to note that your private key is stored on another server when using the online wallet. This makes online wallets vulnerable to theft. For instance, back in 2014, hackers stole Bitcoins worth $460 million from Mt. Gox, a popular Bitcoin exchange site. Online wallets hence should be used only for small, everyday transactions.
Paper wallet is a fancy name for printing your public and private key on a piece of paper. Paper wallets are highly secure as they are offline and in your physical custody. Most online/software wallet services allow you to print your existing wallet keys. In case your wallet does not allow, go to BitAddress and print the public private key combination. To ensure security, make sure you have multiple copies of your paper wallet and keep them in a secure location. Paper wallets are best for people who do not make frequent transactions.
Hardware wallets are cold storage wallets that generate keys on demand while making transactions. These USB shaped devices need to be plugged into your computing device while transacting. Hardware wallets are secure from computer malware since they are offline and generate the keys on the device. Extremely convenient to use, hardware wallets do not require technical know-how to operate. They have sturdy backup options so that you do not lose access to your wallet. They can also be secured with a password to combat theft. If you deal in Bitcoins regularly, invest in Hardware wallets such as TREZOR or Ledger Wallet.
Ultimately, the safety and security of your Bitcoins is your responsibility. Hence, choose your wallet after carefully weighing your options. Online wallets are easy to use, but are vulnerable to theft. Paper wallets are secure, but not as convenient for frequent transactions. Hardware wallets are the most secure, but come with a higher price tag. Choose the wallet that fits your usage and security requirements. Remember, being proactive about your wallet’s safety will save you a lot of trouble in the long run.