What Is a Bitcoin Wallet?
Crypto Basics

What Is a Bitcoin Wallet?

2 years ago

Bitcoin wallets are similar to their fiat counterparts — but there are specifics to using BTC wallets that make them totally different.

What Is a Bitcoin Wallet?

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Bitcoin (BTC) is undoubtedly nothing like traditional currency, but developers still use the terms that we associate with cash to help users to navigate the new world of cryptocurrencies.
For this reason, a key piece of infrastructure that users use to transact Bitcoin and other blockchain-based cryptocurrencies is referred to as a “wallet.”
In its functionality, a Bitcoin wallet is seemingly similar to a bank account. However, Bitcoin is different from traditional currencies due to its characteristics as a censorship-resistant and peer-to-peer electronic cash system, which is secured using public-key cryptography and does not require intermediaries to process transactions.

The architecture of a Bitcoin wallet is therefore fundamentally different to a bank account, and you will need to wrap your head around a few key concepts to understand what Bitcoin wallets are and how to use them.

Strictly speaking, a wallet does not “store” users’ cryptocurrency, but is in fact a device, program or service that generates and stores a master file containing the digital “credentials” that users need in order to access, send and receive cryptocurrency via blockchain transactions.

The minimum “credentials” which a user needs to interact with the public Bitcoin blockchain are a pair of public and private cryptographic keys and a public Bitcoin wallet address.

These credentials are used to digitally sign and authenticate valid Bitcoin transactions on the public blockchain.

The most sensitive of these credentials, the private cryptographic key, must be kept, as the name suggests, absolutely private — much like a PIN or security code for a bank account.

It consists of a unique, alphanumeric string of characters and is necessary for a user to access, spend or transfer their cryptocurrency.

The public key is mathematically derived from the private key and enables a user to receive cryptocurrency from others. Like the private key, it also consists of a very long (256 bits) alphanumeric string of characters.

A Bitcoin wallet is used to generate a corresponding public wallet address that serves as a public identifier for transactions. The address is a shortened — “hashed” — version of the public key (160 bits), making it easier to share with others.

Note that Bitcoin wallets can be used to generate an unlimited number of public addresses, all of which are linked back to the same user wallet.

It is critically important for users not to forget or misplace the record of their private key. As Bitcoin is a disintermediated, peer-to-peer system, users do not have recourse to a third-party to help them to recover their lost public key, meaning they risk losing access to their funds forever.

There are three main types of Bitcoin wallets — software, hardware and paper — which differ in their characteristics and security levels. A further categorization is used to distinguish between Bitcoin wallets that are connected to the internet — “hot” wallets — and those that are not — “cold” wallets.
In our guide on how to use a Bitcoin wallet, we will look at the differences between these different wallets, their pros and cons and how to use them.

between these different wallets, their pros and cons and how to use them.

Crypto Wallets

Bitcoin is just one type of cryptocurrency in a world of thousands of cryptocurrencies, with new types being developed every day. Aside from Bitcoin-specific wallets, there are a number of crypto wallet apps available to secure and hold your crypto assets. Some wallets may only support a single kind of currency, while other wallets are compatible with a number of cryptocurrencies and altcoins. These are known as multi-cryptocurrency wallets.

Each crypto wallet has a unique wallet address. Depending on which cryptocurrency you are receiving, your wallet address may or may not change. For example, with Bitcoin, your wallet address changes after every transaction, but with Ethereum your address stays the same.

If you are looking to expand your portfolio and purchase a variation of currencies, it is often recommended to split up your holdings among several crypto wallets to better secure your assets. While there is nothing wrong with holding all of your assets in a single wallet, some may say that a single wallet with a large amount of coins can draw unwanted attention and be attractive to hackers or other cyber criminals. Moreover, with multiple wallets, you are less likely to lose access to your funds. For example, imagine keeping all of your crypto in one place and then forgetting your private key. You could lose access to everything. With multiple wallets, you can mitigate some of these risks.

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