You’ll need a location to store your bitcoin when you buy it, just like you’ll need a bank account or a physical wallet.
Digital wallets — a form of computer software that connects to the Bitcoin network – are where Bitcoin is kept. Digital wallets contain a unique address that may be shared with others when making transactions, just like bank cards have account numbers.
This one-of-a-kind address is a condensed form of your public key. It’s made up of 26 to 35 random alphanumeric characters and usually takes the following form: 1A1zP1eP5QGefi2DMPTfTL5SLmv7DivfNa.
It’s worth mentioning that each letter and number in this address is crucial. Before sending or receiving money, always double-check a Bitcoin address.
Maintain the secrecy of your bitcoin private keys.
A Bitcoin address has a private key in addition to the public key. This key, as the name implies, should not be shared with anyone. Anyone who has your private key can quickly gain access to your wallet and take your money. Similarly, if you lose your private key due to a failure to properly store it, you may never be able to recover your bitcoin.
Consider your public key as your home address for an easy method to grasp public and private keys. Anyone can see it and use it to send deliveries, or in this case, transactions, to your home. Your personal key functions similarly to the key to your front door. It’s something that only you want, and it’s what prevents others from accessing the contents of your digital wallet.
A private key is used to verify that the public key belongs to you. It gives you access to your wallet and allows you to approve transactions. Some wallets generate a safe seed phrase for you, which is a series of words that you can use to access your wallet if you lose your keys. Keep a copy of this sentence printed or written on a piece of paper in a safe place. Never take a picture of your seed words or a screenshot of them.
Bitcoin wallets come in a variety of shapes and sizes.
There are also many types of wallets for holding bitcoin, just like there are different types of bank accounts, each with its own set of advantages and disadvantages. In a broad sense, bitcoin wallets are divided into two categories:
Hot wallets: These bitcoin wallets are usually available online or on your smartphone and are connected to the internet.
Cold wallets: are bitcoin wallets that cannot be accessed via the internet. They frequently involve physical devices (such as a USB stick) that may be used to securely store bitcoin and other currency.
Wallets in high demand
Hot wallets are the most popular in the crypto industry because of their ease, despite the fact that they are less safe. People can access and swap funds fast since hot wallets are already connected to the internet, which is vital if you want to make quick transactions when the crypto market is moving. Mobile wallets (such as BitPay), web or internet wallets (such as Coinbase), and desktop wallets are all examples of this category (for example, Bitcoin Core).
When you sign up for a cryptocurrency trading platform, you will be given access to a web wallet where you can store your bitcoin. The fact that your private keys are handled by a third party is one of the drawbacks of using online wallets on exchange platforms. Remember the analogy with the front door key? Imagine having the key to your home in the hands of someone else. The owner of the key could lock you out if they chose to, or someone could break in without your knowing if they let the key fall into the wrong hands.
To put things in perspective, the New Zealand-based exchange Cryptopia was hacked in 2019, resulting in the theft of almost $17 million in ether and other cryptocurrencies, forcing the exchange to shut down. A former Cryptopia employee was also found guilty of stealing $170,000 in cryptocurrency by making copies of the exchange’s private keys and saving them to a USB. He now has access to more than $100 million in cryptocurrency as a result of this.
On the other hand, an online exchange wallet is the simplest to set up and use, and several of the most popular exchanges now include insurance funds to recompense consumers in the event of a hack. It is important to note, however, that this should not be used as a sole source of information.
There are other mobile and desktop wallets (also known as software wallets) that allow you more control and security, as previously discussed. Most mobile and desktop wallets, unlike those established by crypto exchanges, allow you to access your private keys. However, if your phone is hacked or stolen, the thief may be able to obtain a copy of your wallet as well as your bitcoin. As a result, software wallets necessitate more stringent security measures. Software wallets such as Electrum and Exodus are examples.
Before you download any software wallet, make sure you do your homework and read other people’s reviews. Also, make sure you’re downloading a genuine wallet replica. Some nefarious programmers make clones of numerous crypto websites and distribute free downloads, posing a risk of a hack.
When it comes to storing your bitcoin, cold wallets such as hardware wallets or paper wallets are the safest solutions. These are entirely offline items that cannot be accessible via the internet, which means that in order to steal the wallet, someone would have to be in the same physical location as it. When using an online paper wallet generator, keep in mind that some can constitute a security risk because you’re entrusting key generation to the website. If you do use one, be sure there are no backdoors in the code (ways for the website developers to see your keys).
If you plan to keep your bitcoin for a long time and not trade it frequently, these are the best options. However, unless you have preserved reliable backups of the keys, if you lose the hardware wallet, your bitcoin may be gone. Large investors keep their hardware wallets in safe places like bank vaults. Trezor and Ledger are two well-known hardware wallet manufacturers.
Don’t worry if you can’t pick which wallet to choose. Many professional bitcoin investors take a hybrid approach, storing the majority of their cryptocurrency in cold wallets and a smaller spending balance in a web or online wallet. This is the best of both worlds situation, and it assures that your bitcoin is kept safe.