What is a bitcoin wallet?

What is a bitcoin wallet?

You need a Bitcoin wallet if you want to buy and store Bitcoin. There are a variety of different wallet types, and this beginners' guide explains how they all work.
Updated: Jan 24, 2022
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Also referred to as a digital wallet, a bitcoin wallet is a program or software where bitcoins are stored, like a bank account. The wallets come in many forms, each providing unique features. There are web-based wallets, mobile wallets, and offline based wallets such as hardware and paper wallets.

I. Why are they called wallets?

Because, just like regular wallets, the purpose of a bitcoin wallet is to store your money. However, a bitcoin wallet does this by recording the movement of bitcoin in and out of itself on a publicly displayed ledger (the blockchain). The wallet facilitates receiving and sending of bitcoins and gives you ownership of bitcoin balance. Although they function similar to a banking app, wallets are not only online; there are options such as hardware and paper wallets that store your bitcoins offline.

II. How do bitcoin wallets work?

Bitcoin wallets are made up of two ‘keys’: one public, and one private. These keys work like bank account details, as they store all relevant information necessary for carrying out transactions. The public key works like an account number: it is the address for people to send bitcoin to a wallet and is usually referred to as the wallet address. Just as the name suggests, it’s made available publicly, meaning that it can be viewed by anyone.

The private key, on the other hand, works like a PIN number: it is used when you want to send bitcoins to someone else. And unlike the public key, this one is confidential and known only to the wallet’s owner.

Usually, you will not have to use the private key yourself, or even have to know it. Mobile and web wallets store the private key in an encrypted form on your behalf, and you use your wallet through a personal password. However, some options such as paper wallets and desktop wallet allow or require you to keep both private and public keys yourself.

III. Do I need a wallet in order to use bitcoin?

Mostly, yes. In order to hold bitcoins you’ll need a wallet where they will be stored. However, it is possible to use CFD platforms without a wallet, as these platforms allow you to trade bitcoins without ever having to take ownership of them. We have a page that explains how CFD trading works, but if you’re looking to purchase, use, and store bitcoin, you need a wallet.

IV. What kinds of bitcoin wallet are there?

There are various types of bitcoin wallets, and each one of them offers different features. These are:

  • Online wallet. This is a web-based wallet that allows you to access your bitcoins through a web browser. Usually, it is hosted by a provider that’s responsible for managing the security of your private key. Examples of online wallets include Blockchain.info, Coinbase, and Xapo.
  • Mobile wallet. This is basically a bitcoin wallet stored on your mobile phone and accessed through an application. It is easy to access and can scan QR codes while you are on the go. Some examples of mobile wallets include BRD, Edge (formerly Airbitz), and Abra.
  • Desktop wallet. This is a wallet you download and use on your computer. The private key is stored on your computer’s hard drive, meaning that you have complete control and responsibility of its security. If the file storing your private key were to become corrupted or deleted without any backup, you could lose access to your wallet and to your funds. Examples of desktop wallets include Electrum, Exodus, and Jaxx.
  • Hardware wallet. This is a specialized electronic device that’s designed to specifically hold bitcoins. These are the safest form of wallet as they store your coins and private key offline. Some of the most popular manufacturers of hardware wallets include Ledger, Trezor, and KeepKey.
  • Paper wallet. This is simply a piece of paper on which both the public and private keys of bitcoin addresses are printed. Since it’s not connected to a network, the bitcoins are completely secure, making it ideal for long-term storage. You can create a paper wallet with services such as BitcoinPaperWallet and WalletGenerator.

V. What is a ‘cold wallet’?

Also known as an offline wallet, a ‘cold wallet’ is a wallet that is not connected to the internet. This is the most secure type of wallet because it protects your funds from cyber hacks, unauthorised access, and other types of vulnerabilities that systems connected to the internet are susceptible to. These wallets are useful if you’re storing a large number of coins for a long period of time, but if you want to be regularly trading your coins you’ll want to be using an online wallet.

VI. How do I choose which wallet is right for me?

It depends what you’re looking to do with your coins. If you want to be trading or selling coins regularly, an online wallet attached to an exchange is best since you can quickly access and trade your coins. If you want to hold your bitcoins and probably use them online for purchases or activities such as gambling and betting, then a mobile wallet is a good option. If you want to buy some bitcoin as an investment for a long time, transferring your coins onto a secure hardware wallet or using a paper wallet is probably the way to go because they will be stored offline until when you need to access them.

VII. Are payments between wallets anonymous?

Yes, they are. You see, when a transfer is made to your wallet, what shows on the blockchain is the two wallet addresses (public keys), and they are not attached to the identity of the person who owns either wallet. This makes it difficult to trace the addresses back to a specific identity.

VIII. How does a wallet keep my bitcoins secure?

Simply put, wallets give you a unique address that proves ownership of your coins. If someone sends bitcoins to your address, the blockchain displays publicly that you own them. In order to move the bitcoins, you will need a private key, which is impossible to guess, unlike a regular password. This makes transactions between wallets incredibly secure. On top of this, different wallets will have different security features to help protect your private key and keep your coins safe.

IX. How much do bitcoin wallets cost?

Usually, nothing. Most online, desktop and mobile wallets are completely free. You just set one up or download an app on your smartphone and you are good to go. However, if you want to get a hardware wallet you can spend anywhere between £20 and £200 depending on the features you want. Basically, those with more security features and extras such as a display screen are usually pricier.

X. Should I use a bitcoin wallet?

Yes, ultimately you have to use a wallet of some description for anything but CFD trading with bitcoin. Whether you want to buy, sell, hold or trade bitcoins on an exchange you will require a wallet for the transactions. Depending on what you intend to do with your bitcoins you might want to consider different options. If you want more convenience and your idea is to access your coins regularly, online and mobile wallets are great options. If you want to invest in bitcoins for the long-term, then consider going for ‘cold wallets’ such as paper and hardware wallets.

XI. Where can I get a bitcoin wallet?

Use our reviews to find the right wallet for your needs. We have links to get the best of each type of wallet, from online-based wallets to mobile wallets to hardware wallets, along with instructions on how to make your own paper wallet. Read through our guides and you will have one set up in a matter of minutes.

Our editors fact-check all content to ensure compliance with our strict editorial policy. The information in this article is supported by the following reliable sources.

Invezz is a place where people can find reliable, unbiased information about finance, trading, and investing – but we do not offer financial advice and users should always carry out their own research. The assets covered on this website, including stocks, cryptocurrencies, and commodities can be highly volatile and new investors often lose money. Success in the financial markets is not guaranteed, and users should never invest more than they can afford to lose. You should consider your own personal circumstances and take the time to explore all your options before making any investment. Read our risk disclaimer >

Harry Atkins
Financial Writer
Harry was a Financial Writer for Invezz, drawing on more than a decade writing, editing and managing high-profile content for blue chip companies, Harry’s considerable experience… read more.

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