Bitcoin Wallet Guide, Reviews and Comparison

Bitcoin Wallet Summary

A Bitcoin wallet is a software program in which Bitcoins are stored. Technically, Bitcoins are not stored anywhere. For every individual who has a balance in a Bitcoin wallet, there is a private key (secret number) corresponding to the Bitcoin address of that wallet. Bitcoin wallets facilitate the sending and receiving of Bitcoins and give ownership of the Bitcoin balance to the user. The Bitcoin wallet comes in many forms. The four main types are desktop, mobile, web, and hardware.

  1. What is a private key?
  2. Types of wallets
  3. What is the Best Bitcoin Wallet to Use?
  4. Additional Bitcoin Wallet Terms
  5. Backing up your wallet
  6. Transaction fee
  7. Conclusion — My Top Picks

1.What is a Bitcoin wallet?

A Bitcoin wallet is a software program that allows you to transfer and store bitcoin. Bitcoin isn’t technically “stored” anywhere so the wallet actually stores a private security key that corresponds to the Bitcoin address of your wallet. The key is actually what gives you ownership and control of bitcoin stored in it, making it an invaluable tool as an investor.

2. What is a private key?

A private key in the context of Bitcoin is a secret number that allows bitcoins to be spent. Every Bitcoin wallet contains one or more private keys, which are saved in the wallet file. The private keys are mathematically related to all Bitcoin addresses generated for the wallet.

Custodial vs. Non-Custodial wallets

Anyone who has been around the Bitcoin and cryptocurrency space for more than a couple of weeks has probably heard the phrase, “Not your keys, not your Bitcoin.” But what does this mean?

What Are Custodial Wallets?

Custodial wallets are despised by some segments of the Bitcoin community. The basic idea is your cryptocurrency is handed over to a third party to be stored rather than taking care of the funds on your own. The removal of third parties from the financial system is a clear point of this technology and explained in the original Bitcoin white paper, which is why custodial wallets are sometimes referred to as Bitcoin banks.

  • A third-party custodian can be helpful in making sure you don’t lose access to your funds.
  • Custodial wallets are often a requirement if you want to trade on the most popular cryptocurrency exchanges.
  • Some custodians will offer you a return on your cryptocurrency-based savings.
  • Someone else is holding your money for you, which means they could decide to simply take it.
  • Custodial wallets operate very similarly to the traditional financial system due to the fact that they are centralized.
  • You may not gain access to new cryptocurrencies that are created via forks of cryptocurrencies that you already hold.

What are Non-Custodial Wallets?

Non-custodial wallets are Bitcoin in its truest form. A non-custodial wallet is simply a piece of software on your own computer or phone that puts you in full control of your cryptocurrency holdings. You hold your own private keys, which means no one else is able to make a transaction on your behalf. However, with greater power comes great responsibility.

  • You can make transactions without someone looking over your shoulder.
  • You can gain access to advanced features such as non-custodial access to the Lightning Network.
  • You can opt into different levels of security depending on your threat model.
  • You can gain access to higher levels of security through the combination of hardware and paper wallets.
  • You will have full access to any dividends or staking rewards associated with your cryptocurrency holdings.
  • Being in charge of your own security comes with great responsibility, and human error could lead to theft or accidental deletion.
  • You will usually be presented with user interfaces that are a bit more difficult to understand.

3. Types of Wallets

There are two main types of Bitcoin wallets — cold storage, and hot wallets.

Cold storage: The secure way to hold Bitcoin

Cold storage (or cold wallets) refers to any type of wallet that is detached from an Internet connection and therefore cannot be hacked remotely. Some examples of cold storage wallets are hardware wallets, paper wallets, and brain wallets. All cold storage wallets are non-custodial.

Hot wallets — The convenient way to store Bitcoin

A hot wallet refers to any form of Bitcoin wallet that is connected in some way to the Internet. This can be a wallet that is connected to a web service, a wallet installed on a computer connected to the Internet, or even a wallet installed on your mobile phone, assuming you have an active data connection to and from your phone.

4. What is the Best Bitcoin Wallet to Use?

Different people use different Bitcoin wallets for different purposes. For example, if I need to store a large amount of Bitcoin safely, I will probably use cold storage. If, on the other hand, I just want to pay for a cup of coffee a hot wallet would be more suitable.

  • How frequently will I use the wallet?
  • Can I afford to pay for a wallet?
  • Will I be storing additional coins other than Bitcoin?
  • Do I need to carry the wallet around with me?
  • Do I need to share the wallet with someone else?
  • How tech savvy am I?
  • How much do I value my privacy?
  • Do I trust myself to safeguard my wallet, or do I want to give a third party the task of doing so?

What is the Best Bitcoin Hardware Wallet?

Ledger

What is the Best Bitcoin Desktop Wallet?

Exodus

What is the Best Bitcoin Mobile Wallet?

Ledger Nano X

  • Supports Bluetooth Low Energy (BLE) to transfer funds instead of scanning QR codes
  • Simple account creation using just a login & password (no printing or emailing of PDFs, writing down passphrases or adding encryption settings)
  • Automatic wallet encryption, backup, and multi-device synchronization

5. Additional Bitcoin Wallet Terms

Multisig wallet

Multi-signature (multisig) refers to requiring multiple keys to authorize a Bitcoin transaction, rather than a single signature from one key. It has a number of applications.

  • Avoiding a single-point of failure, making it substantially more difficult for the wallet to be compromised.
  • m-of-n backup where loss of a single seed doesn’t lead to loss of the wallet.

SPV wallet

Simplified Payment Verification (SPV) — using Bitcoin without running a full network node. By default, upon receiving a new transaction a node must validate it: in particular, verify that none of the transaction’s inputs have been previously spent. To carry out that check the node needs to access the blockchain. Any user who does not trust his network neighbors, should keep a full local copy of the blockchain, so that any input can be verified.

Brainwallet

A brainwallet refers to the concept of storing Bitcoins in one’s own mind by memorizing a seed phrase. If the seed is not recorded anywhere, the Bitcoins can be thought of as being held only in the mind of the owner. If a brainwallet is forgotten or the person dies or is permanently incapacitated, the Bitcoins are lost forever. Using memory techniques allow them to be memorized and recalled easily.

6. Backing up your Bitcoin wallet

Because private keys and seed phrases have complete power over your Bitcoins they must be kept secret and safe. If you fail to protect your wallet’s private key or seed, the Bitcoins it controls could be irretrievably lost.

7. Transaction fee handling

Each Bitcoin transaction has a transaction fee attached to it. This fee is included in order to incentivize Bitcoin miners to include the transaction in the next block of transactions. The larger the size of your transaction, the higher the fee you’ll need to pay in order to get confirmed in the next block.

  1. Does the wallet support Segwit? An upgrade issued to the Bitcoin protocol, which — among other things — allows you to shrink your transaction file size (hence reducing your required fee).
  2. Does the wallet support Replace by Fee (RBF)? If your transaction can’t get confirmed because you didn’t pay a high enough fee, you can easily bump the fee via the RBF option. Your wallet will then rebroadcast the transaction with a fee raised to your required level.

8. Conclusion — My Top Picks

Now that you’re a Bitcoin wallet expert you probably understand that there’s no simple answer to the question “what is the best Bitcoin wallet to use?” But not to leave you empty handed here are my personal picks:

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