Cryptocurrency, just like fiat currency can be spent, traded and stored. This article will give a comprehensive review of how Bitcoins, the preeminent cryptocurrency can be stored, the available storage systems and the advantages and disadvantages of each system.
Bitcoins are stored in a wallet. Traditionally, a ‘wallet’ refers to a physical holder for physical money – in this context, fiat currency. However, one major characteristic of cryptocurrency is the fact that it is virtual, in other words, it has no physical form and outside the digital ecosystem, it has no real value. So if cryptocurrency has no physical form and a wallet can only hold physical cash, what is a Bitcoin wallet? A Bitcoin wallet in the simplest terms is a storage for bitcoins.
A cryptocurrency wallet is less like a regular wallet and more like a bank account, it is a digital storage created specifically for holding cryptocurrency with all the necessary tools that allow for all transactions (sending, receiving and storing) involving the coins. Think of it this way, a wallet is to cryptocurrency what a bank account is to fiat currency.
Components of a Bitcoin Wallet
More technically, a wallet is an address on the Bitcoin network database that stores the public key and the private key. What are these public and private keys? Every wallet has two unique components- the public key and the private key. The public key is essentially an address a user uses to receive bitcoins.
Like the name implies, the public key is known to every user on the network, it is the key other users use if they need to send money to another user. A public key functions like an e-mail address ID, a user can share the ID with anyone and people with the ID can send mails to the holder using that specific ID.
A private key on the other hand is very much confidential unlike the public key. A private key authenticates a user's identity and gives them access to their bitcoins allowing them to spend bitcoins. A private key must be safeguarded at all cost and in a situation where it is compromised, the bitcoins held in the wallet are vulnerable to theft or hacking.
Using a similar analogy, a private key is equivalent to an e-mail address password, it gives the user access to their mails and any other party who knows the password can access the correspondence as well.
Private keys can be generated using a random number generator or made up by the user. A private key is formatted as whole numbers between 1 to 78 digits long. Without the private key, the holder can neither spend nor convert their cryptocurrency and in a case where a private key is lost or misplaced, all the bitcoins held in the wallet and irretrievably lost as well.
Types of Storage
In essence a wallet is made of the public key - to receive bitcoins and the private key - to spend bitcoins. All forms of bitcoin storage are classified under two major categories depending on their internet connectivity status:
- Hot storage
Hot storage is simply wallets that are connected to the internet. Hot wallets are generally very user friendly, however, hot wallets are susceptible to cyber security threats as a function of the internet connectivity.
- Cold storage
Cold storage are bitcoin wallets that are independent of internet connection. These wallets are 'offline' thus are not vulnerable to hacking or other cyber security issue.
Types of Bitcoin Wallet
There are a variety of wallets available and each and every one of them is classified under 5 types depending on the medium of storage. Wallets could be web, mobile, desktop, paper or hardware.
1 Web Wallet
Web wallet also called online wallet is a bitcoin wallet provided through a web service accessible via web browsers like Google Chrome, Mozilla Firefox and Internet Explorer. Here, the private key is hosted on a server offering bitcoin storage and accessed via an internet address i.e. URL. Examples of web wallets include; Coinbase, Blockchain.info, Counterwallet, Xapo, Strongcoin and BitGo.
Advantages of Web Wallet
Disadvantages of Web Wallet
2 Mobile Wallet
Mobile wallet is a wallet that runs on a smartphone or tablet as a mobile application where the private key is stored in the phone. Most mobile wallets are available for Android and iOS platforms can be downloaded and installed via Play store and Apple store respectively.
Windows and BlackBerry compatible wallets are also available. Some of the most recommended bitcoin wallets in mobile are Unocoin, Coinsecure, Bither, CoPay, Breadwallet and Mycelium.
Advantages of Mobile Wallet
Disadvantages of Mobile Wallet
3 Desktop Wallet
Desktop Wallets are software applications that are downloadable and installable on desktops, here the private key is saved to the hard drive of the computer.
In a way, desktop wallets are considered hot wallets as they require internet connection to conduct bitcoin transactions, however they can also go offline and function as cold storage.
Advantages of Desktop Wallet
Disadvantages of Desktop Wallet
4 Paper Wallet
A paper wallet is basically a card on which the private key and public key of a bitcoin wallet are printed on. They are usually printed as QR codes which can be scanned online by the user to perform a transaction. Paper wallets are available in varieties; ranging from those with tamper resistant material to those with holographic labels and several other unique designs depending on the preference of the holder. The most common examples of paper wallets are; BitcoinPaperWallet and BitAddress.
Advantages of Paper Wallet
Disadvantages of Paper Wallet
5 Hardware Wallet
Hardware Wallet is a bitcoin wallet where the private and public keys are stored on a hardware device. They come in small portable devices that can be connected to the computer via USB. Some wallets are battery operated while others do not use batteries, some feature a screen display that can be used interactively while some are without one, some hardware wallets generate the private keys themselves while others require input. Essentially, hardware wallets are in available in various brands and they come with different features offering users a wide range of options to chose from. The best available hardware wallets are Trezor, Ledger Nano S and KeepKey.
Advantages of Hardware Wallet
Disadvantages of Hardware Wallet
There are numerous types of bitcoin wallets available with different features and varying levels of convenience, accessibility, security and safety. It is recommended to weigh the pros and cons of each wallet before settling on one that meets your requirements. However, cold wallets are generally considered safer than hot wallets, till date, there is no recorded incident of a security breach involving a cold storage system. Nevertheless, if a hot wallet must be used, the then it is recommended that the bitcoin holders spread out their assets on credible and trustworthy sites only fixing small amounts of bitcoin at a time.
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