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
- Web wallets usually have simple and user-friendly interface that is easily navigated by users.
- Web wallets allow for easy and speedy transactions thus, they are very convenient.
- Users of web wallets can easily access their bitcoins from anywhere in the world on any device as long as there is an internet connection.
Disadvantages of Web Wallet
- Web wallets are extremely susceptible to hacking. Back in 2014, the biggest bitcoin exchange at the time Mt Gox was hacked of 800,000 bitcoins valued at about $400 million then, money that was irreparably lost to holders.
- Web wallets essentially function like cryptocurrency exchanges and bitcoins are basically under the control of a third party. As such, scammers can set up websites posing as exchanges and cater away with bitcoins invested by other unsuspecting users.
- Because of cybersecurity threats, web wallets are not convenient for holding large amounts of bitcoins.
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
- Mobile wallets are convenient to use - they run just like any other app on the phone, hence they are easily operable and accessible.
- Mobile wallets usually employ multi-layered security protocol to ensure the safety of bitcoins. QR code scanning, biometric ID e.g. fingerprinting are examples of the extra security measures.
Disadvantages of Mobile Wallet
- Like all hot wallets, mobile wallets are vulnerable to hacker attacks.
- Mobile wallets can only hold small amounts of cryptocurrency as it is prone to data breaches.
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.
Desktop wallets are compatible with Windows, Linux OS and Mac OS. Some popular desktop wallets are Bitcoin Core, Multibit, Amory andGreen Address.
Advantages of Desktop Wallet
- Desktop wallets are safer than both mobile and web wallets as they can go offline after each transaction.
- Because the private key of desktop wallets is saved on the hard drive of computers, they are beyond the control of third parties.
- Desktop wallets are practical and easy to understand.
Disadvantages of Desktop Wallet
- Desktop wallets are not in the least bit flexible, the private key is stored on the hard drive of one computer and can only be accessed from that particular computer. This means that bitcoin wallet holders can not carry out transactions except through that computer.
- As desktop wallets still require internet connectivity for transactions, they are still open to security breaches and other cyber security issues.
- If the computer is lost or corrupted by virus, so is the private key. If the data wasn't backed up by the user, then the bitcoins are lost and beyond recovery.
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
- Functioning as cold wallets, paper wallets are some of the safest bitcoin storage systems. The private keys are not digitally stored anywhere else and as a result are completely immune to any form of cyber theft.
- Users have complete control over their bitcoins as the private keys are totally offline and physically held by a user.
Disadvantages of Paper Wallet
- At the end of the day, a paper wallet is just a piece of paper, it can get lost, torn or destroyed. There is no recovery mechanism in place for paper wallets so when they get destroyed or lost, the bitcoins in the wallet are gone.
- Users of paper wallets have to be extra cautious to avoid losing the paper.
- Paper wallets are not as straightforward to use as other wallets, there are a bit more technical and harder to use.
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
- Hardware wallets are cold storage and are considered the safest and most secured type of wallets currently available.
- Because they are very safe, hardware wallets are perfect for holding large amounts of bitcoins.
- They are usually very portable, often thumb sized and can be carried around conveniently or hidden away in a safe place.
- Even if they are used on a computer by viruses, hardware wallets remain immune and cannot be corrupted.
- Some hardware wallets are protected by a PIN other than the private key. In this situation, even if the device is stolen or lost, the private key remains intact and can be recovered by the user.
Disadvantages of Hardware Wallet
- Hardware wallets are not as straightforward and easy to use as other types of wallet for beginners
- Hardware wallets are expensive.
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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