You just bought your first bitcoin using your credit cards or you just want to know which type of bitcoin wallet will be a right fit for you. This article will help you understand the basics and help you make that choice. Your wallets should provide you with adequate security and/or should be easy for you to use. There will be considerations for the different types of bitcoin wallets and how each is tailored toward specific needs.
What Does Your Bitcoin Really Wallet Do?
A bitcoin wallet does not store any bitcoins – those are stored on the blockchain. Rather, a bitcoin wallet stores cryptographic keys which are used to send or receive bitcoins. So, literarily and metaphorically, a bitcoin wallet is a keychain for crypto keys. These keys form a Private and a Public key pair. The public key is used to receive bitcoins while the private key is used to prove ownership of bitcoins on the blockchain and to sign transactions.
This is an important distinction as it is a basis for classifying different types- Ownership of a set of Private keys. it also has some security implications as to who can make transitions using the cryptographic keys.
What are the different types of Bitcoin Wallets?
Bitcoin wallets (and indeed all cryptocurrency wallets) are often classified based on who controls or has direct access to the private keys. These are the Custodian and Non-custodian wallets.
Custodian wallets are wallets that are managed by a third party such as a crypto exchange. With a custodian wallet, You do not own the private keys to the wallets or have access to them, rather, they manage them on your behalf. Each transaction in the wallet is basically a request to the third party to move funds on your behalf. it can as such be delayed (or even possibly denied). Common examples of custodian wallets are those offered by various crypto exchanges (Binance, Coinbase). Custodian wallets can offer so many advantages such as convenience and ease of use them.
- They are easy to set up. Not much technical expertise is required. You only need an email most times
- You do not have to worry about keeping your private keys. They are kept on your behalf
- They are easy to use. You can use them even with limited technical skills.
- Often have added functionality to trade your assets.
- No access to the Private keys
- Less control over the management of your wallet
- You run the risk of losing your bitcoins if your wallet provider is hacked, bankrupted, or denies you access to your account for whatever reason (e.g Government order to freeze your account)
- There may be a KYC requirement.
Non-Custodian wallets are wallets where you the user have access to the private keys. You take personal responsibility to keep them safe and control the movement of your crypto anytime you so wish. Common examples would include your hardware wallets, Papers wallets, and most software wallets (like Blockchain.info wallet, Trust Wallet, Electron wallet, Atomic wallet, Coinomi wallet, etc.)
- They give you access to the Private keys
- You have full control of the wallet and can manage your funds effectively
- Security of funds as you do not need to place your trust in a centralized wallet Service provider.
- Loss of Private keys means loss of funds, no password resets can recover your crypto
- You will need to understand some basic security fundamentals for wallets
Types of Wallet
Bitcoin wallets can be classified as either Hot or Cold Wallets depending on whether or not they are connected to the internet.
Hot wallets are wallets that are connected to the internet in their default state. They offer limited security as they are much more vulnerable to security breaches( anything connected to the internet has a higher chance of being remotely hacked). Examples include your software wallets (Mobile or desktops) and web-client wallets. They are easy to use and suitable for frequent transactions.
Cold Wallets are wallets that store your private keys Offline. They offer better security as they are not accessible from the internet. They are primarily designed for storage purposes. Examples of Cold Wallets include Paper and Hardware wallets.
Paper Wallets have your private keys and wallet address printed on paper and you can securely store them as with other valuable documents. They are a bit more difficult to use and have the limitation of not allowing partial transfer of your assets. They however provide excellent security for your bitcoin
Hardware wallets on the other hand are specially designed hardware devices with an extra layer of security to help you store your private keys offline. They can be likened to a flash drive or USB device that stores your data offline. You only temporarily connect them online to make a transaction. examples include Trezor, Ledger, SafePal, etc.
Choosing the Right Wallet for You
When choosing a wallet, you will have to consider a number of factors such as the level of security you desire, convenience/ease of use, frequency of use, the value of the asset, what you are using the wallet for, and even your level of expertise, etc.
The following general assumptions can be made about the choice of a bitcoin wallet.;
1. Cold Wallets are ideal for storing your private keys, especially for long periods of time. There are not your best choice for frequent transactions as they can be a bit inconvenient or difficult to use.
2. Hot Wallets are ideal for frequent transactions such as for payments for goods and services. It is best not to leave a substantial amount of your assets in hot wallets. Mobile wallets installed on your phone are perfect for small purchases.
3. Use Custodian wallets if you are not holding a substantial amount and you do not want to be burdened with the responsibility of safeguarding the private keys. A custodian wallet is also ideal for trading your assets since many of them are integrated with a crypto exchange. They are also relatively easy to set up.
Ultimately, the choice of using a particular type of wallet should be closely tied to whether or not you are using the wallet for storage purposes or for frequent transactions. It might be worthwhile to have more than one type of wallet to cater to various needs.