by Bontle Moroka
There are many types of wallets used to store Bitcoin, the main ones being web, mobile, desktop, hardware, and paper. A Bitcoin wallet is a program that is used to send and receive, store, and monitor balances of your Bitcoin. Just like you need an email program to manage your email, you need a wallet to manage your bitcoin.
Wallets integrate with the Bitcoin blockchain. They monitor bitcoin addresses on the blockchain and update your balance with each transaction. What defines a wallet is where its key is stored.
What is a Key?
A private key is a long string of numbers and letters that acts as a password to your wallet. This key gives the person in possession of it the power to send bitcoins to other people. You can think of a private key as secret coordinates.
The key is used to generate an address, which, like an email address, is what you give out to people who want to send you Bitcoin. There is no way to figure out your key from knowing the address.
As time went on evolved, HD wallets were created. They generate a phrase or seed, which is a string of common words you can memorise instead of the numbers and letters that make up your private key. HD wallets can also create many addresses from your seed. These addresses all form part of the same wallet.
Because keys and seeds have power, they must be kept secret and safe. Failure to protect them could lead to the loss of bitcoins.
Types of Wallets
A standard wallet creates a file to keep the key. This file should be backed up by copying it to a safe location. An HD wallet will supply you with a seed phrase of up to 24 words to write down in a safe place.
Some wallets hold a full copy of the blockchain to validate each transaction – this is known as a full node. SPV or Simple Payment Verification’s act as a type of light wallet. They don’t hold a full copy of the blockchain and rely on full nodes they are connected to validate transactions. SPV’s are fast and take up less space than a full node wallet.
Hot and Cold
A Hot wallet is any form of wallet that is connected to the internet. Web service, computers, or phones connected to the internet all fall under the description of a hot wallet. These are the most popular, but also the least secure types of wallets. They allow access to their inner workings through Internet connections.
Market exchanges and betting sites require you to deposit funds into their online wallets. Web wallets are the least secure option for storing Bitcoin. They are more vulnerable to hackers as they have many loopholes. Nevertheless, they are highly convenient, allowing you to buy, sell, and send Bitcoins immediately. Multi-factor authentication helps protect against hacking, but these types of wallets are not worth the risk for large sums of coins.
The most secure type of wallet is a cold storage wallet. This is any wallet that is independent of internet connection and cannot be hacked remotely. Hardware, paper and brain wallets all fall into this category. However, to trade and exchange Bitcoin, you need to connect to a computer and use a webpage that allows control over the wallet. Hardware wallets form the optimal mix between security and ease of use.
When deciding on what type of wallet suits you and your needs best, the scale of convenience vs security needs to be assessed.