Welcome to Lesson 4. Today is all about how to safely store your Bitcoin (BTC) in a bitcoin wallet.
Yesterday, you learned that bitcoin has its value set by the laws of supply and demand and that prices are easily influenced because of Bitcoin’s relatively small, steadily growing distribution. You also learned that Bitcoin’s total supply cap of 21 million affects the price.
In today’s lecture, you’ll learn that there’s a wide range of choices when it comes to bitcoin wallets. You will learn that bitcoin wallets do not actually “store” or “hold” bitcoins. Rather, wallets store your private keys needed to handle the bitcoins you own which are stored on the blockchain ledger.
As mentioned above, you’ll need to get yourself a bitcoin wallet to store the private keys necessary to access your bitcoins. Wallets are often described as a place to hold or store bitcoins, but your bitcoins are actually stored on (and are inseparable from) the blockchain transaction ledger. Your wallet is a tool that stores the digital credentials for accessing your bitcoins and allows you to send or receive them. Bitcoin uses public-key cryptography, in which two cryptographic keys, one public and one private, are generated. A wallet is a collection of these keys. A public key is similar to your email address while the private key can be understood and should be treated like a password to that email address. Never share your private key with anyone.
You can choose from several types of wallets. They all share basic functionality. You should pick a wallet depending on how you will use your bitcoins. For instance, do you prefer to use the wallet on your mobile device? Perhaps you just want to store bitcoins safely and hold for many years without spending? Will you use Bitcoin as a shopping wallet and regularly spend/transfer them online and offline? Each of these purposes can be best achieved with a specialized wallet. Remember, you can have more than one Bitcoin wallet and choose which one to use based on the given circumstance.
Let’s discuss some of the various types of wallets.
Software wallets connect to the network and allow you to spend bitcoins in addition to holding the credentials (the keys) that prove ownership. They usually come in the form of mobile applications downloaded from app stores.
Online wallets offer similar functionality but may be easier to use. In this case, credentials are stored with the online wallet provider rather than on the user’s own hardware and can be accessed across each of your devices.
Physical wallets store the credentials offline. A simple “paper wallet” could be the keys printed on a piece of paper that you hold in your pocket or more securely stored in a safe.
A hardware wallet is a product that holds your private keys securely on an electronic device that can be accessed without an internet connection. There are various hardware wallets to choose from including Trezor, Keepkey, and Ledger. The device acts as a secure location for your private keys much like a paper wallet but is a far easier method than paper for sending and receiving bitcoins. If the hardware wallet is lost or stolen it can be restored using a 12-24 word phrase called a “seed.”
If you choose to use services that store your private keys for you, such as an online wallet, be aware that you are completely at their mercy regarding the security of your keys. Most wallets, however, allow you to be in charge of your own private keys. This means that no one in the entire world can access your “account” (i.e. your bitcoin addresses) without your permission. It also means that no one can help you if you forget your password or otherwise lose access to your private keys. If you decide you want to own a lot of bitcoin it would be a good idea to divide them among several different wallets. Don’t put all your eggs in one basket!
Wallets also have a wide variety of anonymity levels, from software wallets which only store your keys, to more open wallets which displays sender/receiver name. Keep in mind that even with software and physical wallets, data will be sent to nodes maintaining the blockchain and the server may be able to view your IP address and connect this to the address data requested. To improve privacy, most bitcoin wallets will automatically create a new bitcoin address each time you want to send or receive a transaction, which makes it more difficult to identify the sender/receiver.