What is a Bitcoin Wallet? (in Plain English)

Hey guys and gals, my name is Nate and welcome to Bitcoin Whiteboard Tuesday! Every few weeks, we'll send you a new and interesting video, like this one, that ex

plain

s some basics about Bitcoin. This way you can learn about Bitcoin yourself or forward these videos to friends or family who have questions. Today's video is about Bitcoin

wallet

s and how to choose the best one. We are going to cover many topics like mobile

wallet

s, web wallets, desktop wallets, paper wallets, brain wallets, HD wallets, multi-signature wallets and of course hardware wallets. So while we have a lot to talk about, don't worry, we'll make it simple for you and in the end, we'll also help you choose the best wallet for your needs.

Let us begin. A Bitcoin wallet is a program to send and receive Bitcoins, store Bitcoins, and monitor Bitcoin balances. Just like you need an email program like Outlook or Gmail to manage your emails, you need a Bitcoin wallet to manage your Bitcoins. Wallets interact with the Bitcoin blockchain; that global ledger of

bitcoin

transactions that we talked about in our last video. Wallets monitor Bitcoin addresses on the blockchain and update their own balance with each transaction. Now this is one of the most important things to remember about a wallet:

what

defines a wallet is where your private key is stored.

A private key? What does that mean? Well, a private key is simply a very long string of numbers and letters that acts as the password to your Bitcoin wallet. It is from this number that your wallet gains the power to send your Bitcoins to other people. You can also consider it as the secret coordinates to locate your Bitcoins. In other words, whoever knows your private key has control over your Bitcoins. The private key is also used to generate your Bitcoin address. This is like your email address. It's something you want to give to people who want to send you Bitcoins.

However, although the Bitcoin address is generated through the private key, there is no way to find out

what

the private key is simply by examining a Bitcoin address. In short, the main function of the wallet is the creation, storage and use of the private key. In other words, it automates the complex cryptography of Bitcoin for you. As Bitcoin wallets evolved, HD wallets, or hierarchical deterministic wallets, were created. HD wallets generate an seed phrase known as a seed or mnemonic phrase. This seed is a string of common words that you can memorize instead of the long and confusing private key.

If your wallet is destroyed or stolen, you can enter the seed to rebuild the private key. Additionally, an HD wallet can create many Bitcoin addresses from the same seed. All transactions sent to addresses created by the same seed will be part of the same wallet. Because these private keys and seeds have complete power over your Bitcoins, they must be kept secret and secure. If you don't protect your wallet's private key or seed, the

bitcoin

s you control could be irretrievably lost. A standard Bitcoin wallet will create a wallet.dat file containing your private key. This file should be backed up by copying it to a secure location, such as an encrypted drive on your computer, an external flash drive, or even copying it to a piece of paper and hiding it.

On the other hand, an HD wallet will provide you with a seed phrase with up to 24 words that you will need to write down in a safe place. Well. So much for the wallet theory. Let's move on to the different Bitcoin wallets that we have at our disposal. Some wallets contain a complete copy of the Blockchain to validate each and every transaction. They are also called full nodes. Other wallets, also known as SPV wallets or lite wallets, do not contain a complete copy of the Blockchain. They rely on full nodes they are connected to to validate transactions.

SPV stands for Simple Payment Verification, these wallets are faster and consume less disk space. As the blockchain is getting bigger and bigger these days, many wallets offer an SPV solution for limited capacity devices such as mobile phones, tablets, and desktop computers. Moving on to hot wallets. A hot wallet refers to any form of Bitcoin wallet that is connected in some way to the Internet. It can be a wallet connected to a web service, a wallet installed on a computer connected to the Internet, or even a wallet installed on your mobile phone, assuming you have data transfer to and from your phone.

Hot wallets, while the most popular, are also the least secure, as they allow access to their inner workings through internet connections. Let's look at the different hot wallets available, starting with web services wallets. Bitcoin markets, exchanges, betting sites, and other services often require you to deposit funds into their online wallets in order to conduct their business. These web wallets are the least secure option for storing Bitcoins, since you do not have access to your private keys. Basically, you are asking someone else to hold your coins for you. These wallets are also more vulnerable to hackers as they have many loopholes along the way.

For example, the website in question, the device you are using to connect to the website, or the internet connection may be monitored to steal your Bitcoins. This forces you to trust both the site operator's honesty and their security practices. In the event of internal fraud or external hacking, your bitcoins are likely to be irretrievably lost. On the other hand, web wallets are very convenient as they allow you to buy, sell and send Bitcoins at any time. The most competent web wallet services will provide multi-factor authentication options, such as validating each account login with a text message, to protect against third-party hackers.

Still, to store a significant amount of coins, using web wallets is not worth the risk. That's why we recommend that you avoid the number one newbie mistake and never store your Bitcoins in an exchange wallet. Now let's move on to desktop wallets. These types of hot wallets store your private key on your computer. So as long as your computer is free of malware or any security weaknesses, your Bitcoins will be safe. However, we all know that is not the case for most of us. Nowadays it is difficult to be 100% protected and this makes internet-connected desktop wallets a valuable target for hackers.

Moving on to mobile wallets. These are wallets that store your private key on your mobile phone. Although many wallets can be accessed through mobile apps, doing so presents a worst-case scenario for security. Mobile wallets offer little security and terrible privacy, given the possible association of your Bitcoin wallet, phone number and geographic location. As phones are frequently lost, broken, or stolen, it is highly recommended to enable multi-factor authentication, password protect your wallet, and create a private key backup. Mobile wallets are very convenient and are designed to provide the highest possible security in an insecure environment. However, substantial sums should not be stored in a mobile wallet unless it is used in conjunction with a hardware wallet, which we will discuss in a minute.

Now let's talk about the most secure form of Bitcoin wallets: cold storage wallets. Cold storage refers to any type of wallet that is independent of any internet connection and therefore cannot be hacked remotely. Some examples of cold storage wallets are hardware wallets, paper wallets, and brain wallets. Let's review them now. Paper wallets are simply pieces of paper with the private key or seed written on them. By keeping your private key on a piece of paper, only someone who can physically access that paper can steal your Bitcoins. However, paper wallets are easily destroyed and therefore it is advisable to create multiple copies so that if one is lost, your Bitcoins can still be recovered.

Another thing to consider is that to send the Bitcoins you have in your paper wallet to someone else you will have to import the private key into some type of digital Bitcoin wallet. This is easily ex

plain

ed in one of the many tutorials we have on the site. The next form of cold storage is hardware wallets. These are physical devices that securely store your private key so that it cannot be hacked even if your device is compromised by malware. You can even use them with a public computer you don't trust. Most hardware wallets provide an initial backup in case the device is lost or stolen.

To send your Bitcoins to someone with a hardware wallet, you will need to have your hardware wallet connected to a computer and use some type of website that allows you to control the wallet. Hardware wallets offer the optimal combination of security and ease of use. Its only limitation is that you must carry your hardware wallet with you at all times in order to send the coins. Finally we come to brain wallets. Brain wallets are just a way to create a private key from a predetermined text or set of words. So instead of getting a randomly generated seed, you decide on a passphrase yourself and use some basic algorithms to generate a private key from that passphrase.

However, Brain Wallets have one major disadvantage: they have a higher chance of being hacked. This is because people tend to be very predictable about what to use as passwords or supposedly random text, and hackers have a way of knowing this. There have been some tests using simple passwords for brain wallets and depositing funds. They have been quickly stolen. Additionally, a Bitcoin user lost 4 Bitcoins from his wallet after using a brain wallet private key generated from an unknown Afrikaans poem. This shows that even if you think you've found dark text for a passphrase, you're still in danger of being hacked.

Now, before I show you exactly how you should choose a Bitcoin wallet, I want to talk about one more important feature that some Bitcoin wallets have: Multisig. Multisig means multisignature, a wallet that allows the sending of Bitcoins only with the approval of enough private keys, from a set of predefined keys. Don't worry... I'll explain it to you. Let's say that Alice, Bob and Charlie want to open a business together and invest some of their Bitcoins, but none of them want a single person to have the private keys to this money. So you each get a key and use a multi-signature wallet that requires two of three of those keys.

This way none of them will be able to keep the money alone, but neither will they need all three to pay the expense. For example, if Alice wants to run with the money, she can't because she only has one key. But if Bob is missing and Alice and Charlie want to pay some expenses, they can do it with their two keys. Multisig doesn't have to be just two of three: it can be almost any combination. For example, a couple wants to have a shared account and decides that only if they both agree can they spend the money, or a company board of directors that allows payments only by majority vote.

Multisig is often used for escrow services where two parties decide on a transaction that requires 2 of 3 keys. If the seller and buyer do not agree, a trusted third party will arbitrate and release the funds. You did it! Now you know everything there is to know about Bitcoin wallets, so let's see how to choose the best wallet for your needs. The first thing you need to know is that different people will use different Bitcoin wallets for different purposes. For example, if I need to store a large amount of Bitcoin securely, I will use a different wallet than if I just want to have a small change of Bitcoin to pay for a cup of coffee.

Wallets typically range on a scale of security versus convenience and you need to decide where you want to be on that scale. Some of the questions you should ask yourself include: How many Bitcoins will I store? How often will I use the wallet? Can I afford to pay for a hardware wallet? Do I need to carry my wallet with me? Do I need to share the wallet with someone else? Am I a technology expert? How much do I value my privacy? Do I trust myself to safeguard my wallet or do I want to entrust a third party with the task of doing so?

Depending on the answers to these questions, you should have an easier time choosing a wallet. Most of the popular Bitcoin wallets are listed on our on-site Bitcoin wallets page, so now it's just a matter of choosingthe best wallet for your needs. Before concluding, keep in mind that you may want to use more than one wallet. For example, you can use a hardware wallet for large sums of Bitcoins and also have a mobile wallet with a small balance for daily payments. This way, even if your cell phone breaks or is stolen, you won't risk a lot of money.

I hope you enjoyed today's Bitcoin Whiteboard Tuesday lesson and I can't wait to see you in our next video. If you still have any questions or comments about the video, feel free to leave them in the comments section below and I'll see you... in a moment.