How Bitcoin Wallets Work (Not Physical Wallets)

CRYPTOCURRENCY  BITCOIN

Bitcoin Wallet

By JAKE FRANKENFIELD

 Reviewed By JULIUS MANSA 

 Updated Jun 30, 2020

What Is a Bitcoin Wallet?

A Bitcoin wallet is a software program in which Bitcoins are stored. Technically, Bitcoins are not stored anywhere. For every individual who has a balance in a Bitcoin wallet, there is a private key (secret number) corresponding to the Bitcoin address of that wallet. Bitcoin wallets facilitate the sending and receiving of Bitcoins and give ownership of the Bitcoin balance to the user. The Bitcoin wallet comes in many forms. The four main types are desktop, mobile, web, and hardware.

KEY TAKEAWAYS:

A Bitcoin wallet is a not a physical item but a software program for holding and trading Bitcoins.

Wallets contain a private key for security. The key corresponds to the address of the wallet.

The four types of Bitcoin wallet are desktop, mobile, web, and hardware.

Understanding Bitcoin Wallets

A Bitcoin wallet is also referred to as a digital Wallet. To trade in Bitcoins, a trader must establish a digital wallet. A Bitcoin wallet is analogous to a physical wallet. However, instead of storing physical currency, the wallet stores relevant information such as the secure private key used to access Bitcoin addresses and carry out transactions. Types of Bitcoin wallets are desktop, mobile, web, and hardware.

Desktop Wallets

Desktop wallets are installed on a desktop computer and provide the user with complete control over the wallet. Desktop wallets function as an address for the user to send and receive Bitcoins. They also allow the user to store a private key. A few known desktop wallets are Bitcoin Core, MultiBit, Armory, Hive OS X, and Electrum.

Mobile Wallets

Mobile wallets perform the same functions as a desktop wallet. Mobile wallets facilitate payments in physical stores via "touch-to-pay" and near field communication (NFC) scanning of a QR code. Bitcoin Wallet, Hive Android, and Mycelium Bitcoin Wallet are examples of mobile wallets. Bitcoin wallets tend to be either iOS or Android system compatible. There is significant malware posing as Bitcoin wallets, so it is advisable to research options before deciding which one to use.

Web Wallets

Web wallets facilitate access to Bitcoins from anywhere, on any browser or mobile device. The selection of your web wallet must be done carefully since it stores your private keys online. Coinbase and Blockchain are popular web wallet providers.

Hardware Wallets

Hardware wallets are by far the most secure type of Bitcoin wallet as they store Bitcoins on a physical piece of equipment that is usually plugged into a computer via a USB port. They are practically immune to virus attacks, and few instances of Bitcoin theft have been reported. These devices are the only Bitcoin wallets that are not free, and they often cost between $100 to $200. 

Special Considerations for Wallet Security

Keeping your Bitcoin wallet safe is essential as Bitcoin wallets are high-value targets for hackers. Some safeguards include encrypting the wallet with a strong password and choosing a cold storage option; that is, storing Bitcoins offline. It is also advisable to frequently back up your desktop and mobile wallets as problems with the wallet software on your computer or mobile device could erase your holdings. 

Related Terms

Cold Storage Definition

With cold storage, the digital wallet is stored in a platform that is not connected to the internet.

 more

Private Key

A private key is a sophisticated form of cryptography that allows a user to access his or her cryptocurrency. 

more

Paper Wallet Definition

A paper wallet is an offline mechanism for storing bitcoins. The process involves printing the private keys and bitcoin addresses onto paper.

 more

Bitcoin

Bitcoin is a digital or virtual currency created in 2009 that uses peer-to-peer technology to facilitate instant payments. It follows the ideas set out in a whitepaper by the mysterious Satoshi Nakamoto, whose true identity has yet to be verified.

 more

What Is a Digital Wallet?

A digital wallet is a a piece of software that stores payment information and transaction history.

 more

Quick Response (QR) Code Definition

A quick response (QR) code is a type of barcode that stores information and can be read by a digital device, such as a cell phone.

 more

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