Any Bitcoin wallet is sufficient. But different types of wallets come with different experiences, and risks.
Wallet service is one of the largest entrepreneurial sectors within the Bitcoin ecosystem.
Bitcoin.org, a resource website for Bitcoin applications, lists close to twenty types of wallets. But the number of all wallet services is way higher than that.
Why is the wallet such an important part of Bitcoin?
It is all you need to function with the cryptocurrency.
The wallet connects you to the blockchain, the Bitcoin decentralized public ledger. The wallet holds the private keys with which you authorize the movement of bitcoins on the blockchain. The wallet gives you an identity on the bitcoin network.
What is a Bitcoin Wallet
Perhaps these and what follows will make sense to you if we tackled the fundamental question: what is a Bitcoin wallet?
The word wallet conjures the image of a small leather purse that you use to carry notes, coins, and cards around. But a Bitcoin a wallet isn’t even remotely identical to the physical wallet.
First, it is a digital file. It is an application. What’s more, it doesn’t carry any money in it, least any cards. As a matter of fact, no bitcoins are kept in your bitcoin wallet.
The most important piece of data in that application is the
private keys. The keys must correspond to the
public address (public key) on the blockchain to which your bitcoins are assigned.
If you lose the private keys, you lose the control over the bitcoins allocated to the corresponding public key on the blockchain. That is why the security of your wallet and, specifically, the private keys is critical.
The security depends on its type
In the beginning, only one wallet was available for Bitcoin users. It was part of the core Bitcoin software. This is the software that you install on your computer to join the Bitcoin network as a
node or a
miner.
There is a challenge with this wallet, though. It is so bulky. If you needed to use it, you would have to download the entire blockchain. At the publishing of this article its size is about 75 GB and grows at about three gigabytes monthly.
Indeed, it demands huge resources concerning memory and even data to be of use to you. But has several strengths. It puts your bitcoins fully in your control. Even more, it is easier to manage your privacy and security from this wallet.
Similar wallets that are now available for downloading on Bitcoin.org include Bitcoin Knots, Electrum, Bither and Multibit.
It has been clear, however, that for Bitcoin to attract more users, simpler, lighter and easier to use wallets must be part of the strategy. Developers have not disappointed in this regard.
The following are some of the wallets you can use with least technical know-how:
- Mobile wallets
- Web wallets
- Hardware wallets
- Paper wallets
In your control or not
But all Bitcoin wallets fall into two main categories; local wallets and those that are by third party providers. This categorization is especially important when considering safety and privacy.
With local wallets, you have the full control of your private keys. The wallets that give this feature include hardware wallets, paper wallets, and full client wallets.
With those that are by the third party service providers, you are often not in charge of the private keys. The company that offers the wallet service keeps the private keys. In their place, you have an account on which you log in using the standard username-password credentials. This category includes web wallets and mobile.
Third party wallets have certain advantages. They are convenient to use on the go. Also, you have someone else to take care of your bitcoins’ security. What’s more, it is easy to move between fiat and bitcoin because some like bitcoin are also exchanges.
The downside is that you have to accept that the security of your bitcoin as secure as the service provider is competent and honest. If the wallet service provider can’t stop a hack then your stand to lose your money.
Also if the service provider isn’t honest, then you have another risk to live with.
Then there is the issue of abiding by the terms and conditions of the service provider. Most of the wallet service providers are companies registered under strict national laws. They must observe laws governing things like anti-money laundering and terrorist financing, among others.
For example online gambling is illegal in the United States. All payment companies are prohibited from facilitating it. Therefore, your bitcoin wallet service provider might be forced to terminate their services to you if you place bets online.
What’s more, they might make reports about your transactions to authorities if they deem them suspicious.
You can use third party wallets, but have it in your mind that your security and privacy are limited.
About the Author
Rupert Hackett is the general manager of Bitcoin.com.au and BuyaBitcoin.com.au. Rupert specializes in the digital currency and digital payment space and holds the world's first Master's degree in digital currencies. He writes for multiple bitcoin and tech websites and is an acting Board Director for the Australian Digital Currency Commerce Association (ADCCA).