When you get some paper bills from an ATM, you need to store them somewhere. Bitcoin is a digital payment system, but when you get your bitcoins you also need to store them somewhere just like you would with regular paper money.
There are currently four options for storing bitcoins. These options are different types of bitcoin wallets. A bitcoin wallet has an address, your public keys, and private keys. Currently, there are software wallets, hardware wallets, web wallets and physical wallets made out of regular paper.
Whenever you use your bitcoin, the bitcoin network interacts with its blockchain, which is a ledger that contains records of all the transactions that have ever occurred on the bitcoin network. When bitcoin software interacts with the blockchain, you will be able to see the balance of your bitcoin wallet in real time.
Software Bitcoin Wallets
A software wallet is an application that you install on your electronic device, be it a Windows PC, Mac, Android tablet, iOS tablet or a smartphone. The software wallet is located on the hard drive of your device and gives you complete control over your wallet because you can only access your bitcoins through your computer. The software is called Bitcoin Core. Its early versions were known as Bitcoin and Bitcoin-Qt.
Bitcoin Core software is open-source software, meaning that anyone who wants to see or use the code can access it. The fact that the software is open-code helps ensure the transparency of the bitcoin system and network. It also allows users to check the software to make sure that it does not contain any viruses, malware or other suspicious code that can harm the network or the devices of its members. It also means that engineers can use the code to develop new bitcoin applications.
Updating Your Software Wallet
Just like with any other software, you will need to regularly update your bitcoin wallet software. On the bitcoin network, the term for updating the software is syncing. The way your device will sync the wallet software depends on the specific type of the device.
The first installation of the Bitcoin Core will most likely take a few days because the software contains a lot of all bitcoin transactions that happened since the beginning of the network. As of November of 2017, this means that you will have to download over 140 gigabytes of data.
When using a software wallet, make sure to sync it every time after you start your computer or close the wallet application.
Encrypting Software Wallets with Passwords
Bitcoin Core software gives you an opportunity to secure your wallet by creating an encrypted password. This password will protect your wallet from having other people access the wallet without your permission. With regular money, you would typically keep your wallet away from where others can access it. Bitcoin Core password is a way to accomplish the same goal with your bitcoin wallet when you use Bitcoin Core software. You will need this password every time you want to send your bitcoins to someone, so make sure to choose a password that you will not forget.
It is also a good idea to back up your software wallet. You can either back up the entire wallet or just the file that contains information about your bitcoins. The file with the information about your bitcoins can range in size between about 100kb and several megabytes depending on the number of transactions you have in your wallet. You can put this file on a USB drive or an external hard drive.
When you install Bitcoin Core, you will be able to create multiple addresses for the same wallet. This means that you can use one of the addresses for receiving bitcoins and give out this address whenever someone needs to send you a bitcoin payment.
A hardware wallet is a physical device, typically a USB key or a hard drive with a cable that you can attach to a computer or a mobile device. All you need to use your bitcoins with a hardware wallet is attach the wallet a device connected to the Internet. Hardware wallets have a number of advantages over regular software wallets.
First, they would typically store your private keys in a special protected area located on a microcontroller. This makes the protection more secure as it is impossible to simply copy the key. Hardware wallets are also immune to viruses. When you use computer software wallet, your computer may get a virus and the virus will try and steal your keys from your wallet. This scenario is impossible with hardware wallets.
However, all of this doesn’t mean that hardware wallets are impenetrable. A hardware wallet will not protect you from malware that can trick you into sending money to a wrong address. The integrity of hardware wallets relies on random number generators, which the creators of hardware wallets often embed in the hardware. The issue with random number generators is that it is extremely hard to verify how truly random a generator is. An insecure random number generator may create keys that hackers can later decipher and recreate. On the surface, the numbers would look random, but they will not be and advanced attackers will be able to use them to hack into wallets. Also, with hardware wallets, there are plenty of possibilities for imperfect implementation during the manufacturing process, including the creation of hardware and installation of software. All of the parts may contain bugs that hackers may later find and exploit.
All of this means that while hardware wallets have a lot of benefits compared to software wallets, they are still not perfect.
Physical Paper Wallets
A physical paper wallet is a way to store your bitcoins. It is the safest way to store your money, but you can’t use your wallet when it is not connected to the blockchain. This means that paper wallet is a way of “cold storage” for your bitcoins.
When you store your bitcoins in a paper wallet, you can always check the balance of your wallet by searching the blockchain, but to use the wallet you will need to connect it to one of the other types of wallets.
Here’s how paper wallets work: to use a bitcoin wallet, you need a private key, which is a long string of characters linked to an address of a bitcoin wallet. A paper wallet is an offline record of your private key. For this reason, it is a really secure way of storing your bitcoins. The disadvantage of a paper wallet is that there is nothing you can do with it unless you are connected to the Internet.
Today there are more and more companies that offer bitcoin wallet services. Fundamentally, these companies serve as a middleman. They promise to take care of the administration and security of your bitcoin wallet. To manage your wallet, such a company will need your personal information, which makes the service non-anonymous.
If you choose to go with a company that offers web wallet services, make sure to choose a reputable provider. In the past, there have been instances of businesses offering web wallets and then disappearing, which resulted in people losing their bitcoins. One of such companies was Mt. Gox, a bitcoin exchange that stopped operating in February of 2014.
Pay special attention to where the company has its official registration address. Different countries have different regulations when it comes to cryptocurrencies. Obviously, you want to deal with companies registered in countries with a strong legal system and reputable background of financial regulations. Examples of such countries include the United States, the Isle of Man and the United Kingdom. Many countries still developing regulations of bitcoin and other cryptocurrencies, which is why you should be very careful with storing your funds on a third-party server such as a bitcoin exchange.
There are three types of such third-party services. They are bitcoin exchanges, dedicated wallet services, and mobile wallets.