Just like you can store physical money in a wallet you carry with you, digital currencies use a digital wallet for storage and payment.
Whether you want to speculate on the value of bitcoin, or need a place to send and receive coins, here’s what you need to know about bitcoin wallets and how they work.
Remember that cryptocurrencies are speculative investments where all your capital is at risk, which means you can lose all your money.
Cryptocurrencies are unregulated in the UK and you will have no recourse to compensation if something goes wrong.
What’s in a bitcoin wallet?
The most important thing to note is that cryptocurrencies like bitcoin are not actually ‘contained’ within a crypto wallet. The ‘coins’ themselves are kept on the blockchain.
Remember, bitcoins have no physical representation – they only exist as numbers on the screen. Thus a bitcoin wallet contains the public and private keys of your bitcoin holdings, both of which are required to perform transactions.
A public key is compared to a bank account number. By itself, it does not provide access to assets in your wallet.
A private key is essentially a password in the form of a long string of letters and numbers that you keep secret. If someone gained access to both your private and public keys, they would be able to spend your bitcoins or transfer them to other accounts without your permission.
Your wallet address is also a unique, alphanumeric string. It’s actually a ‘hashed’ version of your public key. Hashing is when you put data of any size into a hashing algorithm to produce a nearly-unique alphanumeric string of text.
Since a public key is a very long string of text, hashing makes it shorter and more shareable, which is why it is used to create your bitcoin address.
To send bitcoins from your wallet, you simply log in, enter the recipient’s wallet address and input how much you want to send. To receive bitcoins, you simply share your wallet address.
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Wallets can be ‘hot’ or ‘cold’ and ‘hosted’ or ‘non-custodial’. Here’s a look at the differences between the different types.
hot purse They are where your public and private keys are stored online, either with a crypto exchange such as Coinbase, or with a specialist provider. They are known as ‘hot’ because they can be hacked on the internet, and have actually been in the past.
Hot wallets can be either hosted either non-custodial, The former are wallets provided by an exchange (the place where you buy your crypto), for free. Hosted wallet providers usually keep your private keys safe for you, which can save you a lot of headaches if you forget your account password as the provider will be able to help.
Non-custodial hot wallets are not offered by exchanges and are entirely managed by you. This means that you alone hold your private key. If you lose it, you will be out of your holding.
cold purseSometimes referred to as hardware wallets, are physical storage devices that are not connected to the Internet, but are connected to a computer via USB.
Your private and public keys are stored in a cold wallet, and they are safe from hackers as there is no direct connection between their computer and your storage device. However, malware can be used to access cold wallets once connected to the computer.
If you lose the recovery phrase needed to access your cold wallet, there’s no provider to support you, so you won’t be able to retrieve your public and private keys – effectively locking you out of your bitcoin holdings. Will give
You can also download wallets to your smartphone or desktop computer, but they will only be as secure as the virus and malware protection you have installed.
When choosing a wallet, you should consider the level of security you are comfortable with, the price you are willing to pay for storage, and how much responsibility you want to take for your private keys.
Whether you are looking at cold wallets, non-custodial hot wallets or hosted hot wallets, it is worth looking at customer ratings and reviews, especially what people say about the provider’s customer service.
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