Despite their volatility, cryptocurrencies are constantly rising in popularity. With that comes the increased demand for safe ways to store them. As bitcoin and other cryptocurrencies that came after it pushed the technological envelope, so do crypto wallets. Safety is a commodity people are willing to invest a lot of time and effort in.
We’ll explain how these types of wallets work and hopefully help you choose the right solution for you. We’ll also cover how to set up a Bitcoin wallet and how to get the most out of it.
Types of Cryptocurrency Wallets
Since Bitcoin is a digital currency, Bitcoin users need to validate transactions somehow. Every Bitcoin transaction requires two keys, the sender’s private key, and the recipient’s public key. Bitcoin wallets are protected spaces where crypto users can store their private keys. They come in shared, hosted, and non-custodial varieties. In addition, they vary when it comes to safety levels, accessibility, and customization options.
Shared wallets are often known as multisig or multi-signature wallets because they require at least one cosigner to authorize payments from it. They allow you to set up a Bitcoin wallet that can be accessed by multiple people.
As an owner of the shared digital wallet, you may add more users to the account. First, you need to download the wallet app and create your own profile. After adding all users (copayers), you set the number of cosigners that must give permission for any payment requests. Every user will get a specific private key, giving them limited access to the Bitcoin in the wallet.
A shared wallet is a good option for anyone who wants to sign up for a bitcoin wallet with an added layer of security. One user may initiate a transaction but cannot complete it until the required number of cosigners approves it.
Losing a password is something everyone went through at least once. Now imagine if you lost a password, and there’s no way to reset it, or get access to your account. And the account is your wallet. If you know your Bitcoin, you know just how much you stand to lose.
Hosted wallets are a good solution to that problem. If you’re new to crypto and just want to know how to set up a Bitcoin wallet, going with a hosted one is a good idea. When you use this type of wallet, you won’t lose access to your assets if you forget or lose your password. They’re called hosted or custodial wallets because a third party has custody of your cryptocurrency. It basically functions like a bank account, and the wallet host is responsible for protecting assets in their custody. Additionally, most hosted wallet platforms provide good accessibility and user experience.
The major drawback of hosted wallets is that the platform actually holds the user’s cryptocurrency and private keys. This means that getting a Bitcoin wallet with such a platform means relinquishing some control over your assets. You lose one of the main draws of cryptocurrency and face a different type of risk in terms of hacks and scams targeting the platform.
Bitcoin and bitcoin wallet technology is constantly evolving, so hosted wallets might have more options that are more in line with crypto philosophy in the future. When choosing a hosted wallet platform, focus on companies that provide a high level of accessibility, protection, and legal compliance. The distributed ledger allows functional and secure data storage, and you shouldn’t compromise that by choosing an inadequate safekeeping solution.
To get a hosted wallet, open a Bitcoin account on a trustworthy platform, enter your personal information, and create a strong password. If there’s a two-step verification option, activate it for better security. Companies like Token and Block.io offer excellent wallet hosting services.
With non-custodial wallets, you have complete control over the currency. If you forget or lose the password (private wallet key), you lose access to the wallet as well. Similarly, if someone else gains access to your password or a wallet, they can manipulate your funds.
Coinbase and MetaMask are well-known companies that offer non-custodial wallet apps. If you’re wondering how to set up a Bitcoin wallet on Coinbase, that’s very easy. Both Coinbase wallet and MetaMask have dedicated mobile apps for Android and iOS users. Download the wallet app, create an account, and jot down your unique private wallet key. It’s a randomly generated 12-word phrase; without it, you can’t access your crypto funds. Since it’s a non-custodial service, you won’t have to enter any private information.
There are several benefits of having a non-custodial wallet. Besides having full control over your assets, you can also use your cryptocurrency for lending, borrowing, yield farming, and staking. The drawbacks are that you’re responsible for protecting your wallet from hackers and that the customer service is minimal or lacking.
If you merely want to buy or sell cryptocurrencies, create a hosted Bitcoin wallet. If you’re interested in experimenting with various crypto features and want complete control over your investment, go with a non-custodial wallet.
Hardware wallets are touted as the safest way to store cryptocurrency. They look like fancy thumb drives, but they’re purpose-built gadgets that allow you to store crypto keys offline. Hardware wallets aren’t commonly used because they’re relatively complex and cost a lot. A crypto hardware wallet can cost $100 or even more.
Hardware wallets are sometimes called cold storage or cold wallets, as opposed to online wallets that are “hot.” This section will cover how to set up a cold storage Bitcoin wallet and the basic features of the system.
With cold storage, your crypto is stored off the internet, which minimizes the danger from hacker attacks. Hardware wallets often use open-source software, which allows users to validate the entire operation. This makes them particularly resistant to hacking attempts.
Private keys are secured in a microcontroller and cannot be exported in plaintext. Additionally, they’re almost completely immune to malware attacks that steal from software wallets. Since private keys never interface with potentially vulnerable software, you can use them without worrying.
However, hardware wallets are not impervious and have their share of drawbacks. You may send crypto to the wrong internet address thanks to malware attacks that change the receiver’s Bitcoin wallet address. It’s crucial to know how to set up a Bitcoin wallet address properly and double check you did everything right. Any given Bitcoin hardware wallet will rely on a random number generator for security. Since true randomness is practically impossible to achieve, it’s possible to recreate private wallet keys due to weak RNG. In addition, the hardware might have a structural flaw, a weakness in the production process, or it might have been tampered with during the shipping process.
Trezor and Ledger are the most well-known hardware wallet manufacturers. Every manufacturer has specific software that you need to install to configure the wallet. You’ll find the software on the manufacturer’s site, along with instructions on how to install it.
Like with all other offline wallets, there’s no need for Bitcoin paper wallet sign-up or registration of any kind. Paper wallet services allow you to generate and print out your public and private keys on a piece of paper. The result is a printed document with a private key and a public address. The keys are often printed out both as strings and QR-codes, allowing you to use it by simply flipping open your Bitcoin wallet and scanning the codes.
The most significant benefit is increased security. Your wallet is offline until you decide to make a transaction. As such, it is impervious to hacker attacks and malware. The drawback is the paper design, which can be copied or stolen. It can also erode over time if stored improperly.
BitAddress and Bitcoin Paper Wallet offer paper wallet services. As an added security measure, some paper wallets may be designed with a holographic label or tamper-resistant features.
Here’s an original concept on how to make a Bitcoin wallet: create a physical storage device with an authentic hologram that can be removed and thus show a tamper-evident mark. This type of storage was developed in 2011 by Mike Cadwell, two years after the bitcoin network came into existence. Nowadays, companies make physical Bitcoins that look like credit cards or regular coin medals.
Physical Bitcoins have a preloaded amount of BTC, which cannot be spent until the private key is revealed. When used, the coin becomes worthless. Of all mentioned types of wallets, physical Bitcoins are the best option for offline trading. However, they’re not very popular, and there’s a very real danger of counterfeit coins. Unlike other types of storage mentioned here, there’s no need to create a Bitcoin wallet to use physical coins unless you want to redeem crypto for fiat currency. In that case, simply pick any other types of wallets and proceed with the instructions outlined above.
More Than Just a Wallet
Cryptocurrencies are making severe ripples in the finance waters, and they’re getting validated by financial institutions. Having a Bitcoin cryptocurrency wallet of any kind will save you serious headaches since hacker attacks will only increase in the future.
- How do I create a Bitcoin wallet?
Look for the third-party company that offers a wallet package you need at an affordable price or for free Bitcoin. Download the Bitcoin wallet app for smartphones if available. Create an account, follow the Bitcoin account setup instructions, and create a strong password. Keep in mind that some wallet providers might ask for your personal information.
- What is the best Bitcoin wallet for beginners?
Exodus wallet is secure, simple to use, offers a huge variety of cryptocurrencies, and has excellent customer support. It uses closed software, but that’s not a serious drawback for a large number of users. Since blockchain technology is constantly being improved, new wallets and new technologies may replace Exodus as the number one sometime in the future.
- Which is the best Bitcoin wallet?
Coinbase remains the best Bitcoin wallet since its inception. It is the only crypto exchange service that successfully hit the public market and has many useful features. In addition, it uses top-notch security measures, including biometric fingerprint logins.
- What is a Bitcoin wallet, and how does it work?
Bitcoin wallets are methods of storing Bitcoin. Due to the unique nature of blockchain, Bitcoins aren’t actually “stored” anywhere. Wallets are pieces of software that store private keys and facilitate their use in sending and receiving cryptocurrency. This article goes into greater detail on the pros and cons of different types of wallets and explains how to set up a Bitcoin wallet.