Bitcoin Wallet: What It Is, How It Works, Types, and Security

A cryptocurrency wallet is an application that performs the duties of a wallet for your cryptocurrency. This item is referred to as a wallet because it functions in a manner that is similar to that of a wallet, which is used to store cash and credit cards. Instead of keeping these actual goods, it maintains the passkeys you use to sign for your Bitcoin transactions and offers an interface enabling you to access your money.

The blockchain is now available to everyone thanks to the development of modern cryptocurrency wallets. Before the introduction of Bitcoin, the process of transmitting cryptocurrency was a laborious manual effort that required the entry of lengthy keys. These days, the program handles the majority of your work.

Bitcoin’s creator, Satoshi Nakamoto, owned the initial wallet. According to reports, Hal Finney was the first to use the Bitcoin client software wallet. Finney was also the owner of the second wallet, which he used to facilitate communication with Nakamoto. Nakamoto supplied him with ten bitcoins as a test, which marked the beginning of the cryptocurrency mania.

Understanding Cryptocurrency Wallets

Cryptocurrency wallets are software applications on computers or mobile devices like phones or tablets. They use an internet connection to access the blockchain network for the cryptocurrency you’re using.

Cryptocurrencies are not “stored” anywhere—they are bits of data stored in a database. These data bits are scattered all over the database; the wallet finds all of the bits associated with your public address and sums up the amount in the app’s interface.

Sending and receiving cryptocurrency is very easy using these applications. You can send or receive cryptocurrency from your wallet using various methods. Typically, you enter the recipient’s wallet address, choose an amount to send, sign the transaction using your private key, add an amount to pay the transaction fee, and send it.

Receiving is even easier—the sender enters your address and goes through the same routine. You accept the payment, and the transaction is done.

Cryptocurrency Wallet Types

There are two main types of wallets: custodial and noncustodial. Custodial wallets are hosted by a third party that stores your keys for you. This company could provide enterprise-level data security systems businesses use to preserve and secure data. Some cryptocurrency exchanges offer custodial wallets for their customers. Noncustodial wallets are wallets in which you take responsibility for securing your keys. This is the type that most cryptocurrency wallets on devices are.

There are two subcategories of wallets: hot and cold. A hot wallet connects to the internet or a connected device, and a cold wallet has no connection. Lastly, there are three subcategories of wallets—software, hardware, and paper. Each of these types is considered either a hot or cold wallet.

So, you can have a noncustodial software hot wallet, a noncustodial hardware cold or hot wallet, or a custodial hardware cold wallet. These are the most common types, but you may encounter other combinations.

Software Wallets

Software wallets include applications for desktops and mobile devices. These wallets are installed on a desktop or laptop computer and can access your cryptocurrency, make transactions, display your balance, and much more. Some software wallets also include additional functionality, such as exchange integration if you’re using a wallet designed by a cryptocurrency exchange.

Many mobile wallets can facilitate quick payments in physical stores through near-field communication (NFC) or scanning a QR code. Mobile wallets tend to be compatible with iOS or Android devices. Trezor, Electrum, and Mycelium are examples of wallets that you can use. Software wallets are generally hot wallets.