There are two main types of Bitcoin wallets – cold storage, and hot wallets. All the transactions sent to addresses created by the same seed will be part of the same wallet. This seed is a set of common words that you can memorize instead of the long and confusing private key.Īs you can imagine, it’s much easier to write down 12 simple words than a long, confusing string of numbers and letters.Īn example of a seed phrase from an Electrum walletĪdditionally, an HD wallet can create many Bitcoin addresses from the same seed, so you don’t have just one Bitcoin address. HD wallets generate a phrase known as a seed or mnemonic phrase. On the other hand, some people prefer not to be in charge of their own funds and therefore choose custodial wallets.Īs Bitcoin wallets evolved, HD wallets (aka hierarchical deterministic wallets) were created. This goes to illustrate the dangers of a custodial wallet. The Bitcoin community has a phrase that says “Not your keys, not your Bitcoin”. The risks of using a custodial wallet are that the company will freeze your funds, go bankrupt or commit fraud and steal your coins. It’s a place to store your Bitcoins but you don’t actually own them since the company supplying it holds the private keys to those Bitcoins. This means that no one has access to the private key (or seed phrase) other than yourself.Ī custodial wallet is kind of like today’s bank accounts. A non-custodial wallet is any wallet where you are the sole owner of the private key. In general, wallets can be categorized as custodial and non-custodial.
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You could argue that the program itself isn’t that important-the only thing that matters is the private key.įor example, if you have a Bitcoin wallet on your phone and that phone gets stolen, but you’ve written down your private key on a piece of paper before that happened, you could just download a new Bitcoin wallet to a different phone, import the private key to that new wallet, and regain control of your bitcoins again. In other words, it automates Bitcoin’s complex cryptography and blockchain interactions for you. The wallet’s core function is the creation, storage, and use of the private key.
A Bitcoin address is created by running some sort of mathematical algorithm on your private key.Įven though the Bitcoin address is generated from the private key, there’s no way to figure out what the private key is just by examining a Bitcoin address.The program (also known as the client) randomly creates a private key.You download a wallet program to your mobile phone or laptop.The private key is also used to generate your Bitcoin address. The most important thing to remember is this: Whoever knows your private key has control over your bitcoins. It’s from this secret combination that your wallet derives the capability to tell the Bitcoin network you want to send your Bitcoins to another destination.
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The best practice is to write it down on a piece of paper or keep it on a flash drive that’s disconnected from the Internet.Ī private key is a very long string of numbers and letters that acts as the password to your Bitcoins. The private key is best kept offline, meaning you shouldn’t write to a file on your computer. This password is called your private key and-similar to your email password-it should never be shared with anyone. With email, you choose your own password, while with Bitcoin, the wallet chooses it randomly for you. Once you have your address, what’s missing is your password. (Bitcoin addresses always start with a “1” or “3”) Here’s a Bitcoin address example: 1BoatSLRHtKNngkdXEeobR76b53LETtpyT This unique address is called your Bitcoin address, and-just like your email address-you can share it with anyone who wants to send you bitcoins. Like emails, receiving Bitcoins requires a unique personal address. If you want to send and receive emails, you need some sort of a program to do so (e.g., Gmail, Outlook). Generally speaking, Bitcoin wallets are a bit similar to how email works. Bitcoin wallet programs are available for mobile phones, desktops, and even as a standalone piece of hardware (more on that later on). The wallet does this by interacting with Bitcoin’s ledger, known as the blockchain. This isn’t the shortest read out there, but it will teach you everything you need to know about wallets so I suggest bookmarking this page for future reference.Ī Bitcoin wallet is a program for sending and receiving bitcoins.
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