What Are Bitcoin Wallets And How Do They Work

Editorial Team

Bitcoin Wallets And How Do They Work

Over the years, Bitcoin has increased in value owing to widespread acceptance across the world. Today, one can buy Bitcoin either through a stockbroker or a crypto exchange. Purchasing digital currency is the first step of investing in cryptocurrency. Nonetheless, this can be an unfamiliar world for many particularly new investors. Once you purchase your digital coins, you also need a Bitcoin wallet.

Why are Bitcoin Wallets Important?

A Bitcoin wallet is a digital wallet that crypto traders use to send or receive Bitcoins. This wallet is identical to a traditional physical wallet. The wallet stores cryptographic information, which is used to gain access to Bitcoin addresses and ultimately make transactions. It’s now much easier than ever to purchase or sell Bitcoin ( BTC). The next step after you have bought Bitcoin is to make sure it is kept safe. Maybe you’re wondering where to store Bitcoin. BTC is safely kept in a Bitcoin wallet that can be accessed using a key.

This doesn’t mean you have to perform this directly. A wallet uses a secret key to sign outgoing transactions. The key also generates your wallet addresses. Bitcoin exists digitally but you have to keep it in a specific place, regardless of whether you plan to use it to purchase goods and services or invest it in the future. This specific place is a Bitcoin wallet, which was created to ensure digital currencies are kept safe and available when needed for trading purposes. So, to buy Bitcoin you will also need to use a BTC wallet.

Crypto wallets are similar to physical billfolds in that they keep track of your cryptocurrency and store information that can prove ownership. Instead of keeping money in physical form, the wallet stores cryptographic information which is necessary for trading. The device that holds your wallet contains the private key and not cryptocurrencies themselves. Bitcoin coins reside in the Bitcoin blockchain. You will need your private key to authorize transactions of those coins to the wallet of another individual.

How Does A Bitcoin Wallet Work?

Since Bitcoin operates on the blockchain, a secure digital ledger, using a BTC wallet is not as straightforward as using a leather wallet. It is not as easy as opening a wallet to store Bitcoin because it operates on a secure digital ledger. But understanding how wallets work will help to operate them with ease. Cryptographic key pairs are used to send as well as receive BTC. A key pair is composed of a private key as well as a public key that matches it. To send Bitcoin, one needs to use private keys that must remain secret. 

Public keys are used to receive Bitcoin and a trader can share them with everyone. You can create public keys by obtaining a private key. When you create your Bitcoin wallet, a seed is created. To display seeds, mnemonic phrases can be used. They are displayed in the form of a series of words. This seed is used to produce every Bitcoin key you need to send and receive Bitcoin. The industry standard for Bitcoin key creation and management is called the Hierarchical Deterministic framework. Most wallets automatically generate new public keys when you accept Bitcoin.

No longer is the issue of address or public key reuse a problem. If you use the same public keys every time you receive Bitcoins, anyone could easily see your entire payment history. The privacy of a user is greatly enhanced by treating keys as tokens that are only used once. As long as the user knows their recovery seed (often a list of 12- to 24-word created with a wallet), they can restore their wallet at any time.

What is the cost of a Bitcoin Wallet? 

A Bitcoin wallet is free if you are only using it to store Bitcoin. Cryptocurrency exchanges that host wallets charge different fees depending on the transaction one make. Generally, a wallet can be purchased for about $200 or more. Having understood how crypto wallets work, it is essential to always keep track of your Bitcoin wallet key.

Otherwise, someone else could have it and hack into your wallet in order to forward it to their wallet. If that happens, you will lose the digital coins in the wallet. Many cryptocurrency wallets are not centralized and cryptographically secure. In other words, there is no report center or service number that you can call to verify your identity or reset your password. Unfortunately, statistics have shown that up to 20% of Bitcoin in circulation worth millions is lost to digital wallets that users cannot access. That said, there are different types of Bitcoin wallets. Each caters to different needs.

Types Of Bitcoin Wallets

1. Mobile wallets

A mobile crypto wallet is essential for anyone who uses Bitcoin daily to buy goods at shops and make trades in person. The app runs on your smartphone and stores the private keys. It allows you to buy, trade, and store crypto. Some apps also utilize the smartphone’s near-field communication feature (NFC). This enables users to simply tap their phone against the terminal without the need to give any information. Mobile wallets benefit from simplified payment verification technology because they only work with small subsets that are trusted by the Bitcoin network.

These trusted nodes can control the transactions and coins, which is contrary to Bitcoin’s trustless philosophy. These wallets are essential for mobile phones because of the limited system resources. However, having easy access to funds can be a potential threat. Mobile wallets can also be hacked and malware as they are convenient for Bitcoin storage on the go. If someone gains access to your mobile phone, you can lose control of it. This is especially true if two-factor authentication is not enabled.

Two-factor authentication (2FA), which is the second layer of security, requires you to enter a code along with your username and password in order to log in. The main difference between 2FA and password is the fact that a code is sent via SMS to your phone or via email to verify you are the one attempting to log in. An authenticator app such as Google Authenticator or FreeOTP is a more secure way to create 2FA codes. This method is less vulnerable to email hacks or SIM swap attacks.

Crypto traders should only deposit the Bitcoin they need in a mobile wallet. The larger Bitcoin holdings should be kept in a different wallet. There are many mobile Bitcoin wallet apps available for both Android and iOS. These wallets don’t install the whole blockchain to your device, but they can scan the blockchain to determine your balance. It is also worth noting that there are many fake wallet apps and scams out there that are looking to steal private keys from unsuspecting users.

Exodus.com is one of the platforms that offer mobile wallets. This platform helps crypto traders secure as well as exchange and manage cryptocurrencies on mobile wallets.

2. Web wallets 

Web wallets keep private keys on a server that is constantly accessible and managed by a third party. Each crypto exchange offers different features. Some can link to desktop and mobile wallets, while others replicate your addresses across all devices. Just like a mobile wallet, a user of a web wallet can access their funds from any device that has internet connectivity. Website administrators can access your private keys and have complete control over your coins.

A majority of these types of wallets operate on exchanges. Some exchanges have taken advantage of this operation mechanism to steal from users. For example, there have been occasions when exchanges closed down and took off with funds from their users. Hackers are often targeting exchange wallets because they only need an email and a password to access them. 

Nonetheless, exchange wallets can offer some protection against the loss of funds in certain cases. In some cases, exchange wallets offer insurance or backup funds that can be used to repay users in the event of hacking. The fact that people frequently use the same email address and password on multiple services makes it easy to leak these credentials to hackers. Coinbase is the most popular exchange that offers web wallets. You can also get these wallets from crypto brokerage platforms such as robinhood.com.

3. Desktop wallets

Desktop wallets can be downloaded to your computer and installed on it. They store your private keys on your hard disk or solid-state drives (SSD) and allow you to access them from anywhere. They are by definition more secure than mobile and online wallets because they don’t rely upon third parties for data and are easier to steal. One can still connect a desktop wallet to the internet, making it less secure. Desktop wallets can be a great option for people who want to trade Bitcoin in small amounts using their own computers.

There are many desktop wallets available that can be customized to meet different needs. There are many desktop wallets that focus on security and others that emphasize anonymity, convenience, decentralization, and other aspects. Full nodes wallets download the entire blockchain on your machine. This will require hundreds of gigabytes of disk space and an internet connection. They offer you more detailed control of your transactions than most wallets. 

These are several benefits that crypto traders get from a wallet like this. You can check the Replace-by-Fee box if you wish to accelerate your transaction. It offers a drop-down box for intuitive control of the transaction fee, speed control, and other details. Moreover, transactions can be broadcast directly to the memory pool, thus eliminating the need for seeking third-party help. Popular platforms to acquire desktop wallets are Exodus.com, bitcoincore.org, and atomicwallet.io.

4. Hardware wallets

Hardware wallets are a unique type of Bitcoin wallet. They store private keys in a physical device. This is the best way to store any amount of Bitcoin. Hardware wallets are able to be used interactively and securely, unlike paper-based wallets that must be converted to software. Because the funds cannot be transferred from the device in plaintext, they are immune to computer viruses. In most cases, their software is open-source. Many hardware wallets include screens that can be used to verify or display wallet information.

A screen can also generate a recovery phrase, confirm the amount, and even the address of the payment you intend to complete. Hardware wallets offer the highest level of security and convenience. These devices connect to a computer and store your private key for sending and receiving bitcoin. Your funds will remain safe and secure as long as the device is authentic and made by a competent and trustworthy manufacturer.Ledger.com is one of the best sellers of hardware wallets. Their Nano X hardware wallet is their most popular product.

The software on a hardware wallet allows you to receive bitcoin and sign transactions, and it allows you to check your account balance. A hardware wallet is the best choice if you are concerned about security. Do not buy a hardware wallet on any used-item marketplaces. Many fake hardware wallets are out there that can steal Bitcoin or other digital currencies. Make sure you only purchase hardware wallets directly from the manufacturer. Also, make sure to verify that your browser is logged into their official website. To ensure that it is correct, check the URL in your browser’s address bar.

What Are Bitcoin Wallets And How Do They Work

5. Paper wallets

A paper wallet comes in the form of a physical document that has a public address to receive Bitcoins. It also contains a private key that allows for you to transfer or spend Bitcoin kept at that address. Many paper wallets come in the form of QR-codes. This allows you to quickly scan them and add keys to a software wallet to buy or sell digital currencies. You can create a paper wallet by using services that allow you to generate a random Bitcoin address and its private key.

You can print the generated keys with certain services that provide a tamper-resistant design and even an option to order holographic labels. A paper wallet has the advantage of having keys kept offline. This makes it extremely resistant to hacking. But you should still take precautions when creating your wallet. It is important to ensure that nobody sees you creating or storing your wallet. It is best to use Ubuntu or another clean operating system to ensure no spyware can monitor your activities. After the paper wallet has been set up, the website codes should be able to run offline.

This will allow the user to disconnect from the internet before actually creating the keys. Also, use a printer that isn’t connected to the internet. You should be conscious of the fact that you are printing private information on paper. To protect the paper, you should take certain precautions. To prevent water damage and general wear and tears, it is best to keep the paper in a plastic bag. Others prefer to laminate it and store it in a safe box or place.

How to Choose a Bitcoin Wallet

Choosing the right wallet that matches your needs can be challenging because of the different types of wallets available. The good thing is that you are not restricted to using one type of wallet forever. You can work with multiple Bitcoin wallets to cater to all your needs. Below are things to keep in mind when assessing your options.

1. Wallet reputation

When you purchase digital currencies, you are not restricted to any one type or brand of Bitcoin wallet. So, take time and find out more about the user experience from reviews. Also, seek to know the security of the wallet and other features you may be interested in. Learn whether a wallet has been hacked before. Avoid those that have had serious security breaches.

2. Key management

Management of private keys is handled differently in different wallets. For some, the wallet’s service provider is in charge of key management. In this case, you can regain access in the event that you have lost your key. But for other wallets that are completely reliant on the traders, the manufacturer doesn’t know related private keys that secure wallets. Users of these wallets will lose access if they lose their keys. SO, if you fear that you might lose your key someday, you should go for a Bitcoin wallet whose key is retained by the service providers.

3. How do you intend to use cryptocurrency

Here, convenience versus security and speed versus safety come into play. People who spend tokens frequently can go for a more convenient web or mobile option that links directly to the exchange. On the other hand, traders who store a lot of cryptocurrencies should opt for more secure options.

4. Backup options

Some Bitcoin wallets enable users to back up data using a physical device or online. This ensures that if your mobile device or computer crashes, you can always recover access to your digital coins. People who plan to own lots of digital currencies should consider wallets that support data backup.


It is important to note that you cannot convert your Bitcoins to cash anytime you want. But you can sell them whenever you want. Most crypto exchanges usually find buyers on behalf of their members and also manage transactions. This intervention helps to quickly turn your digital coins into cash. Once a sale is completed, it can take you up to three days before you can have the money in your bank account. Also, timeframes and restrictions vary from one wallet to another.