Bitcoin is a peer-to-peer digital cash system created by a pseudonymous person or group of persons named Satoshi Nakamoto in 2009. Bitcoin is an open-sourced decentralized digital money run on distributed ledger technology known as the blockchain. Bitcoin is the first-ever cryptocurrency and bitcoin technology gave rise to many new cryptocurrencies. Bitcoin is permissionless and censorship-resistant. You do not need any intermediary to use or transact in Bitcoin.
What is a Bitcoin wallet?
A Bitcoin wallet is used to store Bitcoin. Every Bitcoin wallet has a unique address and this address is used to receive Bitcoin. You can generate any number of new addresses for every new transaction. You don't need to pay any fees to receive Bitcoin. But when you send Bitcoin to someone you have to pay the transaction fees.
Wallets are just used to store Bitcoin and make transactions. You can create as many wallets as you want. Bitcoin is bought on centralized exchanges like Binance, Coinbase, Kucoin, etc, or P2P exchanges like Paxful and then sent to a Bitcoin wallet.
Types of Bitcoin wallets
There are different types of Bitcoin wallets depending on the infrastructure of wallets and also depending on where they are stored. Based on the information below, you can pick a Bitcoin wallet on your own.
Custodial wallet
Custody is the duty to take care of something. A custodial wallet is using someone's custody to store your Bitcoin. You don't actually own your Bitcoin. You are just using their platform to store Bitcoin and they store this Bitcoin in their own wallet. A custodial wallet is generally good to use for beginners as they do not need to know any technicalities involved in using an actual wallet. A login id and password are what you need to access your custodial wallet.
Bitcoin stored in a cryptocurrency exchange is in the custody of the exchange. Hence, an exchange wallet is a custodial wallet. If the exchange gets hacked, you can lose your Bitcoin. Exchanges also halt withdrawals at times. Exchanges can also seize your funds if they want to. So if you do not want to trade with your Bitcoin and store your Bitcoin in a wallet, an exchange wallet is not the place.
The main motto of Bitcoin is to be your own bank. You need not to trust anyone with your Bitcoin. Bitcoin eliminates the need for an intermediary for storing or using it. Hence, a custodial wallet to store Bitcoin makes no sense.
Non-Custodial Wallet
Non-custodial wallet makes you the owner of your wallet. You and only you are responsible for safeguarding the funds in your wallet. A non-custodial wallet generates a private key for you to store your Bitcoin. The private key proves that you are the owner of your Bitcoin and also allows you to make a Bitcoin transaction. If you give away your private keys to someone, you can forget about your Bitcoin. Hence, the phrase "Not your keys, Not your Bitcoin".
Every non-custodial generates a new private key every time you need a new wallet. Generally, the private key is in the form of a 12 to 24-word phrase. It is also referred to as seed phrase, recovery phrase, or passphrase. Whatever they say, write it down somewhere, keep a backup of this phrase, and store it somewhere safe. Do not give it to anybody, even to a scammer.
All of the wallets mentioned in the examples below are non-custodial wallets.
Software wallet
Software wallets are the wallets that are connected to the internet. Software wallets are also referred to as Hot wallets. Software wallets can be mobile applications or desktop applications. Software wallets are preferred when you store small amounts of Bitcoin. Software wallets are prone to hacking and they must be used with strong passwords.
- Mobile wallet
- Desktop wallet
Mobile wallets are mobile apps that can be installed from Google Playstore or Appstore. Mobile wallets are convenient to use when making transactions at an outlet. It is easy to make transactions by scanning QR codes using mobile wallets. Exodus is a beginner-friendly Bitcoin wallet. Mycelium is another popular mobile wallet.
A desktop wallet is like the software you install on your PC. Desktop wallets are prone to hack if your PC is affected by malware. Desktop wallets provide easy backup to your wallet. You can dedicate a small PC as a Bitcoin wallet, never connect it to the internet and it can be used as a secure hardware wallet. Bitcoin Core and Electrum are some desktop wallets.
Hardware wallet
Hardware wallets are hardware devices that are used to store Bitcoin. They need not be connected to the internet. Since they are not connected to the internet, they are also called Cold wallets. Hardware wallets are the most secure wallets. Hardware wallets are expensive and they cost anywhere between $50 to $300. Hardware wallets are generally preferred to store relatively large amounts of Bitcoin. Even 0.1 BTC is considered enough to use a hardware wallet. Trezor, Cold card are some popular open-source hardware wallets.
Paper wallet
A paper wallet is storing Bitcoin on a piece of paper. The paper contains the passphrase or the password or whatever is required to access your Bitcoin. A paper wallet is not a good way to store your Bitcoin. If you lose the paper, or if the paper burns, you will lose your Bitcoin and make it even scarcer.
Conclusion
Wherever you store your Bitcoin, it is your hard-earned money and it is your responsibility to keep it safe. Many have lost access to their wallets and lost their Bitcoin. A man lost his drive which contained 7,500 bitcoin in 2013. Those Bitcoin are now worth over $325 million and much more in the future. While this is one case, it is estimated that about 3.7 million Bitcoin, which is about 20% of the total circulating supply is lost forever and cannot be retrieved.
Again there are two rules to follow.
- Do not lose your Bitcoin
- Do not forget the first rule
If you lose your Bitcoin, you are only helping others.
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