To secure your Bitcoin purchases, it is absolutely mandatory to rely on a Bitcoin wallet, which will allow you to store your virtual currency. Without the supervision of a bank or governmental authority, you are responsible for your own investments as well as for your storage security system. There exist various forms of Bitcoin wallets, all of which are suited to answer different issues based on the nature of your purchases and your personal or professional objectives.
What Is a Bitcoin Wallet?
Once you understand what Bitcoin is, the next step is to realise why a Bitcoin wallet is so essential. It acts as a vessel for all the cryptocurrencies you purchase and allows you to store large quantities of these assets or to spend them. Without a Bitcoin wallet, it is indeed impossible to buy Bitcoin or to spend it!
Unlike with online banks, there is no adviser at your disposal to manage your account and secure your data. You need to become your own banker and to carefully store your own Bitcoin wallet data. What makes this wallet special is the public and private address system it relies on.
Cryptography to Secure Exchanges
ECDSA (Elliptic Curve Digital Signature Algorithm) was developed to make cryptocurrency exchanges more secure. It establishes a cryptography system which uses an asymmetrical key. When you purchase Bitcoin and store the currency onto your wallet, you are given two keys: a public key and a private key.
The public key’s role is to check that the signature is correct, while the private key sets the transaction order in motion on the network. To receive Bitcoin from someone or from a platform, you simply give the sender your public key. Your private key, however, should be shared under no circumstances.
What Is a Bitcoin Address?
Your Bitcoin address is your personal account number, which is equivalent to your Bank ID or IBAN number. Your Bitcoin address is required for any transaction carried out on a Bitcoin platform. Each address is randomly generated by an algorithm – you should always write it down somewhere secure so no one can access it – in the form of a 26 to 35-character alphanumerical chain which always begins with 1 or 3.
Your Bitcoin address is also required if you wish to send funds to someone. Among the drawbacks of the alphanumerical chain is the fact that it can be difficult to copy it correctly. If you make even the slightest mistake when copying the chain, your Bitcoin will be sent out, but will never reach its recipient. In that case it may be complicated or even impossible to get the Bitcoin you have sent back. This is why platforms have developed QR code or copy/paste solutions which facilitate exchanges and minimise the risk of human error.
Where Can I Find my Bitcoin Address?
For every new transaction carried out, a new Bitcoin address can be randomly created to reinforce security within exchanges. Your Bitcoin address is automatically generated onto your Bitcoin wallet. You then simply need to copy it to validate the transaction (note that you can also use the same Bitcoin address for several transactions).
To have the recipient validate a transaction, go to the ‘Send’ section or to any other dedicated field where crypto exchange is indicated. You need to know your recipient’s public Bitcoin address. It is also possible to send your QR Code straight from your Bitcoin wallet to avoid any mistakes. Once all these fields are filled out, the next step is simply to send the amount the recipient and yourself have agreed upon. To guarantee protocol and exchange security, transaction fees are usually deducted from the total amount. Note that these fees may have an impact on how the network will prioritise your transaction and therefore on how quickly your Bitcoin payment will be received.
Which Bitcoin Wallet to choose?
For all your online purchases made with Bitcoin, there exist three types of support systems to manage your cryptocurrency. While their usefulness and levels of security diverge based on how you are likely to use your Bitcoin, all these solutions may be employed to exchange your tokens.
Hardware Wallet or Cold Wallet
Also known as hardware wallets or cold wallets, physical Bitcoin wallets can be found in the form of paper or offline electronic Bitcoin wallets to store your data. In its electronic version, this device may take the shape of a piece of metal, an external hard drive, an external USB device (similar to a memory stick), etc.
Among the most renowned Bitcoin wallet brands is Ledger. This manufacturer designs latest generation equipment to store and manage your Bitcoin and to transfer all your cryptocurrencies securely.
The main benefit of an electronic Bitcoin wallet is that your private key is not connected to the Internet (it is stored offline), which protects it from any piracy attempts. The drawback, however, is that this is a paid solution, since you need to purchase this physical wallet in order to use it.
Who Is It For?
Individuals and professionals alike favour hardware wallets because they are simple to use and offer excellent data protection. However, they are not connected to your computer. This means that, for instance, should you lose your wallet’s private key, the crypto assets stored on it would be lost forever.
In addition, as the system is not very flexible, it could prove complicated to use for those who lack experience. Physical solutions also pose speed limitations when it comes to trading exchanges, since you need to connect to the network each time you wish to transfer Bitcoin. This hindrance is particularly detrimental to those who complete investments on a daily basis.
For many companies, it remains a choice solution if they wish to ensure the security of their data. Without being connected to online networks, an e-wallet can never be breached, even if a hacker has already infiltrated your computer.
Desktop wallets are the most widespread, since they rely on online platforms to purchase and sell Bitcoin. Storage remains perfectly secure since the owner is the only one who receives a private key directly onto their device. As the sole owner of your crypto assets, you can interact with the blockchain directly without running the risk of having a third party tamper with your Bitcoin wallet’s storage or management solution.
Who Is It For?
Desktop wallets are not recommended for computers which may be susceptible to malware or viruses. If you carry out daily exchanges, it may be preferable to operate from a dedicated computer rather than for your everyday machine in order to minimise the possibility that your Bitcoin wallet could be breached.
Hot wallets, also called ‘web wallets’, store your private key online. While it is particularly convenient for professionals and individuals who carry out trading operations every single day, exposing your private key on the Internet increases the risk of hacking. For that reason, it is advised to only store a limited amount of Bitcoin on these wallets. Hot wallets are routinely used for temporary storage needs.
Who Is It For?
Hot wallets are perfect for those users who have very little Bitcoin on their Bitcoin wallet. As it isn’t a very secure solution, it is recommended not to store large amounts of crypto assets on this Bitcoin wallet to avoid hacking.
Can One Create a Bitcoin Wallet Anonymously?
This is an interesting question, as managing an electronic Bitcoin wallet securely can lead to some very legitimate doubts. If banks and governments have no hand in controlling blockchain exchanges, how can one be sure that these exchanges do not participate in money laundering operations or in other fraudulent ends?
Anonymity & Bitcoin: The Limitations
We must remember that each Bitcoin account is associated with a Bitcoin address, which is equivalent to your digital user address. Thus, the exchanges are very similar to those which subscribe to the traditional banking system. To wire money or receive it onto your bank account, the recipient’s Bank ID (or IBAN number) is required. This unique code gives an overview of all incoming and outgoing operations on your account. A personal Bitcoin address takes on the exact same role with regard to your Bitcoin account.
When an exchange is carried out with a Bitcoin recipient, you give them your Bitcoin wallet’s receiving address, which is a pseudonym but not an anonymity code – if the subtle difference makes any sense. Even if it is impossible to know the exact identity which lies behind a wallet address, it is, however, possible to trace back every exchange ever made using this account.
Regarding the question of anonymity, which has been worrying governments and politicians, come companies decided to implement stricter regulations as of 2017. To that end, they rely on brokers or exchange platforms which keep a trace of every transaction completed together with a Bitcoin address anyone may access (but not with the person’s identity, of course). While this measure was implemented by some Bitcoin platforms, not all of them apply it as of yet. If your wish was to remain entirely anonymous, know that it is quite plainly impossible.