Bitcoin transactions are processed through Bitcoin wallets, platforms that users can make use of to perform these exchanges. A purchaser or seller is identified only by his or her digital wallet’s address, a unique string of letters and numbers with a private key, which only the wallet holder has.
Bitcoin wallets are designed to store the private keys to your cryptocurrency, enabling you to move your funds without having to rely on a third party. Bitcoin isn’t technically “stored” anywhere so the wallet actually stores a private security key that corresponds to the Bitcoin address of your wallet. The key is actually what gives you ownership and control of bitcoin stored in it, making it an invaluable tool as an investor.
The best crypto wallets can be set up for free and with relative ease, meaning consumers can open and close wallets at will to maintain their anonymity. One person can have multiple wallets, and multiple individuals can control a single wallet.
There are several types of Bitcoin wallets to choose from, each with its own set of pros and cons. The options include:
Hardware Bitcoin wallets
This kind of wallet is an external device specifically designed to hold and manage Bitcoins. No transaction can take place unless the hardware wallet is connected to a computer or mobile device, and access to the Bitcoins held within is often protected with a PIN code.
Hardware wallets are considered the most secure type of Bitcoin wallets, as they are cold storage when not connected to a computer. However, unlike software wallets, they’re not free.
Software Bitcoin wallets
Software wallets, also known as hot wallets, can be accessed either via a desktop browser or smartphone app. Whereas hardware wallets are used for long-term storage of large amounts, software wallets are better for storing smaller amounts and making daily spending and receiving payments convenient and fast.
Precisely, a software wallet is defined as an app on your phone or computer containing your private keys. Because it’s usually connected to the internet, it’s theoretically hackable, though the most reputable software wallets are considered extremely difficult to hack.
Software wallets can come in three varieties:
- Desktop wallets: These wallets are installed directly onto a computer, where the private keys are stored on its hard drive. Funds can be accessed only from that computer, allowing you to have full control over your wallet.
- Mobile wallets: These wallets function the same way as desktop wallets, but designed for the mobile experience. Mobile wallets are convenient and can be used on the go, but can carry a greater risk of malware.
- Web wallets: These are wallets that can be accessed through a web browser, oftentimes hosted by a provider who manages the security of your private keys.
In theory, software wallets are more user-friendly than hardware alternatives, if only because they don’t require you to keep track of the whereabouts of a physical device. Some software wallets also offer built-in trading features, so you can quickly sell your crypto through their app or desktop site.
Another advantage of the software wallet is that it can be cheaper than a hardware equivalent. Many of the most popular software wallets charge only transaction fees, which are set by the network of the cryptocurrency you’re using. That said, with average bitcoin fees hitting as high as $30 during peak periods, multiple transactions can certainly take a bite out of your wallet.
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