Bitcoin offers a decentralized and secure way to transact worldwide, but you still need a trusted method to store and manage your digital assets. This is where Bitcoin wallets come in. A Bitcoin wallet helps you keep your Bitcoin safe, make easy transactions, and track your balance.
There are numerous kinds of Bitcoin wallets, each with different features. Security is the biggest concern because, without it, your assets are vulnerable to scams, hacks, theft, malware, phishing attacks, and losing access to your Bitcoin (BTC). Ease of use is also important, especially for people new to Bitcoin.
This article explores Bitcoin wallets, explaining how they work and the different types available.
What is a Bitcoin wallet?
How Bitcoin wallets work
Types of Bitcoin wallets
Securing your Bitcoin with Proton Wallet
What is a Bitcoin wallet?
A Bitcoin wallet is an application or device that allows you to manage, store, and make Bitcoin transactions. Setting up a Bitcoin wallet(new window) is the first step to engaging with this virtual currency.
Although a Bitcoin wallet might sound similar to Apple Wallet, Google Wallet, and other digital wallets, they are fundamentally different. Most digital wallets are designed for contactless payments and depend on traditional banking systems and credit cards. In contrast, a Bitcoin wallet operates on blockchain technology and acts as your personal interface to the Bitcoin network — similar to how your online banking app is your interface to your bank account.
Learn the basics of Bitcoin in our Bitcoin guide for new users(new window).
How Bitcoin wallets work
At the core of Bitcoin’s cryptography are two keys: the public key and the private key. Every Bitcoin transaction requires a private key and a Bitcoin address (which is a hashed(new window) version of a public key).
- Bitcoin address: This is an alphanumeric identifier you can share with others so they can send you BTC. It’s a shorter, more user-friendly version of the public key. You could think of a Bitcoin address as an account number on the blockchain. An example is 1A1zP1eP5QGefi2DMPTfTL5SLmv7DivfNa.
- Public key: This is a long string of characters mathematically generated from the private key. It’s practically impossible with current technology for someone to reverse-engineer the public key and discover your private key because it is a one-way cryptographic function(new window).
- Private key: This acts as the password of your wallet account, allowing you to access and manage your BTC. Private keys are deterministically generated from your wallet’s seed phrase(new window) (plus an optional passphrase) and are used to sign transactions, proving the owner of the Bitcoin wallet has authorized the sending of BTC.
How Bitcoin transactions work
Your Bitcoin wallet displays your current balance and enables you to send and receive BTC.
When you want to send BTC, you enter the recipient’s Bitcoin address and the amount. Your wallet then signs the transaction with your private key and broadcasts it to the Bitcoin network. The Bitcoin network verifies your transaction and digital signature(new window) and then adds your transaction to the blockchain through the mining process.
If someone wants to send you Bitcoin, you provide them with your Bitcoin wallet’s receive address. It’s similar to sharing your email address when someone wants to send you an email. Although for better privacy, you should give out a new Bitcoin address for each transaction since addresses are all publicly visible and can be tracked on the blockchain.
Types of Bitcoin wallets
There are various kinds of Bitcoin wallets, each with its own unique features and functionalities. You can pick a single wallet to manage your Bitcoin or use a combination of wallets to secure multiple accounts. For example, you can use a mobile wallet for small transactions on the go and a hardware wallet for the long-term storage of the majority of your holdings.
Hot vs. cold wallets
Hot wallets are often connected to the internet and often integrated with centralized exchanges, allowing you to buy, sell, and trade digital assets fast. Types of hot wallets include mobile wallets, desktop wallets, and web wallets. However, since they’re often online, hot wallets are more vulnerable to hacking, phishing attacks, and malware. So it’s important to choose a secure, trustworthy wallet.
Cold wallets are offline. They remain disconnected from the internet, except when temporarily connecting to sign transactions. Cold wallets work best for storing large amounts of Bitcoin long term. Examples of cold wallets include hardware wallets, paper wallets, and offline software wallets (installed on a device that is permanently disconnected from the internet). The main downside of cold wallets is that they are less convenient for frequent transactions since you need to connect them to an online device to transfer funds.
Hardware vs. software wallets
Hardware wallets are physical devices that work offline (cold wallets). They usually look like USB drives, connect to a device via the USB port, and can be used with various software interfaces to manage digital assets. Using a hardware wallet is similar to using a hardware key for two-factor authentication (2FA)(new window), as both require physical confirmation for actions (in the case of Bitcoin wallets, authorizing transactions). However, hardware wallets carry the risk of losing access to your funds if the device is lost, stolen, or damaged.
Software wallets are applications that store Bitcoin private keys on your device. They are convenient and easily accessible from any device where the application is installed. Most software wallets need an active internet connection, which can make them more vulnerable to internet-based attacks. For instance, there was a case(new window) when macOS malware replaced legitimate wallet applications with infected versions to steal private keys and seed phrases.
Other types of Bitcoin wallets
Web wallets can be accessed through web browsers and used from any device with an internet connection. They are convenient for quick transactions but are at a higher risk of cyberattacks because they can be accessed from anywhere. Web wallets also require more trust in the service provider to serve the right code.
Desktop wallets are applications installed on desktops or laptops, providing a more secure option as they usually require your permission before updating the code. But desktop wallets are vulnerable to malware if the computer is compromised. Plus, depending on the app, your access may be limited to the device where the wallet is installed unless features like private key exports are available.
Mobile wallets are apps for smartphones or tablets that can be used for on-the-go transactions. They can include additional features like QR code scanning for easy transactions. However, mobile wallets are exposed to online threats. You must also rely on the security of your smartphone or tablet since it can be lost, stolen, or damaged.
Paper wallets are physical printouts of public and private keys, often including QR codes for easy scans. They are secure because they are completely offline and don’t depend on hardware or software. For example, you can store your paper wallet in a safe or deposit box. However, paper wallets are rarely used anymore because they aren’t convenient for regular transactions and require careful handling since they can be stolen, lost, or damaged. Writing down your keys on paper is only a physical backup since you still need a trusted hardware or software wallet to send transactions.
Brain wallets involve remembering a seed phrase (and any passphrase), which is used to generate the private key for your Bitcoin wallet. There’s no physical or digital record, but you risk losing your funds if you forget the seed phrase or passphrase. This has been used in high-risk situations, such as refugees crossing borders, where anything physical may be stolen. Similar to paper wallets, you still need to use a trusted Bitcoin wallet to actually send transactions.
Custodial vs. non-custodial wallets
With custodial wallets, a company, such as a centralized cryptocurrency exchange (CEX), holds your Bitcoin. You don’t have full control over your funds, and the company is responsible for your Bitcoin security. Those new to Bitcoin often find it easier to use custodial wallets, especially since they offer customer support and traditional recovery mechanisms like password reset.
But there are many downsides to custodial wallets:
- CEXs are often targets for hackers, which could result in the loss of your funds. For instance, the cryptocurrency exchange Mt. Gox(new window) suffered breaches that resulted in the loss of hundreds of thousands of BTC and the collapse of the company.
- If the CEX goes bankrupt, you might lose some or all of your assets. It could take a long time to get your money back, and you may only recover a fraction of it, depending on your insurance (if any). For example, Coinbase’s 2024 quarterly report(new window) to the SEC said that in the event of bankruptcy, assets held in custody could be claimed in bankruptcy proceedings. This scenario happened with Celsius Network, which went bankrupt in 2022 and is still working(new window) to repay customers whose accounts were frozen. And there is also a risk of fraud, which famously happened to customers of FTX(new window).
- Plus, the custodial service must comply with the regulations of every country it operates in, such as Know Your Customer (KYC) and Anti-Money Laundering (AML) laws, which reduce the privacy of your transactions.
A non-custodial (self-custodial) wallet lets you retain full ownership of your Bitcoin. Unlike custodial wallets managed by CEXs, non-custodial wallets ensure no third party can access, freeze, or control your funds.
There are several benefits to using a self-custodial wallet:
- Transactions can be more private since you don’t have to undergo KYC processes.
- Since you control your private keys, the risk of losing funds due to the failure, hacking, or bankruptcy of a custodial service is eliminated. Instead, you are fully responsible for keeping your BTC safe.
However, your non-custodial wallet is still susceptible to individual hacks, phishing attacks, and cryptojacking(new window). You are in control of your wallet’s security, so you must take precautions to protect your Bitcoin wallet(new window).
Securing your Bitcoin with Proton Wallet
Having faced the challenges of traditional finance firsthand(new window), we understand the importance of financial freedom. Our experience fueled our commitment to developing Proton Wallet as a complement to traditional banking systems.
We built Proton Wallet as a self-custodial wallet that also has the advantages of internet-connected software wallets. With Proton Wallet, end-to-end encryption ensures you have full control over your Bitcoin. Your encryption keys and recovery seed phrase belong solely to you, ensuring that even if Proton ceased to exist, you would still have access to your Bitcoin.
Additionally, Proton Wallet offers unique features that make it more secure and convenient than other self-custodial wallets. With our mobile apps and web app, you can access and transact with BTC from anywhere with an internet connection. For added ease of use, our Bitcoin via Email feature makes sending Bitcoin as easy as sending email. And our Proton Sentinel advanced security program combines AI and human expertise to detect and block malicious account takeover attempts. This ensures your Bitcoin remains secure even in the face of sophisticated cyberattacks against your account. Proton Wallet is also open source and independently audited.
By choosing Proton Wallet, you are not only securing your digital assets but also supporting our mission(new window) to create a better internet where privacy and security are the defaults.
For more information and to start using Proton Wallet, visit our Wallet homepage or create an account.
