What is a bitcoin wallet?

Before owning any bitcoins, you need somewhere secure to store them. That place is called a “wallet”. Since bitcoin is really just a snippet of code, your wallet will probably live on your computer and/or mobile device, but physical storage gadgets are also used, and there even is such a thing as a paper wallet. Here we’ll take a look at the different types of wallets, with a brief overview of how they work.

But first, it’s important to clarify something that will help to understand how they work. You store your bitcoins at your Bitcoin address, not your wallet. What your wallet holds is the private key that gives you access to your Bitcoin address (which is also your public key). If the wallet software is well designed, it will look as if your bitcoins are actually there, which makes using bitcoins more convenient.

Electronic wallets can be downloaded software, or hosted on the web (“in the cloud”, as we say these days). The former is simply a formatted file that lives on your computer or device, and that facilitates transaction formatting. Hosted wallets tend to have a more user-friendly interface and more on-the-go functions, but you will be trusting a third party with your private keys. There are a few hybrid models, and some really strange ones, and each provider is slightly (in some cases very) different from the rest. This summary is meant as a general overview of the different types, not a list or a recommendation of specific services.

One very cool function worth mentioning is that most wallets will convert your public bitcoin address into a QR code, which makes it so much easier to send bitcoins directly from your phone. You just hold your phone’s camera up to the square, scan it, and the address is entered into the “send” location.

Here’s mine:

(feel free to send me some bitcoins if you wish!)
(feel free to send me some bitcoins if you wish!)

Software wallet

Installing a wallet directly on your computer gives you the security that you control your keys. Most have relatively easy configuration, and are free. The disadvantage is that they do require more maintenance in the form of backups. If your computer gets stolen, hacked or corrupted and your private keys are not also stored somewhere else, you lose your bitcoins.

The original software wallet is the Bitcoin Core protocol, the program that runs the Bitcoin network. You can download this here and become a node (that doesn’t mean that you need to mine bitcoins) with wallet capability, but you’d also have to download the ledger of all transactions since the dawn of bitcoin time (2009). As you can guess, this takes up a lot of memory (over 20GB).

Most wallets in use today are “light” wallets, or SPV (Simplified Payment Verification) wallets, which do not download the entire ledger but sync to the real thing. Armory is a good example of a software bitcoin wallet, as are Electrum and MultiBit.

Web-based wallet

Web-based wallets offer increased convenience – you can generally access your bitcoins from any device if you have the right passwords. All are easy to set up, come with desktop and mobile apps which make it easy to spend and receive bitcoins, and most are free. The disadvantage is the lower security. With your private keys stored in the cloud, you have to trust the host’s security measures, and that it won’t disappear with your money, or close down and deny you access.

Several offer a wide range of services such as bitcoin purchase or sale, multi-wallet generation, coin mixing (to hide the origin), offline storage, merchant services, bank account connection, search function for address of people you know or people near you, maps of places near you that accept bitcoins…  Some are accessible via a web page, others as a browser extension, and almost all have a smartphone app. Among the best-known ones are Blockchain, Coinbase, Xapo and Hive.


image via KeepKey
image via KeepKey

Hardware wallets

Hardware wallets are small devices that occasionally connect to the web to enact bitcoin transactions. They are extremely secure, as they are generally offline and therefore not hackable. They can be stolen or lost, however, and the bitcoins that belong to the stored private keys along with it.

Trezor, KeepKey, LedgerWallet and Case are recent examples of efficient hardware wallets.

Paper wallets

Perhaps the simplest of all the wallets, these are pieces of paper on which the private and public keys of a bitcoin address are printed. Ideal for the long-term storage of bitcoins (away from fire and water, obviously), or for the giving of bitcoin as a gift, these wallets are more secure in that they’re not connected to a network. They are, however, easier to lose. With services such as bitadress.org and bitcoinpaperwallet.com, you can easily create a new address and print the wallet on your printer. Fold, seal and you’re set. Send some bitcoins to that address (the QR code that you see in the picture), and then store it safely or give it away.

image via BitcoinPaperWallet
image via BitcoinPaperWallet


This relatively obscure variety invokes some heavy cryptography to make it not necessary to store private keys anywhere other than in your head. If your memory’s as bad as mine, this is understandable cause for concern, but apparently all you have to do is remember a long phrase (such as the first sentence from your favourite book, or the first few lines from your favourite Beatles song).

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Even within these categories there is a wide variety of services and functions, some very technical, some incredibly useful, and some both. Going into more detail will involve delving into cryptography and connectivity, which is best saved for individual profiles and security updates. Bitcoin wallets is a fascinating sector, impacted by technology, regulation and some unusual business models. And it’s a rapidly changing sector, too. The capabilities of the wallets are deepening in line with our understanding of how it all works, consolidating in line with the regulator’s interest, and broadening in line with our increasing use of digital currency.

(For more on how Bitcoin works, see Bitcoin Basics.)

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