Wednesday, June 29, 2022

How Does Bitcoin Wallet Work

What Are The Risks Of Bitcoin

How Bitcoin Wallets Work (Public & Private Key Explained)

The risks involved with bitcoin include the following:

  • Volatility in investments. Bitcoin does not have a long-term track record or history of credibility behind it. Prices rise and fall quickly, and well-known individuals such as Elon Musk have brought the value up almost 10% and caused it to decline by 5%, just by sending out tweets. In 2014, in one day, the price dropped by 80%.
  • No insurance. Bitcoin exchanges and wallets are not insured by federal or government programs. Unlike bank accounts, if something happens, it is unlikely that individuals will get their bitcoin back.
  • Suspect to ransomware. Because transactions are made digitally and anonymously, bitcoin is the currency of choice when hackers hold an unsuspecting victim’s data ransom.
  • Regulatory restrictions. Bitcoin has also been used for black market transactions, which may invite government regulation to restrict it.

Generating A Private/public Keypair

The first step to getting your bitcoin into cold storage is creating an offline Bitcoin address. This address will have a public/private key pair that is created without ever touching the Internet. A public/private key pair can be thought of as an email address and its corresponding password. To ensure the maximum level of security, its important that this key pair never be exposed to the Internet.

Read more: Get clarity on key terms like public & private keys, transaction inputs & outputs, confirmation times, and more.

Setting up your cold storage paper wallet is fairly simple and requires very little technical knowledge. The one “hard” part is that, to ensure your paper wallet’s private and public keys have never touched the Internet, you’ll need to save the webpage that generates the keys, disconnect your device from the Internet, open the saved webpage on your desktop, then generate the keys.

For Bitcoin Cash , we recommend this wallet-generating tool.

Outweighing The Pros And Cons

Paper wallets have been long regarded as one of the safest ways to store bitcoin. In their earlier days, they were the most secure option because they placed the security of money directly in the hands of the user. Although that is often regarded as a positive aspect, it also means the risks are amplified, especially if you have an incomplete understanding of how they work.

Despite early popularity, many traders see it as merely a âmiddle step in bitcoinâs evolution.â Some may even consider it obsolete, as there are safer and more practical ways to store BTC nowânamely hardware wallets.

However, it shouldnât stop you from exploring them and their practical applicationsâbut remember, itâs important to get a good grasp of how they work before you begin your exploration. The cryptocurrency space is still in its infancy, and there are bad apples in the world looking to take advantage of unsuspecting traders. By further learning how paper wallets work, youâll be able to protect yourself and keep your money safe.

You May Like: How To Get Money Out Of Bitcoin

What Is A Bitcoin Wallet

A Bitcoin wallet is a type of digital wallet used to send and receive Bitcoins. This is analogous to a physical wallet. However, instead of storing physical currency, the wallet stores the cryptographic information used to access Bitcoin addresses and send transactions. Some Bitcoin wallets can also be used for other cryptocurrencies.

Base58 And Base58check Encoding

How do bitcoin work

In order to represent long numbers in a compact way, using fewer symbols, many computer systems use mixed-alphanumeric representations with a base higher than 10. For example, whereas the traditional decimal system uses the 10 numerals 0 through 9, the hexadecimal system uses 16, with the letters A through F as the six additional symbols. A number represented in hexadecimal format is shorter than the equivalent decimal representation. Even more compact, Base-64 representation uses 26 lower-case letters, 26 capital letters, 10 numerals, and two more characters such as + and / to transmit binary data over text-based media such as email. Base-64 is most commonly used to add binary attachments to email. Base58 is a text-based binary-encoding format developed for use in bitcoin and used in many other cryptocurrencies. It offers a balance between compact representation, readability, and error detection and prevention. Base58 is a subset of Base64, using the upper- and lowercase letters and numbers, but omitting some characters that are frequently mistaken for one another and can appear identical when displayed in certain fonts. Specifically, Base58 is Base64 without the 0 , O , l , I , and the symbols \+ and /. Or, more simply, it is a set of lower and capital letters and numbers without the four just mentioned.

checksum = SHA256)


Recommended Reading: How Do You Withdraw Cryptocurrency

Where Can I Buy Bitcoin

There are several ways to get bitcoin, but these are some of the most common:

  • Bitcoin ATMs. There are more than 26,000 bitcoin ATMs in the U.S.

  • Investment brokerages.Robinhood was the first mainstream investment broker to offer bitcoin and other cryptocurrencies. Tradestation, eToro and Sofi Active Investing also offer cryptocurrency trading in most U.S. states.

  • Cryptocurrency exchanges. There are a number of exchanges in the U.S. and abroad. Coinbase is the largest cryptocurrency exchange in the U.S., with access to around 100 cryptocurrencies.

Of the online brokerages and cryptocurrency exchanges that NerdWallet reviews, the following currently offer bitcoin.

Available for:

For Additional Security Consider Multi

Multi-signature wallets â or multisig wallets â are wallets that require two or more private key signatures to authorise transactions. This solution is useful for a number of use cases:

  • An individual using a multisig wallet can prevent losing access to the entire wallet in a case scenario where one key is lost. For example, if a user loses one key, there will still be two other keys that are able to sign transactions.
  • Multisig wallets can prevent the misuse of funds and fraud, which makes them a good option for hedge funds, exchanges, and corporations. As each authorised person will have one key and a sign-off requires the majority of keys, it becomes impossible for any individual to unilaterally make unauthorised transactions.

Any of the wallet types described above have multisig versions. You can have multisig hot wallets, cold wallets, hardware wallets, and so on.

Also Check: Why Is All Crypto Down

Best For Free Buying And Selling: Robinhood


Robinhood is a securities brokerage platform and does not meet the strict definition of a Bitcoin wallet or cryptocurrency exchange. Users who wish to gain exposure to cryptocurrency can do so through Robinhood, but they are unable to deposit or withdraw Bitcoin into or from their account. Users may also face increased risk of loss from hacking. Robinhood began testing a new crypto wallet in October 2021.

  • Limited currencies available

Robinhood started as a free stock trading platform and has expanded to include Bitcoin and other cryptocurrencies. Robinhood has both a wallet-like offering as well as an exchange like Coinbase , so everything is in one place. However, you can’t withdraw or transfer coins to or from Robinhood using another wallet.

Robinhood is a mobile-first platform but it also has a desktop version, available on the web. What really sets Robinhood apart is that its completely free to use. There are no commissions when buying or selling Bitcoin. Robinhood customers can currently buy, sell, and hold Bitcoin and six other cryptocurrencies.

Robinhood has experienced some outages in the past, so it may not be quite as reliable as some other wallet providers.

What Are The Problems With Bitcoin

What Is A Bitcoin Wallet And How Does It Work?

There have been several criticisms of bitcoin, including that the mining system is enormously energy hungry. The University of Cambridge has an online calculator that tracks energy consumption and at the beginning of 2021 it was estimated to use over 100 terawatt hours annually. For perspective, in 2016 the United Kingdom used 304 terawatt hours in total.

The cryptocurrency has also been linked to criminality, with critics pointing out to it being a perfect way to make black market transactions. In reality, cash has provided this function for centuries, and the public ledger of bitcoin may actually be a tool for law enforcement.

Read Also: Should I Buy Crypto On Robinhood

Special Considerations For Wallet Security

Wallet safety is essential, as cryptocurrencies are high-value targets for hackers. Some safeguards include encrypting the wallet with a strong password, using two-factor authentication for exchanges, and storing large amounts in an offline device.

Most modern wallets are generated from a twelve-word mnemonic seed, which can be used to restore the wallet if the device is lost or damaged. These words should be carefully stored in a safe place, since anyone who finds them will be able to steal your cryptocurrency.

Disclaimer: Investing in cryptocurrencies and other Initial Coin Offerings is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual’s situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein.

Bitcoin Wallets The Facts

The Facts

Setting Up Your Bitcoin Wallet

Here are the top 5 options for bitcoin wallets:

  • Desktop Bitcoin Wallets
  • Desktop Wallets

    Mobile Wallets

    Internet-Based Bitcoin Wallets

    Paper Wallets

    Hardware Wallets

    A Closer Look: Bitcoin Exchanges and Online Wallets

    Heres a quick list of some of the best bitcoin wallets/exchanges around the globe:

  • Unocoin: This is an exchange that primarily targets the Indian marketplace. Unocoin allows for an individual to sell, purchase, and store bitcoins. If you are looking to make a deposit, you can do so through any national online bank.
  • Coinjar: This is worth adding to your To-Watch list as it was Australias market leader back in 2015. In fact, the Melbourne-based wallet and exchange provider raised $500K AUD in venture funding and won an award at Finovate Europe two years ago for its user experience.
  • Coinbase: You might have heard of this wallet and exchange service before as it is quite popular. Originally a United States-based service, Coinbase has recently opened up to a variety of European countries.
  • Xapo: Offering deposits in fiat currency that are converted to bitcoin, this wallet and bitcoin debit card service has made a name for itself as of late.
  • Risk to Keep in Mind

    Here are some banks that have been known in the past to be biased against bitcoin:

  • The Royal Bank of Canada
  • Commonwealth Bank of Australia
  • Bank of the West
  • Chase
  • Can You Make Face-To-Face Trades?

    A Brief Overview: Bitcoin Mining

    Can I Turn to Investment Trusts?

    Also Check: How To Flip Bitcoin For Profit

    Addresses Vs Public Keys

    Public keys are often conflated with addresses. An address is derived directly from a public key through a hashing algorithm, and almost all wallets and transactions will display addresses rather than public keys. Behind every address is a public key.

    Addresses are shorter than public keys, and usually begin with a 1, 3, or bc1, while public keys begin with 02, 03, or 04.

    & #x27A4

    Cryptocurrency Fraud And Cryptocurrency Scams

    How Does Bitcoin Work

    Unfortunately, cryptocurrency crime is on the rise. Cryptocurrency scams include:

    Fake websites: Bogus sites which feature fake testimonials and crypto jargon promising massive, guaranteed returns, provided you keep investing.

    Virtual Ponzi schemes: Cryptocurrency criminals promote non-existent opportunities to invest in digital currencies and create the illusion of huge returns by paying off old investors with new investors money. One scam operation, BitClub Network, raised more than $700 million before its perpetrators were indicted in December 2019.

    “Celebrity” endorsements: Scammers pose online as billionaires or well-known names who promise to multiply your investment in a virtual currency but instead steal what you send. They may also use messaging apps or chat rooms to start rumours that a famous businessperson is backing a specific cryptocurrency. Once they have encouraged investors to buy and driven up the price, the scammers sell their stake, and the currency reduces in value.

    Romance scams: The FBI warns of a trend in online dating scams, where tricksters persuade people they meet on dating apps or social media to invest or trade in virtual currencies. The FBIs Internet Crime Complaint Centre fielded more than 1,800 reports of crypto-focused romance scams in the first seven months of 2021, with losses reaching $133 million.

    Read Also: Which Crypto Is Best To Invest

    How Do Private And Public Keys Relate To A Wallet Address

    So, now that you know that a wallet address is very similar to a bank account number, I am now going to explain how you are given control of the funds. People often think that a public key is the same as a public wallet address, however, this is not correct.

    Essentially, each individual cryptocurrency wallet address each have a unique private and public key. The private key allows you to access the funds that are related to the crypto wallet address.

    To give you a real-world example, when you want to transfer money from your bank account to somebody elses bank account, you will need to enter your private password. Nobody else has access to this password, not even the bank. Otherwise, if somebody knew what it was, they would be able to send money from your bank account!

    A private key does the exact same job and it is linked specifically to the individual crypto wallet address. So what about a public key? A public key is mathematically linked to your wallet address! However, it is a hashed version, which I will explain below.

    A hash function allows a sequence of letters and/or numbers to be encrypted into a new set of letters and/or numbers . This adds an extra layer of security and ensures that your wallet cannot be hacked. Here is a quick example to make things simple.

    Private Key: 03bf350d2821375158a608b51e3e898e507fe47f2d2e8c774de4a9a7edecf74eda

    Public Key: 99b1ebcfc11a13df5161aba8160460fe1601d541

    What Is A Crypto Wallet

    On a practical level, a crypto wallet is a device or program that is used to send and receive cryptocurrencies and digital assets. The term wallet can be a little confusing for people new to crypto. A physical wallet is used to store physical currency, however a crypto wallet does not store cryptoassets within it. How can this work? Well, most people already have something similar to this in their physical wallets right now: a debit card. The debit card in your wallet is not money, but it does grant you access to your money. This is similar to how a crypto wallet works, with a key difference being that while a debit card is controlled by a centralized entity , no person or organization controls crypto. This difference means that crypto wallets must function somewhat differently than bank accounts.

    You May Like: How To Track Crypto Portfolio

    Public Vs Private Keyswhats The Difference

    Crypto wallets generally use two types of keys: public keys and private keys.

    Public keys operate in a similar way to your bank account number. A public key is a long string of random numbers that can be shared with a third party, such as a cryptocurrency exchange, without compromising the security of your wallet. This key allows you to receive cryptocurrency in transactionsoftentimes by using a wallet address, which is essentially a compressed version of the wallets public key.

    Private keys, on the other hand, should always be kept private. A private key allows you to access the actual cryptocurrency on the blockchain. So if someone has access to your private keys, its as good as having access to the crypto in your wallet.

    Cons Of Using Bitcoin For Transactions

    Luno Bitcoin Wallet Tutorial and How Does It work

    1. Transactions can be slow

    There are instances where transactions take much longer than expected. This often occurs when theres traffic on the network. If youre looking to make a payment at a retail store, for instance, you wont want to be stuck in a situation where your transaction hangs in the air.

    2. Volatility

    Theres inherent volatility in the Bitcoin market that especially affects its use in retail payments and transactions. The fact that a store gets $10,000 in Bitcoin for an item doesnt necessarily mean that they have $10,000 by the time the transaction clears. Frequent volatility is a must-have for investors but a deterrent for payments.

    You May Like: What Cryptocurrencies Are Backed By Gold

    How Do Cryptocurrency Wallets Work

    As mentioned earlier, a wallet doesnât actually hold your coins. Instead, it holds the key to your coins which are actually stored on public blockchain networks.

    In order to perform various transactions, youâll need to verify your address via a private key that comes in a set of specific codes. The speed and security often depend on the kind of wallet that you have.

    Are Cryptocurrency Wallets Secure

    So, now that you know the different wallet types, along with their levels of convenience, I am now going to talk about how secure they are. Generally speaking, no matter which wallet you use, if somebody has access to your private key, then they have access to your funds. However, the key question is what safeguards are in place to prevent it from happening?

    Any cryptocurrency wallet that has a relationship with the internet will always be vulnerable. Although abusive hackers are unethical people, they can be very intelligent. They are always creating new ways to access other peoples data, which is why you need to make sure you do everything you can to protect your private key.

    Here are some examples of how a hacker could access your funds that are stored alongside an internet connection.

    • Malware
    • Remote access to your device
    • Phishing

    There are a number of things that you can do to protect yourself from the above threats. Firstly, you should always make sure your device is using the latest software. As hackers find new methods, they are able to override the inbuilt safety controls, so by updating your software, you will always have the highest level of security.

    It is also a good idea to set up extra layers of security. There are many crypto wallets that allow you to set up two-factor authentication, which means that to access it you need to confirm a code that is sent to your mobile phone.

    Don’t Miss: How To Transfer Crypto To Bank Account

    Popular news
    Related news