How Bitcoin and Digital Wallets Work
Bitcoin (BTC) is a very popular cryptocurrency, which has attracted all kinds of traders, investors and ordinary people willing to send money from one part of the world to another. The underlying Blockchain infrastructure enables all this to take place. The Blockchain is an electronic ledger which records all Bitcoin transactions that have ever happened. This is what makes it really impossible for cheaters to create fake Bitcoins, or to double spend real ones.
Bitcoin wallets have two numbers, one is called the public key, and the other is called the private key. You can think of these keys as your bank account number (public key), which you give out to anyone you wish to receive a payment from. Whereas the private key, is like your personal pin number you use at the ATM, or to log online, and only you know about it.
The difference from traditional banking, is that Bitcoin is totally decentralized and independent, it works like cash. So your Bitcoin wallet is not really related to you as an individual, no it has anything to do with your ID card. It works very similar to a cash wallet, and if the money is lost, there’s nobody to call for help, nor can the money and related transactions be canceled, like you can do with a credit card.
A Bitcoin wallet is simply a software that makes use of your public and private keys, so as to make the required transactions on the Blockchain, the digital Bitcoin money actually exists on the Blockchain itself, not in your wallet.
Types of Bitcoin Wallets
There are many different types of Bitcoin wallets, each type has different pros and cons. There are Desktop wallets, which are installed one a single computer device, there are online wallets, such as the ones used by the actual cryptocurrency exchanges, and other types of wallets as well. Up to this point you should know that if you want to convert actual fiat currency inti Bitcoin, you must make use of online exchanges such as Coinbase.com, Gemini.com, Bitstamp.net and others. These exchanges allow you to convert local money into Bitcoin and few other major cryptocoins. All other exchanges out there are for trading among cryptocurrencies only, and most of them accept Bitcoin or few more major cryptocurrencies, as a way to get money in and out. In those exchanges, such as Bitrex.com 100s more cryptocurrencies are available to trade. But to get in there, first you have to buy Bitcoin with cash or credit/debit card, and this is only possible at exchanges such as Coinbase, Gemini and few others. Make sure you check the services provided by each exchange.
All exchanges provide you with a basic Online type wallet, Online wallets can accessed from any device, they are not device-specific like Desktop wallets. The problem is that they are not as safe, so it is wise to keep a minimum amount of money in those Online wallets inside these exchanges, just enough to cover your trading needs, but do not use them as a way to store big amounts of Bitcoin for the purpose of long term investing!
Setting up a Desktop Type Bitcoin Wallet
Desktop type wallets are very good for beginners willing to keep Bitcoin investments safe during their first steps into the cryptocurrency world. After that, you can also make use of Hardware type wallets, such as USB storage devices, or premium ultra secure USB devices such as the Trezor, which is highly fool-proof, and hacker-proof.
You can go to Bitcoin.org and read more about Bitcoin wallets first, then see the types of wallets available. If you choose Desktop type, and device operating system, you will get the following choices of Desktop type wallets:
A very good Desktop wallet to use is Electrum, as it’s easier to use than many other types and it’s also faster because it doesn’t require the entire Blockchain ledger to be downloaded on your computer.
By clicking on the Visit Website button, it will get you onto the Electrum page, where you can choose to download a Desktop wallet, for your operating system. In this case we choose the Standalone Executable option.
Two way authentication can be used too, it’s a safer authentication which requires some kind of additional confirmation in order to gain access to the wallet, this is usually some secret code sent to your mobile phone or email. So that even if someone steals your Wallet password, they won’t be able to gain access.
A Seed is a series of words, which is used to confirm your Wallet at setup, but also to regain access to your Wallet in case your computer gets lost, destroyed or it is infected by some virus and cannot longer be used. By using the Seed and your password on a new installation of Electrum, on a new computer, you will regain access to your Wallet and its Bitcoin money.
Here you are required to set a secure password, to encrypt your Wallet, it will let you know how secure your password is, right away, before moving on.
Now at this point, your Desktop wallet is ready to use, and your receiving address is where other users can send you money. It is wise to click on the Wallet tab and export your Private key, and copy it at some secure place, away from your computer.
Remember that Bitcoin and its Wallets are decentralized and almost totally anonymous, as you can see we didn’t have to enter street address details, phone numbers or any kind of personal ID data to create this wallet. This is one more difference to traditional banking, Bitcoin is easy and straightforward, it works like cash, but you need to be careful not to ever lose this money.
Other Bitcoin Wallet Types
For storing large amounts of money, you have to use offline, or secure hardware Wallets, and most secure Hardware type are Wallets that provide cold storage and full protection from viruses, malware and hacker data interception, one such Wallet is the Trezor, and it’s really safe for storing large amounts of Bitcoin.
Trezor, along with Ledger Nano, are advanced Hardware Bitcoin Wallets that completely block and keep out hacker data traffic from your Bitcoin transactions. They are good for serious Bitcoin investors willing to invest a lot of money in Bitcoin.
There are also Mobile type Wallets, such as Jaxx and others, these differ in ease of use and complexity, but the safer a Mobile Wallet is, the lower it runs, and that may be a problem. Moreover, smart mobile devices are prone to hacker attacks, much more so than desktop and laptop computers. No Mobile Bitcoin Wallet should be trusted 100%, because these mobile devices themselves can be exploited by hackers, in highly sophisticated ways. The risk increases even more when the mobile user makes use of free online services, such as free movie sites, free adult sites etc. The reason these sites are free, is because user data is taken and sold to legitimate social media advertisers, but there’s a risk these same sites can be hacked quietly by hackers specializing in Bitcoin theft. So Mobile Wallets should be used for small amounts of Bitcoin, perhaps not more than $500 worth of Bitcoin. You should store all your large Bitcoin investments in few Desktop type Wallets, and even better in Hardware Wallets, with advanced security, such as Trezor or similar.
Remember to be proactive in safety, because a potential hack attack on mobile devices is likely to happen without a warning, these attacks are usually automated and done in a single day, where millions of mobile devices can be targeted and scanned for Bitcoin private keys that hackers can steal. If it does happen, it will be large, and it will be fast. But only users keeping large amounts of Bitcoin in Mobile Wallets will be at risk, Desktop Wallets are less likely to be penetrated, and Hardware ultra safe Wallets cannot be penetrated or intercepted in any way.
Finally, it is wise to backup your Desktop and Mobile Wallets, with seed phrases, so that you can regain access, in case the device is lost. You can further secure Mobile and Desktop Wallets by using Wallet Types that require multi-signature access, this a simple step towards enhancing security even on those Wallets.
Staying Safe Bitcoin
Remember to stay safe online, and to learn more about Bitcoin through Bitcoin.org and Bitcoin.com where useful information is available. Moreover, you should take few simple steps to secure your computer or mobile device, by making few changes and keeping your software up to date. This is important in order to avoid malware infections, ransomware attacks, or silent data theft. And all of this can be avoided by learning few things and taking few precautions. For example you should never open email attachments from unknown senders, or click to run unknown .exe files. Most malicious attacks and Bitcoin thefts happened because of ignorance on the part of the owner. But that’s the nature of the game because Bitcoin is valuable, just like real gold is. Even if you store real gold, you need to think ahead and take precautions. When things are done safely, most of the risk is removed. So it pays to be safe.