Bitcoin wallets are responsible for not only storing the digital asset but also providing access to the funds and allowing traders to conduct transactions. Whether you're buying Bitcoin for the first time or have been investing in the blockchain-based currency for years, understanding how a Bitcoin wallet works will assist you in developing and improving your trading experience.
In this guide, we're going to assist you in understanding what a Bitcoin wallet is, how they work, and where you can find the best one in the United Kingdom.
What is a Bitcoin Wallet?
A Bitcoin wallet not only stores your digital asset but also facilitates the sending and receiving of BTC. While traditional wallets simply provide a means to store your money, crypto wallets are a more complex product providing more functionality to the user. The digital wallet connects to the blockchain and enables you to conduct transactions, keeps track of your balance, and acts as a "decentralized bank account".
There are different types of Bitcoin wallets with some being referred to as hot wallets while others are cold wallets. Hot wallets are simply cryptocurrency wallets that are connected to the internet, while cold wallets are only connected briefly when conducting trades. Wallets connected to the internet are more vulnerable to hacking, hence cold wallets being a more viable option when storing cryptocurrencies long term.
Cold wallets can come in the form of physical hardware, like a USB device, or merely a piece of paper (known as a paper wallet). Most wallets come free however hardware wallets you will need to purchase.
How does a Bitcoin wallet work?
As we mentioned earlier, Bitcoin wallets connect to the blockchain of the network. Each wallet is represented by a 26 character alpha-numeric code, known as your public key, which acts as your wallet address allowing anyone to send you Bitcoin and identify you on the blockchain.
Each wallet also comes with a private key, which is essentially the "pin code" to your wallet. This code gives you access to your wallet, allowing you to access and send crypto, and should not be shared with anyone. If someone were to gain access to your private keys, they would have control over your funds.
The Bitcoin blockchain uses the public keys to track Bitcoin transactions, with each wallet representing a BTC balance, and the network receiving updated copies of this. So while Bitcoin wallets don't actually "store" the digital currency, they hold a record of the current balance and previous transactions. As BTC is sent and received, the blockchain records and updates the ownership of each cryptocurrency as well as the wallets' balances.
What types of Bitcoin wallets UK are available?
There are several options available for Bitcoin wallets in the UK which we'll take a look at below. Crypto wallets fall into two categories - hot wallets and cold wallets - and will differ for each cryptocurrency. I.e. you cannot store Bitcoin in an Ethereum wallet, as each connects to a different blockchain. Bitcoin must be stored in a Bitcoin wallet and Ethereum in an Ethereum wallet.
Hot Wallets
Hot wallets are constantly connected to the internet and provide fast access to your Bitcoin portfolio. There are three main types of hot wallets:
- - Desktop wallet, applications on a desktop
- - Mobile wallet, applications on a mobile device
- - Web wallet, applications accessed through a web browser
While these wallets are known to be more vulnerable to hacking, they are the best options for someone looking to day trade.
Cold Wallets
These types of wallets are considered to be more secure as they are not constantly connected to the internet. There are two main types:
- - Hardware wallet, an external device that uses USB or Bluetooth
- - Paper wallet, where public and private keys are printed onto a piece of paper
When looking to make transactions, you will need to connect the cold wallet to a hot wallet. For instance, hardware wallets will come with hot wallet applications for desktop or mobile that, once connected, can facilitate transactions. Paper wallets also require a hot wallet to conduct the transactions.
An example of a hardware wallet is a Ledger Nano S, which allows you to open an account and provides both app and device to assist you in securely storing your crypto. Cold wallets are best suited for long term hodling.