Technology behind Bitcoin wallets

Bitcoin wallet

To prevent hackers from stealing your Bitcoin on vulnerable cryptocurrency exchanges, you need to get your coins out of the exchange wallet as soon as possible and store them in a Bitcoin wallet.

There have been several cases of exchanges that got hacked. In 2018, Bithumb, A South Korean cryptocurrency exchange got hacked. The hackers were able to divert $30 million worth of digital tokens. Another popular exchange hack is the Coincheck hack. About $534 million worth of NEM coins were stolen from the Japanese exchange. These unfortunate events are proof that an exchange is no place to store your hard-earned money. The best way to keep your cryptocurrencies is to store them in a cold wallet as opposed to porous hot exchange wallets. Don’t miss out on the largest Bitcoin wallets on the internet.

After reading this guide, you should be able to;

  • Explain the way Bitcoin wallets operate.
  • Choose what Bitcoin wallet type is best for you.

Before we dissect the intricacies of Bitcoin wallets, let’s go through the benefits of getting one.

Why do you need a Bitcoin Wallet?

The major essence of transferring your Bitcoin from a third-party crypto server to your Bitcoin wallet is to keep it safe. However, coin safety is not the only benefit of using a wallet. Below are the four cogent advantages of using a Bitcoin wallet.


If you have purchased Bitcoin from an exchange, chances are they have created a wallet on your behalf. However, these exchanges do not provide you a private key to your Bitcoin and the safety of your digital money is prone to attacks from hackers.

When you transfer your coin from an exchange to your wallet, the exchange ceases to have access to your Bitcoin and you take total control of your cryptographic keys.

Invest in ICO

Let’s say you discovered an ICO that seems to have great potential in the global crypto market. The first thing you do is register through the ICO project’s website. Then, you need either Bitcoin or Ether to purchase the ICO tokens. If you choose to invest via Bitcoin, you would need a Bitcoin wallet after purchasing the Bitcoin from an exchange.

Unlimited Control over fees

A Bitcoin wallet offers fee proposals in line with the current network conditions. It allows you to alter the fees after sending the funds via RBF or CPFP. You have the utmost control over the fees in real-time.

Full Transparency

The Bitcoin wallet is a deterministic wallet that allows developers all around the globe to audit the code and ensure nothing fishy is hidden in the wallet.

Note: It is important to note that the benefits listed above are just the basics. There are other uses of cryptocurrency wallets that might not be applicable to a Bitcoin wallet for instance; you cannot sign a smart contract using a Bitcoin wallet. An Ether wallet can be used to sign a smart contract.

How do Bitcoin Wallets operate?

A Bitcoin wallet is simply a computing device, paper, software, or service that allows Bitcoin holders to store cryptographic keys and balance for Bitcoin transactions.

Unlike multi-currency wallets, which stores different cryptocurrencies, the Bitcoin wallet is specifically created for Bitcoin holders. Examples of multi-currency wallets include Trezor, Ledger Nano, Electrium, etc.

The term, store, is used for the sake of laymen who do not understand blockchain technology. Unlike physical and traditional digital wallets, the Bitcoin wallet does not “store” Bitcoin. As regards Bitcoin and Bitcoin-derived cryptocurrencies, the digital coins are decentrally kept in a distributed ledger that is available to all. This distributed ledger is also called a blockchain.

When you purchase a Bitcoin wallet, you will be offered a private key and a public key. The public address is the information you provide a sender when you want to make a transaction.

Do not share your private key with anyone – including traders, exchanges, and even wallet providers – on any occasion. If your password gets in the wrong hands, you may lose all your Bitcoin on a whim.

The private key is made up of a 256-bit long key which comprises letters and alphabets. In simple terms, a 256-bit key contains 64 alphanumeric characters for example “6Klo9093Hikma9hHLamnsb90Oy98HLSMMnSG90MA9Ls0anm8MKLa0aVBLamngv09”. The password should be well-kept since there’s no way a user can access the wallet without the private key.

The public key or Bitcoin address is generated from the private key and defined by 26 to 35 alphanumeric characters in the format, P2PKH (pay to public key hash). The public address can be used to receive Bitcoin, but cannot be used to authorize transactions or honor a smart contract.

Although the public address is an asymmetric key pair of the private key, it is practically impossible to reverse engineer the address to reach the password.

The major benefit of owning a personal wallet is that only the user with the private key can access the bitcoin balance or process a transaction. Unlike centralized exchange wallets, the providers of personal Bitcoin wallets do not have access to your private key and cannot tamper with your Bitcoin.

Types of Bitcoin Wallets

Bitcoin wallets can be classified based on their functions and mode of storing crypto data for example eID wallet, multi-cryptocurrencies wallet, simple cryptocurrency wallet, deterministic and non-deterministic wallets, and multi-signature wallet. Some wallets have two or more functions. However, in this section, we will classify wallets based on their fundamental nature, mode of storage.

The two major types of Bitcoin wallets are hot wallets and cold wallets. Hot wallets are only available to the user online while cold wallets are digital offline wallets that allow users to sign transactions offline and disclose them via the internet.

It is important to note that transactions can only be verified online; hence offline wallets need to be connected to confirm payments.

Every other type of Bitcoin wallet stems from these two wallet types. Popular examples of wallets include desktop wallets, mobile wallets, web wallets, paper-based wallets, and hardware wallets.

Desktop wallet

Desktop wallets are types of cold wallets. With the aid of Bitcoin wallet programs, Desktop users can keep private keys in their cold servers. Like any cold server, the hardware serves as a backup for the main online server. Transactions can be performed offline and verified online. A good example of a desktop wallet is Electrium.

Web wallet

The web wallet aka online wallet can be accessed across all devices, namely phone, desktop, or tablets. The private keys are stored in cloud-based storage by a third party. Examples of online wallets are GreenAddress, Coinbase, and Blockchain.

Mobile wallet

The mobile wallet, like the online wallet, is online-based, but it can only be accessed via mobile phones. The phone needs to be connected to the internet to process and verify transactions.

Transactions can be processed in physical stores through “near field communication” (NFC) scanning of a QR code and touch-to-tap methods. Mycelium, Freecharge, and Paytm are good examples of mobile wallets.

Paper-based wallet

The paper wallet, as its name implies, is a printed paper wallet that carries your cryptographic keys. A handwritten paper with passwords and public address does not qualify as a paper-based wallet. For a printed paper to be regarded as a wallet, it must possess a QR code through which the private key and public key can be accessed. Examples of paper-based wallets are BTC Paper wallet, MyEtherWallet.

Hardware wallet

In hardware wallets, cryptographic keys are kept in a cold storage device such as a USB. To access the wallet, users might have to connect the cold storage device to a computer. Hardware wallets range from $100 to $200. Examples of hardware wallets are Trezor, Ledger, and KeepKey.

Note: The best way to store your cryptocurrency is via a cold wallet, especially when you possess a large quantity of Bitcoin. The onus of securing the cold wallets lies solely on you.

Time to Act

Bitcoin is too valuable to leave at the mercy of an unsecured and unstable exchange. The fact that exchanges can shut down anytime due to unforeseen circumstances is, ipso facto, all the motivation you need to act right and act now. The best time to move your Bitcoin to a solid Bitcoin wallet is yesterday, the second-best time is now.

Disclaimer: This article contains sponsored marketing content. It is intended for promotional purposes and should not be considered as an endorsement or recommendation by our website. Readers are encouraged to conduct their own research and exercise their own judgment before making any decisions based on the information provided in this article.


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