Bitcoin wallets are similar to their fiat counterparts — but there are specifics to using BTC wallets that make them totally different.
Bitcoin (BTC) is undoubtedly nothing like traditional currency, but developers still use the terms that we associate with cash to help users to navigate the new world of cryptocurrencies.
For this reason, a key piece of infrastructure that users use to transact Bitcoin and other blockchain-based cryptocurrencies is referred to as a “wallet.”
In its functionality, a Bitcoin wallet is seemingly similar to a bank account. However, Bitcoin is different from traditional currencies due to its characteristics as a censorship-resistant and peer-to-peer electronic cash system, which is secured using public-key cryptography and does not require intermediaries to process transactions.
The architecture of a Bitcoin wallet is therefore fundamentally different from a bank account, and you will need to wrap your head around a few key concepts to understand what Bitcoin wallets are and how to use them.
Strictly speaking, a wallet does not “store” users’ cryptocurrency, but is in fact a device, program, or service that generates and stores a master file containing the digital “credentials” that users need in order to access, send and receive cryptocurrency via blockchain transactions.
The minimum “credentials” which a user needs to interact with the public Bitcoin blockchain are a pair of public and private cryptographic keys and a public Bitcoin wallet address. These credentials are used to digitally sign and authenticate valid Bitcoin transactions on the public blockchain.
The most sensitive of these credentials, the private cryptographic key, must be kept, as the name suggests, absolutely private — much like a PIN or security code for a bank account. It consists of a unique, alphanumeric string of characters and is necessary for a user to access, spend or transfer their cryptocurrency.
The public key is mathematically derived from the private key and enables a user to receive cryptocurrency from others. Like the private key, it also consists of a very long (256 bits) alphanumeric string of characters.
A Bitcoin wallet is used to generate a corresponding public wallet address that serves as a public identifier for transactions. The address is a shortened — “hashed” — version of the public key (160 bits), making it easier to share with others.
Note that Bitcoin wallets can be used to generate an unlimited number of public addresses, all of which are linked back to the same user wallet.
It is critically important for users not to forget or misplace the record of their private keys. As Bitcoin is a disintermediated, peer-to-peer system, users do not have recourse to a third-party to help them to recover their lost public key, meaning they risk losing access to their funds forever.
There are three main types of Bitcoin wallets — software, hardware, and paper — which differ in their characteristics and security levels. A further categorization is used to distinguish between Bitcoin wallets that are connected to the internet — “hot” wallets — and those that are not — “cold” wallets.
In our guide on how to use a Bitcoin wallet, we will look at the differences between these different wallets, their pros and cons, and how to use them.