Choosing The Right Bitcoin Wallet
- October 18, 2018
- Posted by: CryptoCoach
- Category: Charities, Corporates, Understanding Bitcoin
A Guide to Bitcoin Wallets
This series of blog posts is aimed at people who are unfamiliar with Bitcoin and are keen to learn how to get to grips with it.
If you have never heard of Bitcoin you might want to check this blog post out first: Understanding Bitcoin
If you’ve heard of Bitcoin and you’re interested in buying some then my previous post on Using a Bitcoin Exchange is the best place to start.
Today’s post is all about Bitcoin wallets. When I showed you how to buy Bitcoin on an exchange I finished up the post by recommending that you don’t continue to store it there. Instead I advised you to store your Bitcoin on a wallet YOU control. This blog post is going to help you understand and explore Bitcoin wallets and choose the right one for you.
First Up – What is a Bitcoin wallet?
If you have been following my content and learning about Bitcoin then hopefully by now you understand that Bitcoin doesn’t move around like a file that you might send to someone over email.
Instead Bitcoin works as a decentralised ledger recording the balance of Bitcoin addresses and the inputs and outputs between them to determine who owns what.
With that being the case, what exactly is a Bitcoin wallet then? What does it do and what does it store?
Bitcoin wallets don’t store Bitcoins like a traditional wallet stores cash. Instead they are a tool for interacting with the Blockchain. They are useful as they allow you to create brand new Bitcoin addresses to receive Bitcoin and they create and store the private keys you need to sign and authorise payments from the addresses you control.
Wallets typically allow you to create and store the private keys for multiple addresses. In many ways a Bitcoin wallet is like a banking app. It allows you to control and move your funds and manage and create new accounts (addresses). The difference being that your banking app allows you to control money via a gatekeeper; your bank. A bitcoin wallet allows you to control your money directly on Bitcoin’s decentralised blockchain with no 3rd parties.
The Importance of Using Your Own Bitcoin Wallet
Bitcoin was invented with the goal of allowing people to control their own money without relying on trusted third parties to look after it or process transactions for them.
This is a hugely important point that I think is often underappreciated. Fundamentally, this is Bitcoin’s use case. Never in history have we had a technology capable of allowing two people, who have never met, and have no reason to trust each-other to transact directly without relying on a 3rd party to mediate or store funds.
That’s a powerful use case and it’s what makes Bitcoin so attractive. It’s not censorable, ignores borders and is not subject to the whims of globalists, central planners and monetary politics. Bitcoin then allows the kind of frictionless commerce that a connected world ultimately needs.
With Bitcoin you don’t need to rely on banks, payment processors or money exchange businesses.
Bitcoin allows you to Be Your Own Bank
That’s a powerful pitch, right?
Thing is, what isn’t accompanied by this rousing pitch often enough is the dose of reality that is;
If you do away with central authority and custodians like banks you shift the onus of responsibility over to end users.
If you want to have all the sovereignty over your money that Bitcoin offers, then you need to cut your reliance on third parties to look after it for you. That means that rather than rely on an exchange or a third party to hold your Bitcoin, you should learn to use and secure your own wallet. A wallet that no external party has access to.
A general rule that’s wise to follow is: Not Your Private Keys – Not Your Bitcoin.
In other words, if you are not in sole control over your own private keys then you are not completely in control of your own BTC and they could be vulnerable to theft or censorship.
Bitcoin Software Wallets, Hardware Wallets & Web Wallets
Your first course of action is to choose a Bitcoin wallet. There are lots to choose from. This is where it’s easy to get stuck if you’re a little unsure so let’s break down the different types of wallet available and what the differences are first.
The first thing you will come across is that there are two distinct types of Bitcoin wallet. Software wallets and Hardware wallets.
Software Bitcoin Wallets
A software wallet is just that – software. It is an application that you can download and install on either a desktop PC or mobile device and works like the apps and software you are used to. Typically, you’ll be using an internet connected device, your laptop or mobile.
A software wallet is arguably not the most secure way to store your Bitcoin. It is however the most convenient. For this reason, it would be good to think of a software wallet much like a normal wallet you keep in your pocket. It’s convenient for instant access to cash, but you wouldn’t walk around with your life savings in it.
You could of course install a mobile or desktop wallet to a device that you never connect to the internet. That would make it much more secure, but it’s hardly convenient. That’s where hardware wallets come in…
Hardware Bitcoin Wallets
A hardware wallet offers similar features to a software wallet but is a little different. The clue is in the name. A hardware wallet secures your Bitcoin with a physical device. This physical device is not internet enabled and stores your Bitcoin ‘offline’.
- These devices offer more security when it comes to storing your Bitcoin when compared to software wallets. There are a few reasons for this:The wallets are not internet enabled, meaning they cannot be accessed easily by attackers.
- The wallets are ‘Hierarchical Deterministic’ (HD). If your hardware wallet is stolen, you lose or destroy it, then you can restore your wallet on a brand-new device. (Some software wallets also offer this).
- The private keys to your Bitcoin cannot be taken from the device in plain text.
- You can connect Hardware Wallets to even an infected PC in order to send transactions and it would still be secure from attack.
Whilst being more secure these wallets are less convenient than say a mobile wallet. It’s much easier to quickly scan a QR code and buy a beer with Bitcoin on your mobile phone than connect your hardware wallet to another device to send a payment.
However, what the hardware wallet lacks in convenience it makes up for in enhanced security.
The two main types of Bitcoin wallet then, hardware and software, play different roles for a Bitcoin user. A good analogy I like to use is that my hardware wallets are like my own personal vault. My software wallets are like the wallet I would keep £20 notes in. The software wallet on my mobile might be vulnerable to compromise in just the same way I could be mugged for a physical wallet containing cash. That’s the chance we take for convenience. But just like you don’t keep your life savings in your back pocket you wouldn’t keep large sums of Bitcoin in a mobile wallet.
It’s best practice then to understand and use both software and hardware wallets to come up with a configuration that suits you. So let’s start taking a look at some of the wallets you have to choose from..
Bitcoin Web-Based Wallets
There are a form of wallets that are web-based. They work similarly to other web based applications you may be familiar with like Facebook and Twitter. In other words, you can visit a web page via your browser and log into an account.
We are going to ignore web-based wallets for now. Simply for the reason that a lot of web-based wallet services are set up in such a way that the service you are using stores your private keys in a centralised database. Your Bitstamp account for example works like a web-based wallet.
This isn’t true of all web-based wallets and some do offer interesting solutions that are worth a look at later. However, they do quite often they come with a reliance in some way on a 3rd party. With that in mind, we are going to continue to focus on just software and hardware wallets for now as our aim is to control our own Bitcoin.
Choosing A Bitcoin Software Wallet
Software wallets typically come in two types; Desktop and Mobile and there is an increasing number to choose from. This can be a little overwhelming in terms of choice but it’s straightforward to cut down the options to suit you.
Let’s take a look around and start explaining what’s worth looking out for and the steps you should take next.
You can use the tab menu at the top to first select which type of device you want to use. Desktop, Hardware, Mobile or Web. For the moment select either mobile or desktop depending on which device you’re interested in using. We can look at hardware wallets a little later.
Next, on the same tab menu, select your Operating System. You need a software wallet that is compatible. Some wallets will be compatible with most operating systems and some with only one.
At this point you have cut down your choice of compatible wallets considerably. It’ is however important to point out that there are still many more wallets out there that don’t appear on this website and some are excellent!
With that in mind, this has still been really helpful to start learning about wallets. We can explore the wider ecosystem later.
Now you’re at the stage where it’s time to evaluate the wallets that are left and are compatible with your device. If you now click on each compatible wallet you will see a list of features and attributes that are important to consider. It would take too long to evaluate all of the pros and cons in this post, but I would strongly advocate taking the time to read the descriptions provided on various wallets to get more comfortable with the terminology.
Whilst I can’t evaluate each individual wallet I can provide some things I look for when choosing a software wallet from any provider:
Control Over Your Money
This is an important consideration. Some wallets give you and only you full control over your Bitcoin.
Other wallets offer shared control. With these wallets each transaction must be authorised by both you and the wallet provider. This does add a layer of protection to your Bitcoin as it means that even if your security is compromised there is another party who can prevent unauthorised payments. You will however give up some privacy for this benefit.
Finally, there are wallets that offer you hosted control over your money. These companies keep an encrypted copy of your wallet on their servers which can be useful if you lose access. It does however mean that you could lose your Bitcoins if you use weak passwords and the wallet is compromised. Personally, I prefer to keep my own back-ups than keep them with many others in a centralised service.
Full, Simplified, Decentralised & Centralised Validation
So, what is meant by validation? Well, let’s try and keep this simple. Every time Bitcoin users make transactions miners authenticate, process and include them in a block on the blockchain. Bitcoin nodes around the world then validate this information as true and pass it between one another.
Now you can use a wallet that gives you ‘Full Validation’, like the Bitcoin Core wallet. This essentially means you are running your own node on the network and validating transactions yourself. This might be appealing but it does require over 200GB of bandwidth and does take time to sync with the network. For most users this is way OTT if you just want to use Bitcoin for everyday use.
‘Simple Validation’ is much more user friendly. Your wallet doesn’t need to act as a full node but can still validate payments directly via the Bitcoin Network. In short, you can verify transactions in a reliable way without trusting 3rd parties. Not quite as secure as running a full node but more than ample for a general Bitcoin user.
‘Decentralised Validation’ allows a wallet to validate a transaction, but it relies on getting transaction information about the blockchain from a third party’s server. This does allow some chance for transactions to be hidden or simulated by someone else. It’s decentralised because the server you connect to is completely random which does make an attack by 3rd parties very difficult.
Finally, ‘Centralised Validation’ relies entirely on a third party for transaction information meaning you must trust someone else not to hide or simulate payments.
If I can, I will always opt for a software wallet that at least offers ‘Simple Validation’. Without it I feel I lose one of the most important benefits of Bitcoin. I must rely on and trust 3rd parties not to play silly games with my money. History tells us that eventually, over a long enough timeline this trust is typically gradually abused. Why trust when I can verify.
Secure Vs Vulnerable Environment
One thing you might notice as you explore the wallets, that is a little alarming is that some will have a red mark against them saying that you might be exposed to a vulnerable environment whereas some are marked as having a secure environment.
You’ll likely notice the difference here is whether the wallet is for desktop or mobile. What the site is really getting at here is that typically your desktop is more likely to already contain viruses that could exploit your wallet. This is compared with a mobile wallet where the app is usually stored in an isolated place on your phone.
If you’re opting to use a desktop wallet it makes sense to only install it on a device that you control, that has good security and runs relevant antivirus software. Do not install wallets on shared laptops or laptops that could be used and tampered with by others. In future I will create some posts about how to up your general personal security – useful for much more than securing just your Bitcoin!
Privacy is an interesting topic. Whilst some might see privacy as a means for evading Government control, privacy does also provide protection from more nefarious parties. Bitcoins pseudonymous attributes are useful and certain wallets support them.
Some wallets will create and use a different Bitcoin address every time you make a transaction. This means that all your transactions are not consistently coming from the same address on the blockchain. This makes it harder for anyone watching to attribute the same transactions to the same person. It doesn’t make it impossible, but it does offer a layer of privacy.
Some apps however re-use the same address for all payments. This dramatically reduces the level of privacy you enjoy. Privacy when it comes to money is an interesting debate and you can draw your own conclusions but using different addresses for each different transaction is considered best practice in Bitcoin. Personally, I choose wallets that support this feature.
Control Over Fees (static / dynamic / full control)
An important thing to consider when choosing your wallet is the level of control it offers you regarding the fee you attach to the transactions you make. Transaction fees in Bitcoin can vary depending on how congested the network is at any given time.
If you send a transaction with a fee that’s very low when the network is particularly busy, then it might take a long time for your transaction to be confirmed. If you find yourself in this situation with your money trapped in an unconfirmed transaction there are ways around it but it’s inconvenient.
So, when looking for a wallet I would recommend avoiding ones that only offer ‘static fees’. These wallets don’t look at the current network usage of Bitcoin to determine a fee. Instead they simply use a fixed fee. This means you might be paying higher fees than you need to or not including a fee to sufficient enough to confirm your transaction quickly.
Ideally you should look for a wallet that gives you full control over Bitcoin fees. Better yet, look for a wallet that offers ‘dynamic fees’. These wallets look at network usage and give you a suggested fee for every transaction. Very handy.
Choosing a Bitcoin Hardware Wallet
We have already looked at the reasons why Bitcoin Hardware wallets are so attractive. They offer better security than software wallets overall. They are however a little less convenient. This is why they are a great option for longer term storage of your Bitcoin or for sending larger transactions.
So what options have you got for hardware wallets?
If you click the ‘hardware wallets’ tab on Bitcoin.org you will see there are four options currently displayed.
As you explore these options one thing you will notice straight away is that they are trickier to compare against one another. This is because on the whole they work in the same way and it’s hard to choose between them when it comes to security. Here are things that you might want to consider when opting for a hardware wallet:
- The Trezor and The Ledger Nano S are the best-known hardware wallets and have been around for a while now and have great reputations. That doesn’t mean to say that the Digital Bitbox and KeepKey aren’t also excellent options.
- Hardware wallets (like many software wallets) don’t just support Bitcoin. They can also support some Alt Coins. If you have future plans on acquiring or using altcoins, then you might want to look at which coins each device supports first. With software wallets its usually free to download a new software wallet so it’s OK to worry about this later. Hardware wallets can cost as much as $150 so it’s better to plan ahead.
- Personally, I use more than one hardware wallet. I have both a Trezor and a Ledger as they support different coins and I own more than one Trezor and more than one Ledger. The reason I have more than one of each hardware wallet is that if one fails I can back up to another one quickly without having to wait for a new wallet to arrive in the post. I may need to make an urgent payment. This is not necessary at all but something that was important to me.
- I never buy hardware wallets from retailers other than the manufacturer. Doing this runs the risk of the device having been tampered with. It really isn’t worth it to save a little bit of money. Ordering from the manufacturer ensures you get a secure device. When you do receive your device check the security seals to ensure it hasn’t been opened in transit.
Setting up and Using Hardware wallets is a little different from software wallets. Thankfully all the manufacturers offer useful guides on their website to teach you how to use them.
In future posts we will be taking a closer look at hardware wallets and security and possibly do some reviews.
Paper Bitcoin Wallets
That’s right. You can create Bitcoin wallets out of nothing more than a piece of paper. You don’t even need an electronic device. If hardware wallets look a little pricey or complicated but you still want to store your Bitcoin offline (known as cold storage) then you can just use a piece of paper!
This stores your Bitcoin private keys in physical form and gives you another security option. You could keep this paper wallet in a safe or a secure location and it keeps it safe from sophisticated hackers online.
It is however made of paper, so it’s not as secure as a hardware wallet.
Yes, you could keep it under a mattress and yes, it’s unlikely a burglar would break in and be interested in it (he wants your jewellery) BUT it can be damaged easily or lost. There are many stories of people misplacing paper wallets or losing them due to fire or water damage.
Paper wallets can be very useful for certain circumstances and I use them myself, but I don’t rely on them exclusively. If you’re interested in making a paper Bitcoin wallet then this site can help: Create a Paper Bitcoin Wallet.
Round Up – What You Have Learned
By now you will have probably realised that there is a lot of choice when it comes to choosing a Bitcoin wallet and each comes with their own pros and cons.
Let’s quickly recap some of the main things we have learned in this blog post.
- There are many types of wallet; software, hardware, paper and web-based.
- Different wallets can be useful in different situations. There is no ‘one-size fits all’ solution.
- Software wallets are best for day to day spending money and convenience.
- Hardware wallets are best for longer term security.
- Paper wallets offer good security for free but aren’t as reliable as hardware wallets.
- Different wallets have different features and it’s important to compare them.
The most important thing to have learned from all this is that with Bitcoin, you can BE YOUR OWN BANK. I emphasise this simply because it requires us to think completely differently about how we secure and manage our money. Don’t trust a 3rd party to store your coins and don’t buy Bitcoin on an exchange and leave it there.
If you’ve just set up a new software wallet and you want some guidance on how to use it then I have a tutorial showing you how to use a mobile wallet called CoPay. You may be using a different wallet, but the general guidance will be useful to understand how to use your wallet and send and receive payments. If you followed my earlier guide on how to buy Bitcoin on an exchange and you currently have coins stored there, then once you’ve got to grips with your new wallet you will know how to store them yourself. Well done!
In future I will create more guidance about how to use hardware wallets and other useful tips for using Bitcoin and staying secure. Stay tuned!