How Bitcoin wallets work

Continuing with the debit card analogy from above, a Bitcoin wallet holds at least one “account,” or sub-wallet. We can view this sub-wallet as being roughly equivalent to a debit card. For instance, debit cards have information associated with them, including an account number and a password. Each Bitcoin “account” within a Bitcoin wallet also has information associated with it. For our purposes, the two key pieces of information are the public bitcoin address and the private key. The public address is comparable to the debit card’s account number. The private key, meanwhile, is kind of like a debit card’s password in that it grants access to the bitcoin associated with that public bitcoin address. A private key is a 256-bit secret number. Here is an example:

108165236279178312660610114131826512483935470542850824183737259708197206310322

As you can see, this secret number is a bit unwieldy. One of the key functions of a Bitcoin wallet is to manage the private key. In fact, private keys are almost never handled directly by users. Bitcoin wallets provide a way to write down this private key in a much more human readable format, referred to as a recovery phrase, secret passphrase, or seed phrase. A recovery phrase is a list of words, usually between 12 and 24, that allow you to reconstruct your Bitcoin wallet and gain access to your funds even if your Bitcoin wallet is destroyed. Here is an example of a recovery phrase consisting of 12 words:

Because the recovery phrase is equivalent to a private key, you should never share the words with anyone, or store the plain text on your computer or online.

While the recovery phrase is an improvement upon the private key, it still leaves a lot to be desired. Since you shouldn't store your recovery phrase in plain text (unencrypted form) on your computer, for most people the best solution is to write it down on paper. This presents problems because safely storing a piece of paper can be hard. Further, if you're using a multi-coin wallet (like the Bitcoin.com Wallet), you'll have a separate recovery phrase for every different blockchain your wallet supports. Storing all those recovery phrases on paper quickly becomes onerous. For this reason, the Bitcoin.com Wallet integrates a “Cloud Backup” system. Here you can create a single custom password and use it to unlock all of your private keys, which are stored in encrypted form in your Google or iCloud account.

To set up Cloud Backup in the Bitcoin.com Wallet, just go to Settings > Cloud Backup and follow the instructions.

Read more: Make sure your cryptoassets are safe with these simple tips.

Types of wallets

There are two main types of wallets: hardware wallets and software wallets.

Hardware wallets are the most secure type of Bitcoin wallet because their private keys are stored on a physical device and theoretically cannot be accessed by a computer or from the internet. When a person wishes to make a transaction, they plug in the hardware wallet (usually via USB). The hardware wallet will sign transactions without compromising the private key. The downside to hardware wallets is the cost and availability of the devices. Ledger and Trezor are well known hardware wallets.

Software wallets exist on computing devices, like a desktop computer, a smartphone, or in a web browser. Since computing devices run many programs or applications, they are susceptible to viruses, malware, and phishing schemes, making all software wallets vulnerable to some degree. That being said, hacking incidents are extremely rare and software wallets are generally considered safe for everyday use.

There are many software wallet choices, which can make choosing overwhelming. We welcome you to try the Bitcoin.com Wallet, which is an easy-to-use but powerful crypto wallet trusted by millions, but we have also written several useful articles to help you navigate the process of choosing:

• How to choose the best Bitcoin wallet? With so many choices available, this article will help you weigh the key factors to consider when choosing a Bitcoin wallet.
• What’s a ‘non-custodial’ wallet? The non-custodial model is important because it puts you in charge of your cryptoassets and protects you from third-party risk. If you don’t understand what that means, this article is for you.
• How do I create a Bitcoin wallet? This will help you quickly and easily create a Bitcoin wallet. This article goes into more detail about the different wallet types and their advantages and disadvantages.