As we have already explained, cryptocurrencies how Bitcoin form a decentralized P2P payment network. This means that there is no intermediary (such as a bank or company) that opens an account for you. On the contrary, anyone can create as many “accounts” as they want for free. The accounts are called addresses and each one is always associated with a password or key that allows you to certify that you are the owner of the corresponding address and the funds it contains.
Now, what allows us to control these accounts and our funds are the cryptocurrency wallets or purses. These are actually special software that makes it easy for us to control our cryptocurrency “accounts”. Thanks to them we can send and receive payments from anywhere in the world at any time. Best of all, these wallets allow us to store our coins safely and very easily. That is what they were made for, and although there is a wide variety of options, they all have something in common: they are our door to the use and enjoyment of our cryptos.
NOTICE: This post is a developed explanation of how the storage of currency units works within the Bitcoin network. If you already understand this and what you need is a specific post about Types of wallet by devices and those recommended by Bit2Me Academy, click here.
How does a wallet to store coins like Bitcoin?
Now cryptocurrencies work in much the same way as digital payment systems like PayPal. In PayPal, your email address is used to uniquely identify you as a system user. That way, using your email you can receive payments, but also make them using someone else's email.
In the case of cryptocurrencies such as Bitcoin, instead of using your email, a unique and unrepeatable special address is used. An example of this type of address would be: 1DgTsw8THYhC4XGqaCMdcGS3p9g3dhb9Ru (see in explorer). These addresses have a key mathematically related to the private key that we generate when we start our wallet. Suffice it to say that the addresses we can create are practically infinite, which helps us maintain our privacy and security.
Every time you generate a new address, you can use it to receive payments and, thanks to the password, you can manage your balance whenever you need it. These private keys are controlled entirely by your wallet. Now let's remember that Blockchain It is a ledger that associates balances with identifiers (the addresses). This means that what Bitcoin wallets actually store are not the bitcoins themselves, but the private keys that give you authorization to carry out operations on the bitcoin addresses with which they are associated.
A phrase as common as saying "I have X bitcoins" is not technically true. The only thing you really have are the private keys capable of managing the addresses that have X amount of bitcoins attributed in the blockchain. This is one of the biggest curiosities of Bitcoin: Bitcoins do not exist as such, only the records in Blockchain that have an associated balance. What is actually recorded and confirmed on the blockchain are changes in ownership of the corresponding amounts between different directions, changes in balance.
Thus, a Bitcoin or any other crypto wallet is nothing more than a zone (digital or physical) where to store private keys. However, when we talk about software (computer, mobile) it is normal to use a client (an installable program). This acts as an area where to store private and interface keys to operate on the cryptocurrency blockchain network that we use. It is precisely this that allows us to send, receive and store coins.
What types of purses are there and what are their peculiarities?
Now there are many types of purses, each with its pros and cons. In this article we will see and explain each one of them so that you can understand and choose the one that best suits your needs:
Full wallet and Lightweight wallet purses
First of all, it is important to understand the difference between these two forms of clients (in the case of software type purses) that exist:
The full purses or Full Wallet They are those who download the entire blockchain of the cryptocurrency. These also make you a node of the network (only in node, not in miner). Of course, this downloading the entire blockchain takes up a lot of space. Currently the Bitcoin blockchain exceeds 250 GB of storage space. An example of this type of purses is Bitcoin Core. All Bitcoin wallets are related in one way or another to this development, because it was the first full wallet that existed in the crypto world.
For its part, the light wallets or lightweight wallets, they store private keys locally but not the blockchain. In order for them to work, they must access the blockhain through third parties and carry out their operations through them. This has the advantage that it does not take up much space and does not require a lot of power to operate. However, he has serious security and anonymity problems.
One of the safest options for storing cryptocurrencies are the hardware wallets. These wallets are physical devices that are used to store our private keys securely. They are created in order to offer the greatest possible protection, and to secure our funds against any theft or hack.
To read our article dedicated to Hardware Wallets and see in more detail how it works and what are the best alternatives on the market, click here
As in the case of software that simply stores keys, it is technically a wallet, but it lacks a direct connection to the Bitcoin network (as it is a paper). The paper wallet is a private key printed on a paper, either encrypted with another key or put directly, but it is interesting to mention it.
It is a rudimentary modality and not very comfortable to manage, but it can be considered very safe. It is perfect for "Cold Wallets". The main benefit of using paper wallets is that you are safe from hardware failures or cyber attacks. You can see in our article how to create a Paper Bitcoin wallet step.
To read our article dedicated to Paper Wallets click here
Hot Wallet and Cold Wallet
You will hear these words a lot when talking about cryptocurrency wallets. We are not talking about two wallet subtypes, but two ways of using wallets. Remember that in Bitcoin, and cryptocurrencies in general, you are your own bank. And therefore you have to have extra attention on how you manage this money.
In the same way that you do not carry 10 euros in your day-to-day portfolio, the same is done with Bitcoin. For this, a certain practice is used: what is known as hot purses and cold purses.
Un hot wallet It is the one you use often, the one that, for example, you carry on your mobile phone / computer or the one where an unfortunate accident or theft does not suppose anything more than an unpleasant memory.
Example: Imagine carrying around € 200 in bitcoins in the Bitcoin wallet of your smartphone and then download a malicious APP that copies the private keys of Bitcoin from the memory of your phone causing your bitcoins to be stolen by a criminal in seconds and without giving you account. If this happens, you will have a bad day, but you will not end in ruin since € 200 is not an excessively high amount (at least in Spain).
On the other hand we have the cold wallet ("cold wallet"). This is used for the opposite that you use the hot purse, that is, it is the one that you use very little: large amounts, savings ... The creation of these purses is somewhat more complex, since they depend on being generated under absolute security to prevent the The environment used may be compromised and therefore they are generated with software / hardware without the possibility of viruses and without an Internet connection. As in everything, but especially in Bitcoin, it is about having well-honed common sense and, why not, the degree of paranoia according to the amount of money to handle.
With all this, it is important to know that you have the capacity to make backups and, in case of loss, act quickly to move the funds to a new wallet. And this is simplified in HD wallets.
It is not about high definition purses, much less, it comes from "Hierarchical deterministic". It is a common mistake of many beginners to use a wallet with a "simple" address (which is not generated under an HD structure), and to think that by making a single backup of the private key at the beginning they will be able to recover their bitcoins in the future. NO. Because these purses create addresses on the return flight. With what almost every transaction should make a backup, something tedious.
In case you do not know how Bitcoin transactions work, Click here to learn how Bitcoin transactions work.
A non-HD wallet for each new address it creates generates a private key, as we have said previously, the password that allows you to manage that Bitcoin address. And we must understand that, due to the internal functioning of Bitcoin, almost every transaction needs to add an extra address of its own when sending a payment, known as a return address. Normally, although it depends on how the Bitcoin wallet you use has been programmed, these addresses are new addresses (with a new private key).
Exactly, those new keys are not in the initial backup that was made. That is, if you send 300 euros in a purse that you have 500 euros, and your purse sends the remaining 200 to a new address that you do not have a backup, you are buying ballots for a scare. This is where you should make a new backup.
Instead, and thanks to mathematics, there are HD wallets. Simplifying: an HD wallet starts from a "seed" (a variable number of characters). With that seed, and graphically so that you can see it mentally, a “tree” is generated where each “branch” has a private key and from it a public key and a Bitcoin address are taken. With the same seed, the same tree can always be generated. In other words, if you save your seed, you will always be able to access all the branches (all the private keys) and, with it, the funds in the addresses without making any extra backup in the future, only the initial one.
If you want to know the guts of how mathematics works under this concept, we recommend the following link: BIP0032 (The BIP
These are documents that the community creates by proposing an improvement in Bitcoin: Bitcoin Improvement Proposals, full listing here)
Simplified Payment Verification. These wallets are an intermediate step between the full wallet and the light wallet to take advantage of both worlds: they occupy little but they cryptographically verify the received data to avoid showing the user false information due to a possible attack on the server that sends the information.
They download a full copy of the headers of all the blocks available on the blockchain.
Through this implementation, we can determine if a transaction belongs to a block in the chain without the need to download the entire Bitcoin blockchain. That is, the wallet has just enough to allow you to validate transactions without depending on a trusted third party (in the case of light wallets it would be the server that provides the information and that could be corrupted).
Are the purses safe?
Some more than others, but it essentially depends on how you use them. Private keys are the only way to access the associated bitcoins. If you lose your private keys or they get corrupted, you lose your bitcoins, so the way to keep your bitcoins safe is to prevent by all means that someone can access these keys and avoid losing them.
Avoid using unknown Bitcoin wallets and, in the case of software, better if they are Open Source with public code. Also we recommend you read cHow to securely back up your cryptocurrency at all times.
As a general rule, a paper wallet that has been generated without an Internet connection and your password has been stored on printed paper and stored safely is usually one of the safest ways to store bitcoins. Now, it is much slower than making an online wallet, for example. Each one must decide what to use based on what they need.