What are the different types of Bitcoin wallets?
There are many types and functions of Bitcoin Wallets: Hardware wallets, software wallets, web wallets, brain wallets, and paper wallets. When selecting a wallet it is useful to understand the functionality, benefits, and trade-offs associated with each.
These wallets are those that are installed on a computer that is controlled individually. Only the individual controlling the computer should have access to the private keys that store the Bitcoin. Creating a software wallet is as simple as picking a wallet and downloading it.
Software wallets provide more security than web wallets but greater accessibility than offline wallets. However, with software wallets comes greater responsibility; they are only as secure as the computer they are stored on. As cryptocurrency becomes more valuable, malware becomes more prevalent and if you get hacked or compromised or if your computer or hard drive breaks down, it’s quite likely that your coins will be lost forever.
Private and public keys can be printed out or even written down, providing the closest thing there is to a physical Bitcoin. Being completely offline, no one can get into it without having access to the piece of paper. It’s easy to create a paper wallet yourself using online services such as https://www.bitaddress.org and printing off or writing down the private and public keys.
Using the public key, Bitcoins can be sent to the paper wallet without it being back online. But to send Bitcoin it is necessary to bring the paper wallet online and bring the account into a web or software-based wallet.
Paper wallets provide real security by removing the keys from the digital world into the physical one and can be considered the most secure way to store Bitcoin long term as the Bitcoin is essentially unreachable for spending until they are brought back online. However, it is worth noting that your funds are only secure until you use a computer – if the computer subsequently used to access your Bitcoin is compromised, so too could your wallet.
These are the most convenient wallets. Controlled by third parties, using web wallets means your Bitcoins are easy to access, purchase items or quickly trade. The biggest and significant trade-off is having to trust a third party for your Bitcoin's security. Note also that not all web wallets are created equally and vary in function and capability. Some web wallet providers are about the convenience of converting fiat into Bitcoin and vice-versa, some are about the convenience of instant trading, while some aim to give a mixture of security and convenience. Web wallets that have extra layers of security include multi-sig wallets such as BitGo.
In general, convenience comes at a price. While a wallet provider or exchange remains secure, so too will your Bitcoins. But if an exchange is hacked or compromised there is often little recourse for retrieving your Bitcoins.
A type of wallet in which a seed phrase used to regenerate a Bitcoin private address is committed to memory. The random words or phrase is generated by a computer which can either be memorized or written down. Just like paper wallets, anyone who has access to it has access to the wallet's Bitcoins. Clearly, it is a risky proposition. While memory techniques allow seed phrases to be memorized and recalled easily, if a brain wallet is forgotten or the person dies or is permanently incapacitated, the Bitcoins are lost forever.
These wallets essentially work like a USB stored software wallet or as a method of securely storing paper wallets. They are not connected to the internet and can only be accessed through physical contact. Hardware wallets are more secure than paper wallets as they have a secure chip in them meaning a private key never has to be entered on a connected computer. Instead, a pin is entered on the hardware wallet itself. The risks, of course, come with the loss of a pin code, the loss of the seed word or the damage or loss of the hardware device itself.
Hot Wallets vs Cold Wallets
When it comes to Hot wallets vs Cold wallets, this is simply a terminology that encompasses any kind of wallet that either is connected to the internet (Hot) or not connected to the internet (Cold). Hot wallets are those such as web or exchange wallets stored and connected online. Cold wallets can be paper wallets, hardware wallets or software wallets stored on a removable storage device.
It’s easy to think of a wallet as a place that stores bitcoins, but a wallet doesn’t hold physical bitcoins. Instead, Bitcoins are associated with the wallet address and it is the Blockchain that is responsible for keeping track of how many coins are spendable by each wallet.
Next Up: How are bitcoins traded and what is a wallet signature?