In part 1 of the “Cryptocurrency Trading & Investing For Beginners” series, we looked at cryptocurrency basics, what is Bitcoin and how the Blockchain works.
Part 2 of the series continues on from Chapter 2 of the Beginners guide to Crypto trading book . You’ll learn about the various types of wallets available to store your Bitcoin and how to install a Bitcoin wallet on your laptop.
Chapter 2: Bitcoin Wallets
A Bitcoin wallet is like a bank account – it stores, secures and allows you to send and receive Bitcoins. In particular, a wallet stores your private keys and public keys. The public key is used to send/receive money and the private key is what actually gives you access to your account.
The main reason why traders prefer to use their own wallet is to mitigate counterparty risk. That is the risk that someone may hack a cryptocurrency exchange or the exchange goes bankrupt and you lose your money.
For instance, back in 2014 hackers stole $460 million worth of Bitcoins from Mt. Gox, a popular Bitcoin exchange site in which thousands of users lost their money.
When the time comes to buy Bitcoins, it’s recommended that you transfer your Bitcoins from an exchange to your personal Bitcoin wallet.
Types of Bitcoin Wallets
Given that there are over 20 types of Bitcoin wallets available. Do you need to know all of them? Hell no.
To keep it simple, wallets can be classified into two main categories: Hot Wallet and Cold Storage Wallet.
Note: each alt coin will have its own specific wallet for storage and this section covers mainly Bitcoin wallets.
A “hot wallet” refers to any kind of online storage wallet. Storage of coins on a hot wallet means that it is accessible online via the web. For example, a cryptocurrency exchange’s shared wallet is a hot wallet and since it’s stored online, there is counterparty risk involved.
A “cold wallet” refers to any kind of offline storage wallet. Storage of coins is offline in the form of USB hardware devices. These wallets are more secure as they are stored physically offline and hackers do not have access to them.
Now that you know the difference between hot wallets versus cold wallets, there are 4 different types of Bitcoin wallets you can use:
1. Software Wallets
Software wallets are hot wallets that require you to download a software client (program) onto your desktop, laptop or mobile device to create and use a Bitcoin wallet.
Electrum – is popular software desktop wallet for Bitcoins only. According to the Electrum website, it works by “focusing on speed with low resource usage and simplifying Bitcoin”.
Electrum does not send your private keys to the servers, it verifies the information reported by services using a technique called “Simple payment verification”. Although the wallet looks a bit old-fashioned, it’s regarded as a secure, fast and efficient Bitcoin wallet for beginners.
Exodus – is a software desktop wallet that has a user-friendly design, supports Bitcoin in addition to multiple cryptocurrencies (like Ethereum, Litecoin, Monero etc). It encrypts your private keys, transaction data and tracks the value of your portfolio in real time.
One of the benefits of using this wallet is that you can trade other currencies within their interface using ShapeShift. ShapeShift allows you to quickly swap your coins for other alt coins or cryptocurrencies.
The downside to using Exodus is that it’s not open source which means other developers can’t contribute to the development of the Exodus wallet.
Your Bitcoins are only as secure as the computer or mobile they are stored on. If you have malware on your computer, it’s tough but not possible for hackers to steal your wallet information.
Make sure you back up your software wallet file and encrypt the wallet in the event that your computer crashes and is unrecoverable. If you need to reformat your computer and have not made a backup of your wallet then your Bitcoins are lost.
2. Online Wallets
Online Wallets are the easiest to use amongst hot wallets. One of the easiest ways to get an online wallet is to go to Blockchain.info and sign up for a new account.
Another hot wallet that’s great for beginners is Coinbase. It’s also known as a “custodian wallet” where your wallet’s private keys are in possession of a custodian, like Coinbase and also includes all the wallets held on exchanges.
It has a simple user interface, you can buy Bitcoins immediately with a credit or debit card and a hot wallet is automatically assigned to you.
The tradeoff between using online wallets is that your private keys are stored on another server making it susceptible to hackers. Online wallets should be used for making small Bitcoin transactions while large holdings of Bitcoin should be transferred to hardware wallets.
3. Hardware wallets
Hardware wallets are cold-wallet storage devices that add an extra security layer because it generates a private key on the device itself and is protected against regular computer malware.
Hardware wallets look like USB devices and you can secure the device further by entering a password to unlock it. If your computer is prone to malware and you trade often, then hardware wallets are the most secure option.
4. Paper Wallets
A paper wallet is a cold storage method and involves printing out your public and private keys on a piece of paper. Most online and hot wallet services allow you to print out your existing wallet keys. Often paper wallets will have QR codes, so you can quickly scan them and add the keys into a software wallet to make a transaction.
The benefit of a paper wallet is that the keys are not stored digitally anywhere and not subjected to cyber-attacks or hardware failures. But a paper wallet can be torn or damaged by water so it is important to make multiple copies of this paper and secure it inside a locker.
Factors To Consider When Choosing A Wallet:
Choosing the right wallet depends on several factors outlined below. Keep in mind that you can have more than one wallet and easily switch between hot or cold wallets depending on your circumstances.
1. Frequency of use
If you send Bitcoins regularly, I suggest using a wallet app on your mobile so that it’s always available. This may include locking a large portion of your Bitcoin on a cold storage like a hardware wallet and leaving a small amount on a mobile wallet. But if you’re just buying Bitcoins as a long-term investment then it’s ideal to transfer your holdings over to a hardware wallet.
2. Ease of use:
Choose a wallet that has a user-friendly interface so that you can easily send or receive Bitcoins. Some wallets have a confusing interface which tends to scare new Bitcoin traders.
If you’re paranoid about someone stealing your Bitcoins then third-party wallets like hot wallets may not be ideal. They require you to sign up with your name and email which gives away your identity.
Top picks for wallets:
Coinbase – 3rd party hot wallet. User-friendly, easy to set up and you receive a $10 bonus using this link http://bit.ly/coinbase-vo. It offers a web and mobile wallet and is very reputable among Bitcoin users and traders.
Use this wallet if you want to buy Bitcoin immediately through the exchange and don’t mind signing up with your name and email. It’s how I purchased my first Bitcoin.
Blockchain.info – 3rd party online wallet. It’s a bit harder to get around than Coinbase but it’s much more secure as the company doesn’t have direct access to your Bitcoins. Anonymity is still compromised but you will have more control over your coins.
TREZOR – hardware wallet. A secure hardware wallet where anonymity is maintained but it comes with the price of purchasing the actual product. Considering the fact that it protects your investment, it’s well worth it.
Ledger Wallet – hardware wallet. If you’re planning on holding large amounts of Bitcoins as a long-term investment then consider using Ledger wallet. The most popular wallet model is the “Ledger Nano S”.
You set up your wallet by choosing a PIN to protect it from intruders. Later, you will receive a 24-word seed that will be used to create your private keys.
This seed should be written down in a safe place and NOT on your computer, as whoever knows this seed has control over your Bitcoins.
The Ledger wallet is much more stylish, affordable than Trezor and comes in a variety of models. The only difference between TREZOR and Ledger is that TREZOR has been around for a longer time.
Note – You can store your Bitcoins between several wallets. Keep small amounts on hot wallets for trading purposes and large amounts on cold wallets for risk management purposes.
REMEMBER: Always keep your seed and private keys safe.
How to send Bitcoin to wallets:
- To send someone Bitcoin, you need their Bitcoin “receiving address” for example: e9873d79c6d87cd0fb6a5778633389
- If you want someone to send you a bitcoin, you share your wallet’s “receiving address”.
- QR codes can also be used in the same regard
- To make sure someone has sent you Bitcoin, enter that address to blockchain.info and you will see all the transactions associated with that address.
Tutorial: Installing Electrum Wallet
For beginners, I recommend installing Electrum as it’s one of the most widely adopted and secure wallets out there for Bitcoin. Let’s set your Electrum wallet up now.
- Go to https://electrum.org/#download
- Select the version for your operating system and download it
- Click on the open the setup, the install wizard should open
- Select “Auto connect” and click “next”
- Leave the default wallet name and Click “next”
- Select “standard wallet” and click “next”
- Select “create new seed” and click “next”
- The next screen should give you a “wallet generation seed” (write it down and store it somewhere safe)
- Click “next”
- Confirm your seed by retyping it into the box, then “click”
- Choose a password to encrypt your wallet keys, then click “next”.
- Electrum then generates your wallet address, please wait.
- You should see 3 tabs: History / Send / Receive.
- We’re going to focus on “Receive” tab, this is the “receiving address” that you will need to enter on the exchange to transfer Bitcoin into your wallet.
- It should look like the image below however don’t transfer Bitcoin into your wallet yet. Continue reading these instructions to understand Electrum’s features first.
- On the bottom left of the screen, you will see “Balance: 0.mBTC”. The 0 means you have 0 Bitcoins in this wallet and the mBTC stands for millibits that is 1 thousandth of a bitcoin = 0.001BTC.
- You can change that metric by going to the “tools” menu, select “preferences”, then in the “Appearance” tab, change “Base unit” to “bits” and click “close”. Alternatively leave it as is.
- Let’s say you already have Bitcoins sitting in your wallet. When you want to spend your Bitcoins, go to the “Send tab”, in “Pay to” enter the address of the person you want to send Bitcoins to.
- In “Description”, add your own notes and enter the amount of Bitcoin you want to send.
- That’s it, make sure you have your “wallet seed” in a secure place and your password memorized.
- Backup your wallet because if you lose it, your Bitcoins will be permanently lost!
Over to you. Let me know if you found other Bitcoin wallets that are useful for beginners.