how bitcoin wallets work
Continuing the debit card analogy above, a bitcoin wallet has at least one “account” or sub-wallet. we can see this secondary wallet as equivalent to a debit card. For example, debit cards have information associated with them, including an account number and 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 account number. meanwhile, the private key is like a debit card 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:
Reading: How does a bitcoin wallet work
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 this private key in a much more human-readable format, called 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 rebuild 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 over the private key, it still leaves a lot to be desired. Since you should not store your recovery phrase in plain text (unencrypted) on your computer, for most people writing it down on paper is the best solution. this presents problems because it can be difficult to securely store a sheet of paper. Also, if you are using a multi-currency wallet (such as bitcoin.com wallet), you will have a separate recovery phrase for each different blockchain your wallet supports. Storing all those recovery phrases on paper quickly becomes an onerous task. 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 your private keys, which are stored encrypted in your google or icloud account.
To set up cloud backup on the bitcoin.com wallet, simply go to settings > cloud backup and follow the instructions.
read more: Make sure your crypto assets are safe with these simple tips.
types of portfolios
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, in theory, cannot be accessed from a computer or the internet. When a person wants to make a transaction, they connect the hardware wallet (usually via USB). the hardware wallet will sign transactions without compromising the private key. the disadvantage of hardware wallets is the cost and availability of the devices. ledger and trezor are well known hardware wallets.
software wallets exist on computing devices, such as a desktop computer, smartphone, or 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 said, hacking incidents are extremely rare and software wallets are generally considered safe for everyday use.
There are many options for software wallets, which can make the choice overwhelming. We invite you to try the bitcoin.com wallet, which is an easy-to-use yet powerful crypto wallet trusted by millions, but we’ve also written several helpful articles to help you navigate the process of choosing:
- how to choose the best bitcoin wallet? With so many options available, this article will help you weigh the key factors to consider when choosing a bitcoin wallet.
- What is a “non-custodial” wallet? The noncustodial model is important because it puts you in charge of your crypto assets 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 types of wallets and their advantages and disadvantages.