What is a Bitcoin wallet?
A Bitcoin wallet is a digital wallet which allows you to receive, send and store Bitcoin.
Every wallet comes with an address. The easiest way to think of a Bitcoin address is like a financial email address. It’s a unique address that is only accessible by you, via a password, only instead of receiving messages you are receiving Bitcoin.
Note that in this guide wallets work the same for almost all cryptocurrencies, so the exact same information applies for Ethereum wallets, Dogecoin wallets etc.
Wallet Basics: Public and Private Keys
Every Bitcoin wallet contains two types of information known as keys.
- Public Keys
- Private Keys
What’s the difference?
Your Public Key is more commonly known as your Bitcoin address or wallet address.
Think of this as your bank account number. You can safely give your bank account number out to anyone, and even publish it publicly online. People can use it to send you money, but it doesn’t give anybody the ability to actually access your bank account.
This is exactly how a Public Key works. If people have your Bitcoin address, or Public Key, they can send Bitcoin to you, but won’t be able to access your Bitcoin. It is safe to give your Bitcoin address to anybody you want.
Your Private Key is the encrypted key to access your wallet.
Think of a Private Key like the Bitcoin version of your internet banking password. If someone gets access to your internet banking password, it means they could go into your bank account and steal all your funds. It’s exactly the same with your Private Keys. Never share your Private Key with anybody, ever. If anybody gains access to the Private Key to your Bitcoin wallet, your Bitcoin will be gone, forever.
What are the different types of Bitcoin wallet?
There are three main types of Bitcoin wallets:
- Exchange wallets
- Soft wallets
- Hard wallets
In this guide, I will go through all of them and explain when you can/should use them.
Exchanges are not technically wallets. They are third parties which keep your assets in wallets for you, and manage them on your behalf.
Pros of exchanges
The main advantage of exchanges is convenience.
Having your assets on an exchange means you can instantly buy, sell and trade when the opportunity strikes. If Bitcoin is spiking and you want to quickly sell some, sending it from your private wallet to the exchange might be too slow, and the price will have changed by the time it arrives. Having the ability to instantly interact with the market is one of the main reasons people keep their coins on exchanges.
The other reason is exchanges give you benefits, such as the ability to stake, join mining pools and earn interest.
The final and most common reason is that exchanges make things easy for beginners. Many people new to cryptocurrency don’t feel ready to manage their own wallets. Instead of needing to keep their own Private Keys secure, they prefer to have an account with a third party and access it with the more familiar “email address and password” login, and the third party takes care of the security of the Private Keys for them.
Cons of exchanges
Exchanges are not government-guaranteed the same way bank accounts are, so if an exchange goes bankrupt or disappears, your coins will disappear with it.
For this reason, people generally avoid keeping large amounts of assets on exchanges, preferring to use private wallets instead. This has happened many times in the past with exchanges being hacked, going bankrupt, or just being outright scams.
If you’re using an exchange, make sure it’s a reputable exchange backed by established and trusted people in the industry.
When To Use An Exchange Wallet
If you’re just starting out in crypto, it can be easier to use an exchange as your wallet while you only have a small amount of crypto assets.
I generally recommend newcomers to crypto start with an exchange wallet. I discuss this more in this article.
Remember - exchange wallets are only for holding amounts of crypto you can afford to lose.
I'm talking a few hundred bucks or maybe a few thousand depending on your financial situation. Do not be holding six figures or more on exchanges.
The reason I recommend exchange wallets is they're extremely easy for newbies to set up and maintain access to. If you try and use more complicated wallets before you're ready, you risk losing access to them if you don't understand how to back them up properly (this happens all the time!)
Once you get more serious and accumulate more assets and learn more about crypto, you can then start using the more secure soft and hard wallet options discussed later in this guide.
Exchanges I recommend
- Binance - This is my top recommendation and the exchange I use most often. It is currently the biggest exchange in the world and has an excellent safety record.
- Kucoin - This is a smaller exchange I've been using since around 2017 - I like the UI a lot and use it for buying lesser-known coins.
How To Set Up An Exchange Wallet
If you would like to use an exchange as your wallet, getting it set up is extremely easy and should only take a couple of minutes.
I recommend starting with Binance.
Once you’ve done that, head to the Wallet tab.
Click Fiat/Spot Deposit & Withdrawal.
Click the yellow Deposit button.
This should bring you to the Deposit page.
On that page, you can select any coin you want, and you should have a wallet address available that will be associated with your account.
In the screenshot below, I am showing my wallet address for Bitcoin:
The alphanumeric string under “Address” is your Bitcoin address, or Public Key.
(You will not know your Private Key, as Binance secures this for you).
Soft wallet is a term used to describe a web-based wallet.
These are wallets that are generated in a browser, an app, or software on your computer.
The main difference between a soft wallet and an exchange is you need to manage the Private Keys for a soft wallet on your own.
If you lose the Private Keys, it means you will no longer have access to that wallet.
Yes, that means if you have $1 million of Bitcoin in a soft wallet and you lose the Private Key (password), that $1 million is gone!
There is no 0800 number to call or link to reset your password. There are many people who have lost large amounts of Bitcoin because they didn’t take care of their Private Keys.
Pros of a soft wallet
- Easy to set up (usually free)
- Very convenient, can access your coins with a few swipes
- Reasonably safe
- Safer than exchanges
- Good for day-to-day usage
Cons of a soft wallet
- Not 100% secure (but still 99.9%, in most cases)
- Easy to be complacent and lose keys or jeopardise security
- Can’t earn interest or sell coins without first sending to exchanges
When to use a soft wallet
To be honest, I don’t actually use a soft wallet for anything. They are more secure than an exchange, but I prefer to use a hard wallet for anything I don’t keep on an exchange.
However, for anyone who doesn’t want to spend money on a hard wallet, a soft wallet is a good free alternative for coins you want to keep in your own custody.
Soft wallets are also necessary for people who use Bitcoin and crypto in day-to-day life, and need to be sending and receiving cryptocurrency on a regular basis.
For example, Bitcoin has become legal tender in El Salvador recently and people are doing things like buying groceries and Starbucks with Bitcoin. For this, people will be using soft wallets.
Soft wallets I recommend:
How To Set Up A Soft Wallet
I already have an in-depth guide for setting up an Exodus wallet, so in this example I’ll set up a soft wallet using Trust Wallet.
First, download the Trust Wallet app on your phone.
You’ll be asked if you already have a wallet or want to create a new one.
Select Create A New Wallet.
They’ll ask you to set a PIN number.
This is not your Private Key.
This is simply a PIN to secure the app on your phone and to give you easy access to the wallet.
Then you’ll be asked to back up your wallet.
Pay attention because this step is important:
Once you click Continue, you will be presented with a display of 12 words in a specific order.
In crypto, we refer to this series of words as your seed words.
The seed words are your Private Keys! (more technically, they are an encryption of the keys).
If somebody ever gains access to your seed words, they gain full access to your wallet and your Private Keys.
Therefore, take great care to store these in a private and secure place.
You should write these seed words down and keep them in the most secure place possible (ideally, on a piece of paper in a safe in your house, or in a bank vault).
Some people keep them in a private Dropbox folder or email folder, but this is not as secure as you would think.
For a soft wallet with just a few thousand dollars, that might be fine, but anything more and you will want secure offline storage of your seed.
I need to double-stress that this backup is essential for the security of your funds.
If you ever lose your phone, you will be able to restore your wallet on any phone only if you have these seed words. Make sure they are secure! This will help you avoid ending up like this guy.
Once you’ve backed up your seed words/Private Keys, you will be presented with your wallet:
To find your Bitcoin address, click the Bitcoin symbol and click Receive.
This will bring up your Bitcoin address, both in alphanumeric form and QR code form:
That’s it! You have a working soft wallet.
Simply use this address whenever you want to receive Bitcoin here.
You will also see within Trust Wallet you can send and receive a large variety of coins within the same wallet.
Play around with it and see what you can do!
A hard wallet is a physical device which generates and stores your Private Keys securely.
They look something like this:
A hard wallet is the most secure way to store your crypto assets because the Private Key is never shown on your phone or laptop screen, it is generated securely within the wallet device itself and is never presented to the internet.
This means your funds are always 100% secure, unless you personally jeopardise your Private Keys by showing them to someone or losing them.
Even a hacker with full access to your laptop will never be able to see your hard wallet Private Key, because it’s encrypted within the device and never actually shown to your phone or laptop.
However, because a hard wallet is still managed entirely by you, you still risk losing your coins if you don’t secure it properly.
That means if you lose the passwords or private keys to your hard wallet, those coins are lost forever. There is no 0800 number or support desk to call, or “forgot password” link you can click.
Note: Some people think hardware wallets aren't secure because they would be easy to lose. However, your crypto isn't actually stored on the device itself. Think of your crypto like your emails, and your hardware wallet like your phone. Even if you lose your phone, you haven't lost your emails. You just need to purchase another phone and you can access your email again.
The key with hardware wallets (and all wallets) is that your private keys are backed up. As long as you have secured your private keys in a safe place (such as a safe), even if you lose the hardware device, you can simply buy another device and restore your wallet. The lost device is pin-protected so it's unlikely whoever finds it will be able to get into your wallet either.
If you hold any significant amount of your wealth in crypto, you must have a hardware wallet. If you ever lose a large amount of crypto and you didn't have a hardware wallet, you deserved it. Yes, I said it. Having a hardware wallet is non-negotiable. It is simply the safest and smartest way to secure your crypto assets.
Pros of a hard wallet
- Maximum security
- Private Keys generated offline and off your phone/laptop
- Can store many different currencies
Cons of a hard wallet
- Costs money
- Can be inconvenient if regularly accessing funds
- Risk of loss if not managed properly
When to use a hard wallet
Here's the difference between soft wallets and hardware wallets:
You can think of a soft wallet as the wallet you keep in your pocket. This is where you keep crypto for paying for day-to-day things, but it's not ideal for keeping huge amounts of money.
Think of a hardware wallet like a vault at a bank or a safe in your house. It's not great if you need to access it all the time, but it's perfect for storing large amounts of assets you want to lock away for a while.
For people holding large amounts of cryptocurrency, a hard wallet is easily the safest option.
Hard wallets I recommend
Trezor is now my sole recommendation for hardware wallets.
I no longer recommend purchasing hardware wallets from Ledger. While I don't have an issue with the Ledger devices themselves, the company recently had a data leak that leaked 300k customers' email, phone and physical address information. I don't need to explain to you why this is an extreme security risk if hackers know you own crypto and know where you live. Some investors who hold millions in crypto have even said they've needed to move house to protect themselves. To make matters worse, they haven't changed their data policy and still are storing customer data for several years after you purchase.
Trezor on the other hand only stores your data for the legally required 90 days and then deletes it to protect customer privacy.
If you do want to purchase a ledger, my advice is don't get it delivered to your home address. Have it delivered to a PO Box or a work address. This doesn't eliminate the security risk but is much safer than exposing your home address.
The other piece of advice I will give is never purchase a hardware wallet from a third party as you risk buying a device that's been tampered with. Always buy directly from Trezor or Ledger.
How To Set Up A Hard Wallet
Once you receive your Trezor, the very first thing you want to do is make sure it's sealed with the Trezor holographic seal:
If it's not, you should contact Trezor and let them know you received a device with a broken seal and they will replace it.
A broken seal means your device may have been tampered with and your assets will not be safe.
If your device is sealed, go ahead and break the seal open and connect it to your PC.
Then head to trezor.io/start:
You will be taken through a wizard where you set up a brand new wallet.
First, they will ask you to update the firmware on your device to the latest version:
Once the latest firmware has been installed, you will get asked whether you want to set up a new wallet and restore an old wallet.
Select Create New Wallet:
The next step is your seed backup.
Pay attention because this is the most important step.
You are given two options.
If this is your first hardware wallet, I would recommend using the Standard Seed Backup.
During this phase, you will be asked to write down 12 words in a specific order.
This is your backup.
You must write this down (on a physical piece of paper, not on your phone or computer).
If you ever lose your Trezor, you will be able to restore your wallet on any new Trezor device as long as you have these 12 words.
This means these 12 words are the keys to your assets.
It means if you lose these 12 words and someone finds them, they can instantly access your assets.
Essentially it's a very long password.
Ideally, you want to keep this in a safe or a bank deposit box, but it's up to you how many copies you make, and where/how you secure it.
Remember - the device itself is unimportant.
It is protected by a PIN and if someone enters 3 incorrect PINS, the device will lock permanently.
If you lose the device, you can just buy a new one and restore your wallet.
But only if you have your seed words. Protecting your assets is all about protecting your seed words.
Once you've backed up your seed words, you will set up a PIN for your device.
It's a simple PIN, no different to a credit card or phone PIN:
Your wallet will then be setup and ready for use.
You can access it through the Trezor Suite desktop app, or at suite.trezor.io, where you can see your deposit address and balances.
When you first login to your wallet, you will be shown whether you want to use a standard wallet or a passphrase wallet:
I highly recommend using a passphrase.
What is a passphrase?
Remember when you backed up your wallet with your 12 seed words?
Those 12 words are like a very long password to your wallet.
A passphrase is a 13th word that you get to choose.
It adds a second-level layer of security to your wallet.
Even if someone finds your seed words, they won't be able to access your wallet because they need the 13th word.
The 13th word can be any combination of letters, numbers and symbols
My advice for the 13th word is to:
- Choose a word you will never forget (such as your childhood phone number, street name, first crush etc.
- Store the word separate from your seed words (since it should be easy to remember by heart, anyway).
However, remember that using a passphrase is optional, and if you're not comfortable with the added complexity you don't need to use it.
Got any questions about wallets? Leave them in the comments?