What are Bitcoin Wallets?


The Bitcoin Wallet software is designed to create and manage cryptographic keys. It offers several essential functions, including the ability to send and receive Bitcoin, back up keys, and monitor the available balance.

Typically, Bitcoin client software encompasses both the client and wallet functionalities. The wallets associated with the Bitcoin Core client are saved on disk as Berkeley DB files.

Private keys are produced by randomly selecting a 256-bit number generated by the wallet software. These private keys enable wallets to authorize outgoing transactions. It is important to note that wallets do not actually hold any coins; rather, they do not maintain a balance or store coins for users. In the Bitcoin network, coins are not physically present; instead, only transaction data is recorded on the blockchain, specifically in the form of unspent transaction outputs (UTXOs), which are utilized to determine the total amount of bitcoins.

Within the Bitcoin ecosystem, various types of wallets are available for storing private keys. As software solutions, they also offer users functionalities to manage and execute transactions on the Bitcoin network.

Types of Bitcoin Wallets

Let us explore the common types of wallets, which are given in the further sections −

Non-deterministic Wallets

Non-deterministic wallets are characterized by their use of randomly generated private keys, often referred to as Just a Bunch of Keys wallets.

When the Bitcoin Core client is initially launched, it generates a set of keys and continues to create additional keys as needed. Handling a significant number of keys can be challenging and prone to errors, which may result in the theft or loss of cryptocurrency.

Additionally, it is essential to regularly back up these keys and ensure their security, such as through encryption, to mitigate the risks of theft or loss.

Deterministic Wallets

Deterministic wallets utilize a seed value to derive keys through hash functions. This seed is generated randomly and is often expressed using human-readable mnemonic phrases. These mnemonic phrases are outlined in BIP39, a Bitcoin improvement proposal that facilitates the generation of deterministic keys.

By using these phrases, users can recover all associated keys, simplifying the management of private keys.

Hierarchical Deterministic Wallets

Hierarchical deterministic wallets, as outlined in BIP32 and BIP44, utilize a tree structure to store keys, all derived from a single seed. This seed creates the master key, which in turn generates child keys and further extends to grandchild keys. Rather than producing keys directly, HD wallets generate private key generation information that facilitates the creation of a series of private keys.

The entire hierarchy of private keys can be easily restored if the master private key is accessible. This characteristic makes HD wallets user-friendly and highly portable. Numerous HD wallets are available, both free and commercial, including options like Trezor, Jaxx, and Electrum.

Paper Wallets

As the name implies, this is a paper-based wallet with the required key material printed on it. It requires physical security to be stored.

Brain Wallets

Brain wallets utilize a master private key that can be generated from the hashes of memorized passwords. The fundamental concept is that this passphrase serves as the basis for deriving the private key.

When applied in hierarchical deterministic (HD) wallets, it can create a complete HD wallet from just one remembered password. This approach is referred to as a brain wallet.

Hardware Wallets

Hardware wallets represent an alternative approach for securely storing keys through the use of tamper-resistant devices. These devices can be specifically designed for this purpose.

Additionally, with the rise of NFC-enabled smartphones, a secure element (SE) can be integrated into these devices. Among the various options available, Trezor and Ledger wallets are the most widely utilized hardware wallets for Bitcoin.

Online Wallets

Online wallets, as suggested by their name, are completely hosted on the internet and are typically offered as a cloud-based service. They allow users to access a web interface for managing their wallets and executing a range of functions, including sending and receiving payments.

While they are user-friendly, they require a level of trust in the service provider. A notable example of an online wallet is GreenAddress.

Mobile Wallets

Mobile wallets, as indicated by their name, are applications designed for mobile devices. They offer multiple payment options, particularly the convenience of using smartphone cameras to swiftly scan QR codes for transactions.

These wallets are compatible with both Android and iOS platforms and include options such as Blockchain Wallet, Breadwallet, Copay, and Jaxx.

How to Choose a Bitcoin Wallet?

The following points clearly explain how to choose a bitcoin wallet for payments and other transactions −

  • The selection of a Bitcoin wallet is influenced by various factors, including security, user-friendliness, and the features offered.
  • Among these considerations, security is the most critical aspect, and it should take precedence when choosing a wallet.
  • Hardware wallets are generally regarded as more secure than web wallets due to their design, which is resistant to tampering.
  • In contrast, web wallets are hosted online, which may expose them to greater security risks compared to a hardware device.
  • Mobile wallets for smartphones have gained significant popularity, as they provide a favorable mix of features and security.
  • Numerous companies offer these wallets on platforms like the iOS App Store and Google Play.
  • However, recommending a specific type of wallet can be challenging, as it largely depends on individual preferences and the specific features each wallet provides.
  • It is essential to prioritize security when making a decision about which wallet to utilize.