Bitcoin was the first cryptocurrency invented. A person can earn/trade for Bitcoins or can mine (create) them. Mining them is a process that uses specialized cryptocurrency mining software and computer processing power to make the complex mathematical calculations required to create Bitcoins.
Bitcoin transactions are recorded in a blockchain that makes a permanent record of all the transactions. Blockchains are managed on a peer-to-peer decentralized basis. The blockchain uses public encryption keys to identify the buy/sell participants in a transaction. Bitcoin users need to have a Bitcoin wallet with public/private encryption key pairs in order to make Bitcoin transactions.
Guide to Bitcoin Wallet
Encryption is the basis for protecting the information held in a Bitcoin wallet. There is a public encryption key that can be given to anyone and is the public information stored in the blockchain records. There is matching private encryption that is necessary to do any transactions with the public key.
A Bitcoin wallet is a storage medium that holds the Bitcoin information and the public/private encryption keys necessary to make Bitcoin transactions. A Bitcoin wallet may be information written on paper or digital information stored locally by a user on a hard drive or a thumb (USB) drive or stored online with a digital wallet or on a cryptocurrency exchange.
Bitcoin use is semi-anonymous because the public/private encryption keys do not give any other information about the users. This was one of the main attractions for using Bitcoins originally, especially by criminals. However, making Bitcoin transactions through a cryptocurrency exchange identifies the users.
Best Bitcoin Wallet
There are many choices of Bitcoin wallets. The best one to use depends on the need. There are two basic categories of Bitcoin wallets. One type is self-managed and self-protected. The other is software that is managed online.
Self-managed wallets include paper wallets, desktop wallets, and hardware wallets, such as those stored on a thumb (USB) drive. Online wallets are web-based software systems connected to the Bitcoin blockchain records and/or part of a cryptocurrency exchange system.
How Do I Create a Bitcoin Wallet?
A self-managed Bitcoin wallet is a secure way to store information but does not directly allow any Bitcoin transactions. You will need a public encryption key with a public address to receive Bitcoins and a private encryption key that is used to spend or transfer the Bitcoins that are held at that public address.
This information can all be stored on paper and the things needed can be created by using BitAddress or BitcoinPaperWallet. Having a paper Bitcoin wallet reduces hacking risk, although the paper records need to be securely protected.
The Bitcoin wallet information can be stored on a desktop or laptop computer using local downloaded software such as Electrum and Exodus. The information can be stored on a hardware device, such as those offered by Trezor or Ledger Nano X. There are also mobile solutions such as Mycelium, Samourai, and Bitcoin Wallet.
To use a self-managed Bitcoin wallet requires sending the public encryption key to another person who wants to do a Bitcoin transaction and then using some intermediary who is paid a fee to get the Bitcoin transaction added to the public blockchain records. This is a slower method and the fee offered for recording the transaction may need to be substantial to get the transaction recorded on the blockchain.
How to Get a Bitcoin Wallet?
The fastest and easiest way to get a Bitcoin wallet and to be able to make transactions is to sign up for an account on a cryptocurrency exchange, such as Coinbase or Robinhood. Coinbase works online and for mobile users. Robinhood is only for mobile users and is popular because it offers all buy/sell transactions for free.
A Bitcoin wallet, managed as software on a cryptocurrency exchange, allows instant transactions for the published cryptocurrency exchange prices. There is no need to search for an individual to conduct a transaction. Like a stock exchange, a cryptocurrency exchange matches buyers and sellers at current market prices.
For beginners, this is the easiest way to get started; however, DO NOT keep significant cryptocurrency funds in a cryptocurrency exchange. Over $1 billion has already been lost this way. Keep only enough for transactions and realize your cryptocurrency is at risk on an exchange. Keep large amounts of cryptocurrency elsewhere, by using a safer, offline storage method.
Holding More Than Just Bitcoins
Bitcoins are the most well-known form of cryptocurrency; however, there are many other cryptocurrencies to choose from now. Most cryptocurrency wallets can hold more than just Bitcoins. Coin Time Machine lists 100 cryptocurrencies and their current values.
Here are the top 10 cryptocurrencies:
- Binance Coin
- Bitcoin Cash
- Bitcoin SV
To understand the various forms of Bitcoins, Investopedia explains the difference between Bitcoin vs. Bitcoin Cash. Bitcoin was the original. Bitcoin Cash was subsequently created to allow for more transactions per second, quicker payments, and lower transaction fees. Bitcoin SV was created as a “hard fork” on November 15, 2018. It uses the Bitcoin history to that date and then adds new transactions based on methods intended to restore the original Bitcoin protocol.
Risk of Loss
Just like having a physical leather wallet full of cash, a cryptocurrency wallet is subject to being stolen or lost by the person who owns it. It is important to protect the password, the private encryption key, and the physical data storage medium (or paper) that holds the cryptocurrency wallet information.
It is necessary to have the private encryption key to open the digital wallet or be able to hack it for the cryptocurrency to be used. Robust password security is necessary to protect the private encryption key. If a password, which allows the use of the private encryption key can be guessed, stolen, or hacked, then the cryptocurrency wallet can be compromised.
Physical loss of the storage medium creates a significant risk. One man lost $127 million of Bitcoins by accidentally throwing a computer hard drive away that had the cryptocurrency wallet of Bitcoins stored on it. Even though the man knows where it is, the city refuses to allow the man to search the San Diego landfill where the computer hard drive was thrown out.
Cryptocurrency Exchange Risk
Using a cryptocurrency exchange makes it convenient to conduct transactions in cryptocurrencies. This is attractive to many users. These accounts are easy to set up and easy to use. However, this exposes the exchange users to the serious risks that the cryptocurrency exchange can be hacked.
If a cryptocurrency exchange goes bankrupt because of this problem, the users of that system can lose everything. This is what happened to Mt. Gox, which was the largest cryptocurrency exchange for Bitcoin until it lost close to half a billion dollars and went out of business.
Other more recent problems continue to remind us that serious security risks exist on exchanges.
On April 20, 2018, TechFunnel reported that CoinSecure, which is a cryptocurrency exchange based in India, lost $3 million of Bitcoins due to theft. The company was holding these Bitcoins for itself and for its customers in a Bitcoin wallet owned by the company.
On May 8, 2019, Wired reported that Binance, one of the world’s largest cryptocurrency exchanges, lost $40 million due to the theft of its cryptocurrency.
Now that there you have a clearer understanding of Bitcoin wallets, how to use them, how to find a good one for specific platforms, and how to reduce risk of loss, it is time for you to start using cryptocurrency. Cryptocurrency technology is more accessible for average users and it is becoming more useful.
It is not a good idea to jump in as a novice user and start speculating (gambling) with the values of cryptocurrencies. On the other hand, it is a good idea to have some fun and learn how to manage a Bitcoin/cryptocurrency wallet to buy, sell, and trade using cryptocurrency.
Don’t be intimidated, just give cryptocurrency a try with a very modest amount of real money so you can brag to your friends that you are part of the early adopters of what is a disruptive global financial system change that continues to expand.