Last updated: 20th February 2014
Bitcoin wallets store the private keys that you need to access a bitcoin address and spend your funds. They come in different forms, designed for different types of device. You can even use paper storage to avoid having them on a computer at all. Of course, it is very important to secure and back up your bitcoin wallet.
Bitcoins are a modern equivalent of cash and, every day, another merchant starts accepting them as payment. We know how they are generated and how a bitcoin transaction works, but how are they stored? We store fiat cash in a physical wallet, and bitcoin works in a similar way, except it’s normally digital.
Well, to be absolutely accurate, you don’t technically store bitcoins anywhere. What you store are the secure digital keys used to access your public bitcoin addresses and sign transactions. This information is stored in a bitcoin wallet.
Bitcoin wallets come in a variety of forms. There are four main types of wallet: desktop, mobile, web and hardware. Here’s how they work.
If you have already installed the original bitcoin client (Bitcoin-Qt), then you are running a wallet, but may not even know it. In addition to relaying transactions on the network, this software also enables you to create a bitcoin address for sending and receiving the virtual currency, and to store the private key for it. There are other desktop wallets too, all with different features. Multibit runs on Windows, Mac OSX, and Linux. Hive is an OSX-based wallet with some unique features, including an app store that connects directly to bitcoin services. Some desktop wallets are tailored for security: Armory falls into this category. Others focus on anonymity: DarkWallet – a product still in development – will use a lightweight browser plug-in to provide services including coin ‘mixing’ in which users’ coins are exchanged for others’, to prevent people tracking them.
Desktop-based wallets are all very well, but they aren’t very useful if you are out on the street, trying to pay for something in a physical store. This is where a mobile wallet comes in handy. Running as an app on your smartphone, the wallet can store the private keys for your bitcoin addresses, and enable you to pay for things directly with your phone. In some cases, a bitcoin wallet will even take advantage of a smartphone’s near field communication (NFC) feature, enabling you to tap the phone against a reader and pay with bitcoins without having to enter any information at all.
One common feature of mobile wallets is that they are not full bitcoin clients. A full bitcoin client has to download the entire bitcoin block chain, which is always growing and is multiple gigabytes in size. That could get you into a heap of trouble with your mobile service provider, who will be only too happy to send you a hefty bill for downloading over a cellular link. Many phones wouldn’t be able to hold the block chain in their memory, in any case.
Instead, these mobile clients are often designed with simplified payment verification (SPV) in mind. They download a very small subset of the block chain, and rely on other, trusted nodes in the bitcoin network to ensure that they have the right information.
Examples of mobile wallets include the Android-based Bitcoin wallet, Mycelium, and Blockchain (which keeps your bitcoins encrypted on your phone, and backed up on a web-based server). Some have special features unique to them. Kipochi, for example, lets people use their phone numbers as their bitcoin addresses. Apple is notoriously paranoid about bitcoin wallets. Coinbase had its mobile wallet app pulled from the app store altogether in November 2013, and this was followed in February 2014 by removal of Blockchain.info’s iOS app. You can still use bitcoin using a browser on the iPhone, and CoinPunk are developing such a solution, which Apple cannot ban.
Web-based wallets store your private keys online, on a computer controlled by someone else and connected to the Internet. Several such online services are available, and some of them link to mobile and desktop wallets, replicating your addresses between different devices that you own.
One advantage of web-based wallets is that you can access them from anywhere, regardless of which device you are using. However, they also have one major disadvantage: unless implemented correctly, they can put the organisation running the website in charge of your private keys – essentially taking your bitcoins out of your control. That’s a scary thought, especially if you begin to accrue lots of bitcoins. Coinbase, an integrated wallet/bitcoin exchange operates its online wallet worldwide, but only allows people to buy bitcoins in the US. Blockchain also hosts a web-based wallet, and Strongcoin offers what it calls a hybrid wallet, which lets you encrypt your private address keys before sending them to its servers – encryption is carried out in the browser.
Hardware wallets are currently very limited in number. These are dedicated devices that can hold private keys electronically and facilitate payments. Trezor and Mycelium currently have wallets in development, but, as of February 2014 neither of them had delivered finished products. Announced on February 4th 2014, though, is the Nymi sports wristband from Boinym, which can act as a bitcoin wallet and uses your heart rhythm as a security key.
Are bitcoin wallets safe?
It depends how you manage them. The private keys stored in your wallet are the only way to access the transaction data stored in a bitcoin address. If you lose them, you lose your bitcoins. So, they are only safe in so far as no one else can access them, and they don’t get lost.
How can I secure my wallet?
There are several ways to make your bitcoin wallet more secure:
One way to protect your wallet from prying eyes is to encrypt it with a strong password. This makes it difficult to access your wallet, but not impossible. If your computer is compromised by malware, thieves could log your keystrokes to find your password.
Back it up
If you have your private keys stored in one wallet, then if you mislay that wallet or it gets corrupted, then you will lose your keys. Backing up your wallet makes a copy of your private keys, but it’s important to back up your whole wallet. Some addresses are used to store change from transactions, and may not be shown to you by default. Back the whole thing up in several different places, and keep them safe from prying eyes.
Take it offline
If you are too nervous to store your bitcoin keys digitally, for fear that they may be stolen by hackers, there is another option: ‘cold storage’. Cold storage wallets store private bitcoin keys offline, so that they can’t be stolen by someone else on the Internet.
It’s a good idea to use cold storage for the bulk of your bitcoin fortune, and transfer just a little to separate bitcoin addresses in a ‘hot’ wallet with an Internet connection, making it easy to spend. That way, even if your mobile phone is lost, or the hot wallet on your notebook PC is erased during a hard drive crash, only a small amount of bitcoin cash is at risk.
Many software bitcoin wallets feature a cold storage option. Or, you could go completely analog, and simply use paper for offline storage in the form of a ‘paper wallet’.
There are several sites offering paper bitcoin wallet services. They will generate a bitcoin address for you and create an image containing two QR codes: one is the public address that you can use to receive bitcoins; the other is the private key, which you can use to spend bitcoins stored at that address.