Last updated: 22nd December 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 five main types of wallet: desktop, mobile, web, paper and hardware. Here’s how they work.
If you have already installed the original bitcoin client (Bitcoin Core), 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 OS X-based wallet with some unique features, including an app store that connects directly to bitcoin services.
Some desktop wallets are tailored for enhanced security: Armory falls into this category.
Others focus on anonymity: DarkWallet – uses 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 blockchain, 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 it over a cellular link. Many phones wouldn't be able to hold the blockchain 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 blockchain, and rely on other, trusted nodes in the bitcoin network to ensure that they have the right information.
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’s iOS app. However, in July 2014, bitcoin wallet apps began to reappear on the iOS store, and now all of the major bitcoin wallet providers have released new editions of their previous apps.
There are also other types of wallets that can be used on a mobile, such as the browser-based wallet CoinPunk is developing. Another unusual wallet is the Aegis Bitcoin Wallet, which supports Android smartwatches.
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. Users in the US and Europe can buy bitcoin through its exchange services.
Circle offers users worldwide the chance to store, send, receive and buy bitcoins. Currently only US citizens are able to link bank accounts to deposit funds, but credit and debit cards are also an option for users in other countries.
Blockchain also hosts a popular 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.
Xapo aims to provide the convenience of an simple bitcoin wallet with the added security of a cold-storage vault.
Hardware wallets are currently very limited in number. These are dedicated devices that can hold private keys electronically and facilitate payments.
Trezor hardware wallet
The Trezor hardware wallet is targeted at bitcoiners who wish to maintain a substantial stash of coins, but do not want to rely on third-party bitcoin storage services or impractical forms of cold storage. Read our Trezor hardware wallet review to find out more.
Ledger USB wallet
Mycelium, Cryptolabs and BitStash currently have a hardware wallets in development, but, as of December 2014 none of these had delivered finished products. Announced on February 4th 2014, is the Nymi sports wristband from Boinym, which can act as a bitcoin wallet and uses your heart rhythm as a security key.
One of the most popular and cheapest options for keeping your bitcoins safe is something called 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.
The benefit of a paper wallet that is made correctly is that the private keys are not stored digitally anywhere, and are therefore not subject to standard cyber-attacks or hardware failures.
To find out more about creating a paper wallet, read our tutorial.
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.
Are bitcoin wallets anonymous?
On the one hand, bitcoin is entirely anonymous. On the other, it is completely transparent and trackable. Due to this fact, bitcoin is often cited as being pseudonymous.
This fact resulted in some companies emerging with the goal of controversially tracking suspect transactions to 'police' the blockchain. To counter this, ideas were developed in the bitcoin community to take anonymity further, such as merge avoidance, stealth addresses, and coin mixing.
The alpha version of Dark Wallet – a crowdfunded bitcoin wallet – went live in May 2014. Created by Amir Taaki and Cody Wilson, Dark Wallet was designed to provide new tools for financial privacy, including in-built coin mixing and stealth wallet addresses. At the time of writing, the developers are urging users to use the testnet with 'play money' to iron out bugs before risking significant amounts of bitcoin.
Wallets and services like Dark Wallet ultimately mean that using bitcoin can be as anonymous as you want it to be.
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, but you mislay that wallet or it gets corrupted, 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 up the whole wallet in several different places, and keep them safe from prying eyes.
The number of services which support multi-signature transactions is increasing. Multi-signature addresses allow multiple parties to partially seed an address with a public key. When someone wants to spend some of the bitcoins, they need some of these people to sign their transaction in addition to themselves. The required number of signatures is agreed at the start when people create the address.
Since multiple signatures are needed before funds can be spent, the additional signatures could come from, say, a business partner, your significant other, or even from a second device which you own, to add a second factor to spending your coins.
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 analogue, and simply use paper wallets for offline storage.
Paper wallet image via zcopley / Flickr