Introduction on Bitcoin Wallets
Bitcoin is a digital currency, and a wallet is needed for storing, receiving, and sending your crypto. A wallet is protected with a private key so that only the owner of the wallet has access when needed. There are a number of facts to consider when you decide on your Bitcoin wallet depending on your goal. Let’s take a look at each type of wallet and its advantages and disadvantages.
Types of Bitcoin Wallets
Custodial vs. Non-Custodial Wallets
A custodial wallet is a wallet organized by a third-party institution, whereas a non-custodial wallet is not. If you are new to crypto and not tech-savvy, you may be better off to let a third party control your crypto. If you lose a password for the custodial wallet, you can still recover the passwords. However, you could lose access to your Bitcoin if you lose your private key for non-custodial wallets. For custodial wallets, there is a danger that the owner of the wallet company could run with everyone’s Bitcoin as we are going to discuss later. For non-custodial wallets, you are responsible for your wallet. Just in case your private key to the wallet is lost, you should always back up to a safe location. For non-custodial wallets, users can transact Bitcoin without a third-party inspection. This may be preferred if the user wants privacy over security.
Hot vs. Cold Wallets
Hot wallets are Bitcoin wallets that are connected to the internet. Hot wallets are great for everyday transactions and your Bitcoin is easily accessible. On the other hand, cold wallets are not connected to the internet and considered safer than hot wallets. Examples of cold wallets are a hardware wallet and a paper wallet. Both examples use physical means to store the private key offline. Cold wallets are more suitable for long term investors since the wallet is not as easily accessible as hot wallets. There are some hot wallets that offer the service for free, but cold wallets cost approximately $CAD 90 to 233 (based on Nano X price and Trezor T price). Hot wallets give you quick access to your Bitcoin and they are user-friendly. However, since a hot wallet is connected to the internet there is a higher chance of losing your crypto due to cybersecurity threats compared to cold wallets. We will take a closer look at this shortly.
Software vs. Hardware vs. Paper Wallets
For software wallets, investors use computer software to store Bitcoin. The examples of software wallets are web wallets, desktop wallets, and mobile wallets. Your Bitcoin is stored online with web wallets. You can access your crypto with ease without installing a program to your computer. For desktop wallets the user needs to download a wallet software to their computer and for mobile wallets the user needs to download apps to their phones.
Whenever you make transactions, you need to plug in your hardware wallet to your computer.
Paper wallets have blockchain addresses and private keys printed out as a QR code on a paper.
Software wallets could be susceptible to hackers since everything is based online. What you type in or store on your computer can be accessed by a hacker. In case your computer is hacked or damaged, you can still recover the password through the recovery phase. However, it is much more convenient than hardware wallets since you can access your Bitcoin everywhere you go. If you are sending a small amount of Bitcoin for a short-term transaction, software wallets are recommended.
Hardware wallets are considered to be more secure than software wallets to store your Bitcoin. The private keys on the small device are only accessible to you. Different hardware wallets have different methods for encrypting the private key. Once a decrypted private key is accessed, there is no way to protect the crypto within the hardware wallet. A cold wallet becomes a hot wallet once it is plugged into a computer since at that moment it is “online”. Once it is unplugged from the computer, it becomes a cold wallet again. In case you lose your hardware wallet, you can restore your Bitcoin to a new wallet. There are upfront costs to purchase the hardware of $CAD 59 plus. If you are a user who has a lumpsum Bitcoin and want to store it for a long time, a hardware wallet is for you.
Paid vs. Free
There is a default fee for paid wallets and you do not have to pay to receive Bitcoin for most paid wallets. Usually, higher fees are associated with higher levels of security rather than speed of approvals. For both paid and free wallets, make sure that you choose a reputable company to protect your Bitcoin from being stolen.
Known Issues and Hacks of Bitcoin Wallets
Mt. Gox, a cryptocurrency exchange based in Tokyo, operated from 2010 and 2014. The exchange traded 70% of Bitcoin transactions at its peak but declared bankruptcy in 2014. In February 2014, Mr. Gox’s wallets were hacked, and the company lost 850,000 Bitcoins which was 6% of Bitcoin in circulation at the time (worth $USD 460 million hacking value in 2014). The hacking had a devastating effect on the price of Bitcoin. Shortly after the hack, Mt. Gox reported that they found 200,000 Bitcoin in their old-format digital wallets from 2011.
However, the recovered Bitcoin had been held in for the creditors for a few years since the company was under bankruptcy protection.
In March 2021, $USD 5.7 million in crypto was stolen from hot wallets from a crypto platform Roll. The attacker broke in and obtained the private keys for the hot wallets. Right after the hack, the attacker sold Ethereum.
Conclusion
There are a number of Bitcoin wallets available in the market. Depending on your purpose, you can choose your wallet accordingly. If you want added security for a long-term Bitcoin investment, a custodial, hardware wallet is recommended. If you are trading small amounts of Bitcoin for a short-term investment and you need to trade at a fast pace, software is recommended. Regardless of which wallet you choose, you need to do research on how security systems work for the wallet and if you can trust the company. Always remember to back up your private key somewhere safe and never share it with anyone. Crypto wallets have been the target for attackers, and it is always wise to be careful.
Disclaimer: No Investment Advice The contents of this article are for informational purposes only and are not intended as, and shall not be understood or construed as, investment advice, financial advice or trading advice. There are substantial risks associated with the trading of cryptocurrencies and you should consult with a licensed financial advisor prior to making any trading or investment decisions. Content Not Warranted The contents of this article are provided “as is” and without warranties of any kind. You bear all risks associated with the use of the content provided including without limitation, any reliance on the accuracy, completeness or usefulness of any content available within this article.
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