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The idea of investing in Bitcoin appeals to many, but one stumbling block has been the need to use a special ‘wallet’ to store your assets. It’s a new concept, but it is, in fact, quite easy to break down the tech jargon and soon realise that good platforms are offering a safe and straightforward approach to managing your Bitcoin.
The need for wallets comes down to the fact that cryptos such as Bitcoin are revolutionising the financial markets. Wallets are part of their technological DNA and getting on board with the new processes means some things have to be done slightly differently.
The crypto frameworks operate using blockchain technology, which means all the participants in the Bitcoin market have accounts in the same (Bitcoin) computer system. Your wallet is part of that system and what you use to receive and send coins. The size of each individual’s Bitcoin holding will be shared publicly and, that way, all members of the system can see where they stand. This cuts down on the risk of anyone scamming the system and claiming they own more than they do.
Desktop Bitcoin wallets are stand-alone devices that store your Bitcoin, which you hook up to an internet-connected device when you want to trade coins.
In technical terms, a desktop wallet is an address from which you can send and receive Bitcoins. They are protected by the fact that the owner holds details of the private key that is used to access it. Having the option of disconnecting your desktop wallet from the internet and keeping them in ‘cold storage’ minimises the risk that your device can be hacked into.
In an ideal world, storing BTC on your desktop shouldn’t be an issue, but there are factors to consider that mean it is not an ideal way to store coins, particularly in large size.
For starters, you need to be completely sure that the software you download is legitimate. There is also a slim chance your wallet could become corrupted or malfunction. Backup protocols can provide some protection against you losing track of your account if this happens, but some other wallet types avoid this risk completely.
Different desktop wallet software packages offer varying degrees of security add-ons. Look for one that includes two-factor verification and multi-signature protocols.
Security should be your priority, and to a large extent, you get what you pay for. There are some providers of desktop wallets such as Armory that offer safety checks and don’t charge a fee. Another popular choice is Electrum, which charges a fee of 0.2mBTC for sending Bitcoins.
At the same time, you will still have to occasionally access the online BTC market to buy and send coins to your desktop wallet. Some desktop wallets are, by default, hooked up to a particular exchange, which might not be your preferred choice.
Those balancing day-to-day commitments with trading the crypto markets will be drawn to the convenience of mobile bitcoin wallets. It’s possible to set up your wallet and buy or send Bitcoin using a range of mobile trading wallets that are compatible with Android and iOS operating systems.
As phones don’t have the processing power of desktop machines, using a mobile device involves using your phone to access an account on a crypto platform, such as eToro, which is regarded as one of the best Android wallets.
When it comes to mobile BTC wallets, coins are not stored on your actual phone. This gets around the risk of your handset being lost or stolen. If you make the right choice, you can take advantage of the apps that offer mobile wallets, which are packed full of security features.
The eToro Money crypto wallet, for example, comes with DDoS protection, multi-signature functionality and other default security protocols.
A hardware wallet is a bitcoin wallet that stores your private keys in a secure hardware device. They’re relatively new entrants into the sector but relatively secure because they can hold your coins off the main Bitcoin network in ‘cold storage’.
There is, of course, a trade-off associated with keeping your coins offline – while hardware wallets keep track of your holding and transactions, they cannot confirm if you have received coins. That requires connecting to a web interface, usually that of the manufacturer of the device.
Setting one up is as simple as downloading a wallet from a trusted provider. All the information relating to your Bitcoin holdings will be stored on the hard drive of your (Windows, Mac, Linux) machine with any transactions reported to the Bitcoin system when you access the internet to trade.
If you select a service provider that does provide Full Node coverage, then keeping track will take up a lot of space on your hard drive and take up a lot of internet bandwidth as well.
To date, there have been no known incidents of Bitcoin being stolen from hardware wallets. Nothing is bullet-proof and there are still a range of risks and protocols to follow to minimise them.
The risks could include a malware attack where authentic recipient codes are switched by an attacker, but multi-factor verification can be used to address this threat. There is also the risk that the device is corrupted or compromised during the production or installation processes.
As the name suggests, paper bitcoin wallets involve keeping track of your holding using a slip of paper. This approach, which was popular during the infancy of the crypto revolution, is now far less widely used due to the many potential downsides associated with it.
Paper wallets involve storing your private key and bitcoin address in physical form, most usually a printout. Security can become an issue right from the first stage of the process with users sometimes complaining the print out containing the important information was unclear or faded over time. At the same time, printers can be equipped with internal memory storage, meaning someone who can access your printer can check the log and obtain the vital information.
Paper wallets also promote address reuse, which impacts the reliability of the BTC protocols. Exporting the paper wallet contents to an online wallet is not a smooth process either, as a subsequent part-sale of your holding can mean it’s hard to reconcile your updated holding.
More bad news is that most paper wallets are generated by browser-based wallets, which have their own security issues meaning paper wallets offer the worst of both worlds.
They might, at first glance, appear to involve a tried-and-tested approach, but paper wallets miss out on the advantages associated with embracing the hi-tech approach taken by wallet providers such as Prime XBT and Cryptology.
Source: Prime XBT
Using an exchange opens up the opportunity to develop your Bitcoin holding into a multiple cryptocurrency crypto wallet. Choosing an exchange should still prioritise security, but long as you use a safe exchange, the potential for accessing different crypto markets is almost endless.
Bitcoin exchanges are not regulated by financial regulators or governments and, for the main part, don’t provide enough insurance or security to be used for the storage of currency in the same way as a bank. You ultimately have to place a lot of faith in exchanges perceiving the reputational risk of them transgressing to be too high and damaging to their business model.
You also have to hand over the private keys to your wallet, so are trusting a third party with your holding. Even if they are not a scam, you are relying on their security systems being strong enough to repel hackers from penetrating their systems.
It is possible to buy Bitcoin outright using a regulated broker such as eToro.
Crowdsourcing information is always a good idea and the new Ledger Nano X desktop wallet consistently ranks highly in industry and user reviews.
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Deposits using bank transfer are free of charge but using other processing agents can incur charges.
Bitcoin has come a long way in a short time and is now bought and sold in a very similar manner to other assets such as stocks, forex and commodities. The core principle of the transaction involves exchanging fiat currency for Bitcoin, and the different wallets are just the means of supporting that process.
A wallet is essentially a software-based means of storing your Bitcoin. At a granular level, it’s very much like any other online bank account, which only you have access to. Personal information such as your name isn’t shared publicly, but the wallet does report to the blockchain network what your holding is.
There are a variety of types of wallet and each one has its relative pros and cons. Which one you choose ultimately comes down to personal preference and which type best suits your way of doing things.
If curiosity is the driver of you wanting to ‘buy a little bit of Bitcoin’, then the operational risks of the different wallets may not be too great a consideration. If you’re looking to scale up to have one of the biggest Bitcoin wallets in town, then giving the subject some thought would be advised.
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