The Complete Beginner's Crypto Crash Course, What is a Bitcoin Wallet? (in Plain English)
Hello guys and gals, my name is Nate, and welcome to Bitcoin Whiteboard Tuesday!
Every few weeks we're going to send you a cool new video, just like this one,
explaining some basic concepts around Bitcoin.
This way you can learn about Bitcoin yourself
or forward these videos to friends or family members who have questions.
Today's video is all about Bitcoin wallets and how to choose the best one.
We're going to cover a lot of topics like mobile wallets, web wallets, desktop wallets,
paper wallets, brain wallets, HD wallets, multisig wallets
and of course hardware wallets.
So even though we've got a lot to talk about, don't worry,
we'll simplify it for you,
and in the end we'll also help you choose the best wallet for your needs.
Let's get started.
A Bitcoin wallet is a program to send and receive Bitcoins,
store Bitcoins and monitor Bitcoin balances.
Just like you need an email program like Outlook or Gmail to manage your emails,
you need a Bitcoin wallet to manage your Bitcoins.
Wallets interface with the Bitcoin blockchain;
that global ledger of bitcoin transactions that we talked about in our last video.
Wallets monitor Bitcoin addresses on the blockchain
and update their own balance with each transaction.
Now here's one of the most important things to remember about a wallet:
What defines a wallet is where its private key is stored.
A Private key? What does that mean?
Well, a private key is just a very long string of numbers and letters
that acts as the password to your Bitcoin wallet.
It's from this number that your wallet gets its power
to send your Bitcoins to other people.
You can also think of it like
the secret coordinates for locating your Bitcoins.
In other words,
whoever knows your private key has control over your Bitcoins.
The private key is also used to generate your Bitcoin address.
This is just like your email address.
It's something you want to give out to people who want to send you Bitcoins.
However, even though the Bitcoin address is generated through the private key,
there's no way to figure out what the private key is
just by examining a Bitcoin address.
To sum it up,
the wallet's core function is the creation, storage and use of the private key.
In other words it automates Bitcoin's complex cryptography for you.
As Bitcoin wallets evolved
HD wallets, or hierarchical deterministic wallets, were created.
HD wallets generate an initial phrase known as a seed or mnemonic phrase.
This seed is a string of common words which you can memorize
instead of the long confusing private key.
If your wallet gets destroyed or stolen,
you can enter the seed in order to reconstruct the private key.
Additionally, an HD wallet can create many Bitcoin addresses from the same seed.
All of the transactions sent to addresses created by the same seed
will be part of the same wallet.
Because these private keys and seeds have complete power over your Bitcoins
they must be kept secret and safe.
If you fail to protect your wallet's private key or seed,
the bitcoins it controls could be irretrievably lost.
A standard Bitcoin wallet will create a wallet.dat file
containing its private key.
This file should be backed up by copying it to a safe location
like an encrypted drive on your computer, an external flash drive
or even copying it to a piece of paper and hiding it away.
An HD wallet on the other hand
will supply you with a seed phrase with up to 24 words
that you should write down in a safe place.
Okay. So much for wallet theory.
Let's move on to the different Bitcoin wallets available to us.
Some wallets hold a full copy of the Blockchain
in order to validate each and every transaction.
These are also called full nodes.
Other wallets, also known as SPV wallets or lite wallets,
don't hold a full copy of the Blockchain.
They rely on full nodes that they are connected to
in order to validate transactions.
SPV stands for Simple Payment Verification,
these wallets are faster and consume less disk space.
Since the blockchain today is becoming increasingly big in size
many wallets offer an SPV solution for limited capacity devices
such as mobile phones, tablets and desktops.
Moving on to hot wallets.
A Hot wallet refers to
any form of Bitcoin wallet that is connected in some way to the Internet.
This can be a wallet that is connected to a web service,
a wallet installed on a computer connected to the Internet
or even a wallet installed on your mobile phone,
assuming you have data transfer to and from your phone.
Hot wallets, although the most popular, are also the least secure
since they allow access to their inner workings
through internet connections.
Let's view the different hot wallets available
starting with web services wallets.
Markets, exchanges, betting sites and other Bitcoin services
frequently require you to deposit funds into their online wallets
in order to conduct your business.
These web wallets are the least secure option for storing Bitcoins
since you don't have any access to your private keys.
You're basically asking someone else to hold your coins for you.
Such wallets are also more vulnerable to hackers
since they have many loopholes along the way.
For example, the website in question,
the device you're using to connect to the website
or the internet connection can be monitored to steal your Bitcoins.
This forces you to rely upon
both the site operator's honesty and their security practices.
In the event of internal fraud or external hacking,
your bitcoins will likely be irretrievably lost.
On the other hand, web wallets are highly convenient
as they allow you to buy, sell and send Bitcoins at a moment's notice.
More competent web wallet services
will provide Multi-Factor Authentication options like
validating every account login with a text message,
to guard against external hackers.
Even so, for storing any significant amount of coins,
web wallets are not worth the risk.
That's why we advise that you avoid the number one newbie mistake
and never to keep your Bitcoins in an exchange wallet.
Now let's move on to desktop wallets.
These type of hot wallets store your private key on your computer.
So as long as your computer is free of malware or any security weaknesses
your Bitcoins are safe.
However, we all know that's not the case for most of us.
Today it's hard to be 100% protected
and this makes desktop wallets that are connected to the internet
a valuable target for hackers.
Moving on to mobile wallets.
These are wallets that store your private key on your mobile phone.
Although many wallets are accessible via mobile apps,
doing so presents the worst possible scenario for security.
Mobile wallets offer low security and terrible privacy,
given the potential association of your Bitcoin wallet,
phone number and geo-location.
As phones are frequently lost, broken or stolen,
it's strongly advised that you enable multi factor authentication,
password-protect your wallet and create a private key backup.
Mobile wallets are highly convenient
and designed to provide as much security as possible
in an insecure environment.
Nonetheless, substantial sums should not be stored on a mobile wallet
unless used in tandem with a hardware wallet
which we will discuss in a minute.
Now let's talk about the most secure form of Bitcoin wallets,
cold storage wallets.
Cold storage refers to any type of wallet
that is independent of any Internet connection
and therefore cannot be hacked remotely.
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