How Does a Bitcoin Wallet Work?

Bitcoin Wallets Explained
Coin Cloud Team
, published on 
May 10, 2021
How Does a Bitcoin Wallet Work?

You know what a wallet is. You’ve probably had one to keep your cash in since you were a little kid, and later your ID and credit cards. But what’s a Bitcoin wallet?

In a nutshell, a Bitcoin wallet — sometimes called a digital wallet, mobile wallet or crypto wallet — is a virtual version of your real wallet, designed to keep your Bitcoin and other digital currencies.

Keep in mind that not all digital wallets or mobile wallets can hold Bitcoin … sometimes those terms are used to describe personal finance applications like Venmo, PayPal, Zelle, Apple Pay, Samsung Pay or Google Pay. And while someday we expect all of those to be compatible with Bitcoin, that’s not always the case yet.

Wallets for Bitcoin

A wallet designed for Bitcoin come in a few different forms. We can divide them into hardware and software wallets, as well as hot and cold wallets. We can then further divide the hot wallets into custodial and non-custodial.

But they all basically work the same way: They tag a spot on the blockchain where digital currency resides, and “reserve” that coin as “yours.” So the Bitcoin is never actually stored in your wallet, which is why you can import a wallet into a new platform or device, and even have it on multiple devices at the same time … you’re basically just moving the code that gives you access.

However, since that sounds a little weird and complicated, let’s just say it’s stored in your wallet. Because for all practical purposes, it really kind of is.

Then you have a wallet address that you can give people to send you Bitcoin, which is similar to giving them your email address. They can send you stuff … but they can’t access your email account or pretend to be you unless they hack your account, or you give them password (in the case of a Bitcoin wallet, that’s like giving them your recovery phrase or private keys).

Hardware vs Software Wallets

Hardware wallets usually take the form of a USB stick or handheld drive, while software wallets are computer programs, mobile applications or web platforms. Hardware wallets are secure because you can hide the whole thing away, whereas software wallets can be hacked or deleted if you’re not careful.

Hot vs Cold Wallets

Hot wallets are connected to the internet … so the connection is what’s “hot” (active). But that also means it can be hacked. Most software wallets are hot wallets, although you can have a software wallet installed on a computer that doesn’t have internet access, and then it becomes a cold wallet.

Cold wallets are sometimes called “cold storage” because, just like when you put your seasonal clothes in cold storage to keep until next year, you put your Bitcoin in cold storage when you don’t want to access it. Most hardware wallets are cold wallets, although they have to connect to the internet temporarily when you want to see your funds or move them around.

Custodial vs Non-Custodial

Custodial wallets limit your ability to control your funds, but they’re easy to get started with. If you buy crypto through PayPal, or your Coinbase account, you’ve got a custodial wallet. You can still send and receive, buy and sell, but you can’t import your wallet anywhere else because you don’t have access to your private keys; instead, the “custodian” (online platform) keeps those. You might have heard “Not your keys, not your coins,” which means you don’t really own, manage or control your funds with a custodial arrangement.

Non-custodial wallets aren’t controlled by anyone but you, and you get access to your own private keys and/or recovery phrase so you can import your wallet wherever you want. They are considered extremely secure, and most crypto enthusiasts recommend them. Pretty much all hardware wallets are non-custodial, as well as many high-end software wallets, like the Coin Cloud Wallet app.

The bonus feature of the Coin Cloud Wallet is how seamlessly it works with Coin Cloud DCMs, even allowing you to set up a sell transaction in advance and reserve your cash at any machine for up to 48 hours.

Disclaimer: The information and views supplied on the Coin Cloud blog are for educational and entertainment purposes only. We are not financial advisors, so please do your research and consult with a trusted financial specialist before investing your money.

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