Bitcoins can be stored in a wallet, which may have one or several addresses. A wallet address can be thought of as your bank account number. Just like you can have multiple bank accounts, you can also have multiple wallets and wallet addresses.
What is a Public Key?
A public key is used to create your wallet address using a HASH160 hashing algorithm.
For every public key, there’s a private key. The asymmetrical combination of the public/private key pair allows you to encrypt and decrypt messages using these interchangeable keys, meaning a message encrypted by your private key can be decrypted by the public key and vice versa.
It is extremely important that you do not share your private key and take backups of your keys. If you lose your private key, you basically lose all your coins, implying that you can no longer prove that the public key actually belongs to you. But all transactions remain on the blockchain and no one except the person who has your private key can claim your coins.
Further down the road, there will be many coins without owners.
What is a Wallet?
I lied to you when I said you could store bitcoins on wallets. The truth is, bitcoins are not actually stored on your computer. Instead, the record of how many bitcoins you own are publicly recorded in the blockchain. So if you send or receive Bitcoins, the transaction is recorded into a blockchain node, which will notify other nodes. Eventually, every single node will be notified about the transaction.
When you install Bitcoin wallet software, it downloads (and periodically syncs) the entire blockchain database in your computer and displays the amount of Bitcoin that you have. If you run low on disk space or do not want to download the whole blockchain history, you can find several alternative wallets that do not download anything on your computer. These software wallets read the blockchain and simply display the number of coins that you have. However, if you wary of security, you should stick to the official wallet, or even download the source code and compile it yourself.
Does Bitcoin Offer Anonymity?
No, it does not. If you provide your wallet address to someone, they can easily learn how many coins you own and your entire transaction history. Unlike popular belief, Bitcoin does not offer anonymity.
What is a Cold Wallet?
When it comes to security, cold wallets are preferred over hot wallets. Hot wallets are basically software wallets which are stored on a computer and/or connected to the internet. Storing your coins on a computer (or a mobile) wallet is a risky business. If your computer is compromised, you are extremely likely to lose all of your coins.
Cold wallet or cold storage techniques help you to safeguard your digital assets.
Hardware Wallet
Hardware wallets can be connected to a computer when needed and mostly kept offline and secured physically. You depend on these devices to store your keys.
Although hardware wallets are said to be secure and reliable, I believe it’s extremely risky to trust hardware wallets because again these are no different from a combination of hardware and software.
Also, you cannot trust the intention of a third party.
What if a major security flaw is discovered at a later time? Would you still be able to save your coins from getting stolen?
How unlikely is it for the hardware wallet app to send your private key to the developers?
Can you absolutely guarantee the wallet would not use pre-generated keys?
Paper Wallet
A paper wallet is nothing special than writing down your wallet address, public key, and private key on a paper, and that’s all. That’s your own offline wallet which is highly secure unless you lose it. Just when you need it, entering the correct key combination will provide you access to your coins. Be cautious that the paper does not get burned, washed, or destroyed.
Multisig Wallet
Multisig or multiple signatures refers to a technique which provides an additional layer of security for transaction posting where several people are required to sign the transaction using their private keys.
Multisig wallet in itself does not imply cold wallet. The individual owners can decide where to store their keys on a software wallet or a cold storage medium.