Hello everyone!
As promised in my previous post I am going to gradually share the information that I have gathered during my researches on cryptocurrencies and help newcomers to avoid the mistakes that I have done, still I hope that it is going to be useful for experienced traders as well.
Personally for me, the choice of the wallet is of equal importance with the actual accumulation of the funds on my balance. So, when I was learning about wallets, I just imagined that I already had x100 on my initial investment. That helps to increase the seriousness of the attitude. Hence, I have to ask you to take the topic without simplifications.
It took me some time to decide which sources I should stick to among those that I have. But after some considerations over creating my own review I have made up my mind not to re-invent the wheel. Almost a year ago I bumped into a Youtube channel of a Russian guy ( nickname - Sean Piknick ) whose explanations I still consider as the most comprehensible and amazingly informative.
So I will simply translate his videos here to get his thoughts available for English speakers and certainly make the references to his channel for Russian speakers in this post and my future posts where his information is included.
Let us get started.
This post is created to give you the basics about all the types of wallets and their peculiarities to know which wallets to use in this or that situation. To make the choice of the wallet more conscious we should cover the next 3 topics:
The major value of Bitcoin and the main purpose of any wallet
Wallet system
Types of wallets and their characteristics
The major value of Bitcoin and the main purpose of any wallet
Here Sean refers to the original Satoshi Nakamoto`s document "Bitcoin: A Peer-to-Peer Electronic Cash System" to help you to understand the importance of the choice of your wallet.
It is worth mentioning that Peer-to-Peer means "from a sender to a receiver directly". Like you are handing cash to another person but in an electronic way.
Here is the quotation form the document:
"Commerce on the Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments. While the system works well enough for most transactions, it still suffers from the inherent weaknesses of the trust based model".
"What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party".
This lead us to the following values of Bitcoin:
- I can keep money in my possession, utterly and completely, at any moment of time, that belong to me only, and not to anybody else.
- I can manage my funds at any moment of time without asking anybody for a permission.
- I can give any amount to any person and it is granted that he receives them wherever he is within minutes.
Only these values are considered as determinant when choosing a wallet. The convenience of usage and all the other "bonuses" should take a second place.
So, all of the above defines the major points of any wallet:
- The wallet must provide you with the proof of control of your bitcoins.
- The wallet must allow you to manage your funds at any moment without obstruction.
If these points are 100% available, then we can take into consideration all the other criteria.
There are 2 important issues as well - Safety and Privacy. I will talk about it in my next post as they worth creating a separate one.
Wallet system
So, what is a wallet? Among new users, there is a misconception that the wallet is a long line of latin letters and numbers, like this one: 1A1zP1eP5QGefi2DMPTfTL5SLmv7DivfNa
And this is wrong. This is just a public address, the one above in particular, believed to belong to the mysterious Satoshi Nakamoto. You can have a countless number of addresses in your wallet.
To understand it right, let us use a metaphore.
The wallet represents a bank, wallet address represents a bank account (You can have a number of bank accounts).
Like this:
The thing is - bank accounts are managed by other people working for that bank, however, you and you only can manage your wallet addresses. See the difference?
In any case this was the Satoshi`s idea. But further here you will find that it is not always like that.
Basically, the wallet is not more than an ordinary file that contains information about all your addresses. This file is managed by the program that writes addresses into it, creates new addresses and lets you send your bitcoins. It is important to understand that the program is not the wallet itself. It just manages the wallet`s file but does not prove that you own your bitcoins.
Here we are approaching the essential thing you need to know about bitcoin wallets on a basic level.
Your bitcoin wallets contain a public address (the one I talked about above) and a PRIVATE KEY. It is even longer number of letters and symbols that is not shown in your wallet until you ask to reveal it.
You own your bitcoins only when you own the PRIVATE KEY!
If somebody else has this private key, he/she can spend your bitcoins the same as you!
Types of wallets and their characteristics
- Online web wallets
- Mobile wallets
- Desktop wallets
- Hardware wallets
- Paper or physical wallets
1. Online web wallets
- Blockchain.info
- Xapo
- Coinbase
- BitPay
- Trading exchanges
This is the list created by Sean. I do not see any reason to update it. You will see why in my next few statements. As mentioned by Sean in his video ( and I have made sure myself that during researches on various forums, chats and talking to other traders), Blockchain.info is an ordinary commercial project. It is not an official bitcoin wallet as believed by many. It is just a name chosen by the project`s creators.
Among all of the five examples above, only Blockchain.info provides you with a private key. All the others, in fact, are bitcoin banks. You bitcoins are controlled by those projects. They "promise" you that at your first demand they will send your funds wherever you want them to go. But they still own your money at any moment of time as they, not you, have the private keys.
So as a matter of fact, they do not always let you manage your funds. Periodically, those occasions take place, like Know-Your-Client or money laundering suspicions. If you use one of online wallets, sooner or later you will definitely have an issue.
2. Mobile wallets
- Bitcoin Wallet
- Mycelium
- Xapo
- Coinbase
- Copay
Mobile wallets usually provide you with private keys, BUT NOT if they are mobile versions of bitcoin banks among online wallets like Xapo or Coinbase.
So, do they allow you to manage your funds without obstructions? The thing is that all mobile wallets work in a simplified transaction conformation system. This means that they have to collaborate with third parties, not with the bitcoin blockchain directly. It is not that crucial as a user can choose the third party to work with. But this option is not available in a mobile wallet, this may potentially cause you problems.
3. Desktop wallets
- Bitcoin Core
- MultiBit Classic
- Electrum
- Armory
- Copay
These do provide you with private keys!
Do they allow you to manage you funds without obstructions? Among these 5, only Bitcoin Core and Armory work directly with the bitcoin blockchain. This means that having access to Internet they grant you the possibility to send your bitcoins to any other address. The other 3 have the same issue as mobile wallets - they work in a simplified transaction conformation system.
4. Hardware wallets
- Trezor
- Ledger Wallet
- KeepKey
- Pi-Wallet
The purpose of this type of wallets is in storing private keys. They are initially created to keep your private keys on a removable device or even on a separate mini computer like when using Pi-Wallet.
Can you use your bitcoins without any obstruction? Well, to use them you need to connect the hardware wallet to a computer that has this wallet`s program downloaded. If this program works with the blockchain without third parties - yes. If not, then there might be problems with sending your funds at the moment you need it.
5. Paper wallets
https://tools.bitcoin.com/paperwallet/
These are the websites that allow you to create a physical paper wallet.
They generate you a public and a private key. Whether you can or cannot manage your funds freely, depends only on the program that your use to import your bitcoins to.
To sum this all up
It is better to use Online web wallets and Mobile wallets only for transactions. It is not recommended to use them to store your funds. It is preferable to send everything that exceeds your daily needs to your Desktop or Hardware wallets. The commissions will be paid of in spades when your exchange cuts you the right to manage your bitcoins until you provide them with the list of documents to confirm your personality for instance.
Desktop wallets are good to use for larger amounts but remember the safety principles. If you master those principles, desktop wallets will become a reliable storage for you.
Hardware and paper wallets better fit to store long-term.
In my next post I will concentrate on a usage safety and privacy.
The document describing Bitcoin ecosystem from Satoshi Nakamoto - https://bitcoin.org/bitcoin.pdf
The link to Sean Picknik`s original video in Russian -
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