Bitcoin Wallets

What are Bitcoin wallets?

The Bitcoin Journey

What are Bitcoin wallets?

Demystifying Bitcoin wallets
How does a Bitcoin wallet work?
Are bitcoins in the wallet?
What about hackers?

In section 2, we are going to explore the storage and security of Bitcoin through the use of wallets, in order to understand where these famous bitcoins are located and how to interact with them!

Demystifying Bitcoin wallets

We use wallets to interact with the Bitcoin network in three main ways:

To receive bitcoins
To send bitcoins
To secure them against hacking and theft attempts

A Bitcoin wallet can have many shapes and forms: a software on your computer, an application on your smartphone, a physical device like a USB key, or even a piece of paper. Each of them serves different use cases. In fact, some are designed for large transactions with an emphasis on security, while others prioritize privacy, or they are intended for daily payments of small amounts.

Portfolios can thus be categorized into broad families of use, always centered around a key question: are you the owner of the funds or are you leaving control of your money to a third party? We will explore this topic in detail in the next chapter, but the question remains straightforward: is the money in your pocket or in your banker's pocket?

How does a Bitcoin wallet work?

Whether it's your Bitcoin "banker" or yourself, the vast majority of Bitcoin wallets work with a similar technology based on asymmetric cryptography, which involves a system of key pairs: a private key for spending and a public key for receiving.

Private key

When initializing a wallet, a secret recovery phrase, also known as a mnemonic phrase (private key), is generated and presented to you in the form of 12 or 24 words.

The private key is fundamental because it constitutes the ownership of the bitcoins and therefore the right to use or send them. Therefore, the holder of the private key is the true owner of the bitcoins. As the popularized statement goes, “Not your keys, not your coins.”

This key must be kept secret and well protected, as it unlocks your fortune!
Public key & address

The public key is generated from the private key and it is linked to it. Sharing the public key poses risks to privacy (because other users can see your balance) but not to security (because they cannot spend your funds without possessing the private key). In turn, the public key is used to create Bitcoin addresses, and thus receive money.

These addresses are automatically created by your wallet and can be shared securely. To maximize your privacy, it is advisable to use them only once.

In a summary, this technology empowers us to receive bitcoins without enabling the receiver to steal our funds! A mailbox could be a fitting metaphor: people can deposit money into it, but you are the only one who can open it.

Are bitcoins in the wallet?

Although your keys are stored in your wallet, the bitcoins themselves are actually "stored" in the Bitcoin blockchain, which is a public distributed ledger within the Bitcoin peer-to-peer network (we will delve into it in section 3). This means that losing the device containing your wallet does not necessarily result in the loss of your bitcoins. What allows you to recreate your wallet and spend your bitcoin is actually the private key, so always remember to secure it properly!

Fortunately, since 2017, the private key can be represented by a simple list of 12 or 24 words, known as 'mnemonic phrase, which are quite easy to save. This phrase serves as a backup for your funds and allows you to recreate your wallet using any Bitcoin wallet software or app. Therefore, anyone who finds this list of words can access your bitcoins.

What about hackers?

What if someone accidentally guesses our list of 12 or 24 words? The short answer is that it is highly unlikely, thanks to the cryptography used to create the wallet. To put it into perspective, accidentally discovering your same mnemonic phrase is akin to finding the "right" number between 1 and 2 raised to the power of 256, which is almost equivalent to finding the "right" atom in the Universe. However, if you are not satisfied with this default security, you can always enhance it by adding a passphrase (an extra word) to your Bitcoin wallet.

Thus, the probability of hacking your Bitcoin wallet is astronomically low if you follow the good security practices that we will detail in the next section.

Keep in mind to choose the right wallet for your needs and usage: detailed tutorials on managing and securing different wallets are available in the tutorial section of our university.

If, during your journey down the rabbit hole, you want to learn more about building a Bitcoin wallet, from entropy to receiving addresses, we recommend the CYP 201 course dedicated to this topic:

Bitcoin Wallet Architecture

Intermediate

4.7(90)

Dive into the cryptographic principles that power Bitcoin wallets.

4.7(90)

Bitcoin Wallet Architecture

Dive into the cryptographic principles that power Bitcoin wallets.

Quiz

btc1013.1

1/5

What is the private key in a Bitcoin wallet?