2.1 What is a Bitcoin Wallet

As a bitcoin user, having a personal bitcoin wallet is an ideal starting point. In Chapter 2.0, we will go through key points about bitcoin wallets and their variants, how to set one up properly and securely, and the industry standard practices to safeguard your funds.

Before we touch on wallets, it is important to first understand the concept of public and private keys in the context of cryptocurrencies.

Public and Private Keys

• A public key is a string of characters that looks something like this:
  1C5263F79C6D87DCO8E65463CD427D89FS45O2103DA61F2OBD67FC233AF357D8
• A public key is an address where bitcoin is sent to and received.
• You can inform someone your public key (also known as receiving or wallet address) so that they may send you bitcoin.
  You can think of your public key like your email address which you can pass to another person so that he may send you an email.
• Bitcoin users have to be careful that the public key has been accurately scanned or copied in its entirety. A bitcoin sent to a different or wrong address (e.g. missing a digit) is as good as a lost bitcoin.
• A good habit is to check that the first and last 3 alphabets/digits tally with the original address generated by the Receiver’s wallet.
  Both Receiver and Sender should always check that no alphabets or digits are missing from the front or back of the receiving address before Receiver conveys address to Sender and before Sender sends bitcoin to Receiver.
• A private key is a string of characters that looks something like this:
  5K645263F9C6D8DO8E6A57842D89FS45O21DA31F2OBD67FC23AF
• Yes, a private keys looks just like a public key, but with a totally different purpose.
• With your private key, you can check how many bitcoin on the blockchain belongs to you and it allows you the ability to spend those bitcoin.
  You can think of your private key like the password to your email account. With the password, you may check your email or send an email to someone.
• As such, your private key has to remain as so – private!
• A popular phrase with regards to private key in cryptocurrency circle is “Not your keys, not your coins”. It would serve all cryptocurrency users well to remembers this one very important rule. As we will see below, sometimes even when a wallet bears your name, you do not necessarily own the private key to that wallet.

Now that we know what public and private keys look like and what they really are, let’s see how they fit in the context of a bitcoin wallet.

How Bitcoin Wallets Work

• A bitcoin wallet contains one or more private keys which are stored in the wallet file hidden away even by the wallet owner for security reasons.
• If the private key is accidentally revealed by the wallet owner or recorded by a malicious party, the entire wallet is compromised.
• As a bitcoin wallet owner, when requesting bitcoin from another person, you can generate a public key (also known as the wallet address) from the wallet. You can then send this address to that person via email or instant message so that they may copy and paste it into their wallet to send you bitcoin.
• A QR code is generated with each public key so that another person may scan this code with their wallet via the smartphone camera conveniently.
• A new address is generated for each new transaction if a previously generated address has been used before. However, the old address is still valid and may still be given out to receive bitcoin, although this is generally discouraged for privacy reasons.
  Example: You can print the address with the QR code onto a piece of paper or place it on a website to receive donations in bitcoin. An address could be used multiple times for payments or donations from people around the world.
• It is important to understand that the bitcoin does not “physically” reside in the wallet. The bitcoin resides on the blockchain at all times. The wallet merely points to the bitcoin on the blockchain which belongs to you, and your private key grants you access to manage or send your bitcoin to a different address.
• When you send or transfer your bitcoin to someone, the bitcoin on the blockchain changes ownership from you to that person. Their wallet would then show ownership of those bitcoin on the blockchain. The bitcoin doesn’t actually move physically (in a digital sense) from one wallet to another.
• This is why it is perfectly alright if you lose your bitcoin wallet, e.g. if your smartphone is damaged or stolen, PROVIDED THAT you still have access to your private key.
  Example: This would be similar if you had lost your smartphone and your emails. All you have to do is reinstall the email client app on a new phone and with your password (private key), you would be able to reaccess all your emails on the cloud (bitcoin on the blockchain). Your emails (bitcoin) are never stored in your email app (bitcoin wallet) on your smartphone.
• Since the private key allows someone to spend the bitcoin that is assigned to that key, it is very important that the private key be kept safe at all times. Standard safe practice includes storing it offline by writing it on a piece of card and keeping that paper safe in a vault, or stamped on a metal plate for better durability. Another good practice would be to have backups stored in different locations to prevent destruction caused by fire. Private keys should never be stored online (e.g. saved on a phone or an email in the cloud) as if this is successfully accessed by a hacker, they would essentially gain control of those bitcoin and transfer them to a different (their) wallet.

The above gives an overview of how wallets, private keys, public keys, and bitcoin on the blockchain work and what happens when bitcoin is sent from one wallet to another. It is a simplified discussion without touching on the more advanced topic of unspent transaction output (UTXO), block size and how transaction fees are calculated. In reality, a bitcoin wallet works more like a giant keychain that manages a large number of keys, rather than a conventional wallet that holds funds.

In the next section 2.2 Types of Bitcoin Wallets, we look at the four different types of bitcoin wallets and their characteristics, strengths and weaknesses, and ease of use.