Hello guys and gals, my name is Nate,
and welcome to Bitcoin Whiteboard Tuesday! Every few weeks we’re going to send you
a cool new video, just like this one, explaining some basic concepts around Bitcoin. This way you can learn about Bitcoin yourself or forward these videos to friends
or family members who have questions. Today’s video is all about Bitcoin wallets
and how to choose the best one. We’re going to cover a lot of topics like
mobile wallets, web wallets, desktop wallets, paper wallets, brain wallets,
HD wallets, multisig wallets and of course hardware wallets.
So even though we’ve got
a lot to talk about, don’t worry, we’ll simplify it for you, and in the end we’ll also help you choose
the best wallet for your needs. Let’s get started. A Bitcoin wallet is a program to
send and receive Bitcoins, store Bitcoins and monitor Bitcoin balances. Just like you need an email program like
Outlook or Gmail to manage your emails, you need a Bitcoin wallet
to manage your Bitcoins. Wallets interface with
the Bitcoin blockchain; that global ledger of bitcoin transactions
that we talked about in our last video. Wallets monitor Bitcoin addresses
on the blockchain and update their own balance
with each transaction.
Now here’s one of the most important
things to remember about a wallet: What defines a wallet is
where its private key is stored. A Private key?
What does that mean? Well, a private key is just a very long
string of numbers and letters that acts as the password
to your Bitcoin wallet. It’s from this number that
your wallet gets its power to send your Bitcoins to other people. You can also think of it like the secret coordinates
for locating your Bitcoins. In other words, whoever knows your private key
has control over your Bitcoins. The private key is also used to
generate your Bitcoin address. This is just like your email address. It’s something you want to give out to people
who want to send you Bitcoins.
However, even though the Bitcoin address
is generated through the private key, there’s no way to figure out
what the private key is just by examining a Bitcoin address. To sum it up, the wallet’s core function is the creation,
storage and use of the private key. In other words it automates Bitcoin’s
complex cryptography for you. As Bitcoin wallets evolved HD wallets, or hierarchical
deterministic wallets, were created. HD wallets generate an initial phrase
known as a seed or mnemonic phrase.
This seed is a string of common words
which you can memorize instead of the long confusing private key. If your wallet gets destroyed or stolen, you can enter the seed in order to
reconstruct the private key. Additionally, an HD wallet can create
many Bitcoin addresses from the same seed. All of the transactions sent to
addresses created by the same seed will be part of the same wallet. Because these private keys and seeds
have complete power over your Bitcoins they must be kept secret and safe. If you fail to protect
your wallet’s private key or seed, the bitcoins it controls
could be irretrievably lost. A standard Bitcoin wallet will create
a wallet.dat file containing its private key. This file should be backed up
by copying it to a safe location like an encrypted drive on your computer,
an external flash drive or even copying it to a piece of paper
and hiding it away. An HD wallet on the other hand will supply you with a seed phrase
with up to 24 words that you should write down in a safe place.
Okay. So much for wallet theory. Let's move on to the different
Bitcoin wallets available to us. Some wallets hold
a full copy of the Blockchain in order to validate each
and every transaction. These are also called full nodes. Other wallets, also known as SPV wallets
or lite wallets, don’t hold a full copy of the Blockchain. They rely on full nodes
that they are connected to in order to validate transactions. SPV stands for Simple Payment Verification, these wallets are faster
and consume less disk space. Since the blockchain today is becoming
increasingly big in size many wallets offer an SPV solution
for limited capacity devices such as mobile phones, tablets and desktops.
Moving on to hot wallets. A Hot wallet refers to any form of Bitcoin wallet that is connected
in some way to the Internet. This can be a wallet that is connected
to a web service, a wallet installed on a computer
connected to the Internet or even a wallet installed on
your mobile phone, assuming you have data transfer
to and from your phone. Hot wallets, although the most popular,
are also the least secure since they allow access
to their inner workings through internet connections.
Let's view the different
hot wallets available starting with web services wallets. Markets, exchanges, betting sites
and other Bitcoin services frequently require you to deposit funds
into their online wallets in order to conduct your business. These web wallets are the least
secure option for storing Bitcoins since you don’t have any access
to your private keys. You’re basically asking someone else to
hold your coins for you. Such wallets are also
more vulnerable to hackers since they have many loopholes along the way. For example, the website in question, the device you’re using to
connect to the website or the internet connection
can be monitored to steal your Bitcoins. This forces you to rely upon both the site operator’s honesty
and their security practices. In the event of internal fraud
or external hacking, your bitcoins will likely be
irretrievably lost.
On the other hand,
web wallets are highly convenient as they allow you to buy, sell
and send Bitcoins at a moment’s notice. More competent web wallet services will provide Multi-Factor
Authentication options like validating every account login
with a text message, to guard against external hackers. Even so, for storing any
significant amount of coins, web wallets are not worth the risk. That’s why we advise that you avoid
the number one newbie mistake and never to keep your Bitcoins
in an exchange wallet. Now let’s move on to desktop wallets. These type of hot wallets store
your private key on your computer. So as long as your computer is free of malware
or any security weaknesses your Bitcoins are safe.
However, we all know that’s not
the case for most of us. Today it’s hard to be 100% protected and this makes desktop wallets
that are connected to the internet a valuable target for hackers. Moving on to mobile wallets. These are wallets that store
your private key on your mobile phone. Although many wallets are accessible
via mobile apps, doing so presents the worst
possible scenario for security. Mobile wallets offer low security
and terrible privacy, given the potential association of
your Bitcoin wallet, phone number and geo-location. As phones are frequently
lost, broken or stolen, it’s strongly advised that you enable
multi factor authentication, password-protect your wallet
and create a private key backup. Mobile wallets are highly convenient and designed to provide
as much security as possible in an insecure environment. Nonetheless, substantial sums
should not be stored on a mobile wallet unless used in tandem with
a hardware wallet which we will discuss in a minute. Now let’s talk about the most
secure form of Bitcoin wallets, cold storage wallets. Cold storage refers to any type of wallet that is independent of
any Internet connection and therefore cannot be hacked remotely.
Some examples of cold storage wallets are hardware wallets, paper wallets
and brain wallets. Let’s go over them now. Paper wallets are just pieces of paper
with the private key or seed written on them. By keeping your private key
on a piece of paper, only someone who can
physically access that paper can steal your Bitcoins. However paper wallets are easily destroyed and therefore it’s advisable to
create multiple copies so that if one is lost
your Bitcoins can still be retrieved. Another thing to consider is that to send the Bitcoins you have on
your paper wallet to someone else you will have to import the private key
into some form of digital Bitcoin wallet.
This is easily explained in one of
the many tutorials we have on the site. The next form of cold storage
is hardware wallets. These are physical devices
which safely stores your private key such that it cannot be hacked
even if your device is compromised by malware. You can even use them with
a public computer that you don’t trust. Most hardware wallets provide a seed backup in the event that the device itself
is lost or stolen. To send your Bitcoins to someone
with a hardware wallet you’ll need to have your hardware wallet
connected to a computer and use some sort of web page
that allows control over the wallet. Hardware wallets offer the optimal mix
between security and ease of use. Their only limitation is that you need to keep
your hardware wallet on you at all times in order to send the coins.
Lastly we come to brain wallets. Brain wallets are just
a way to create a private key out of a predetermined text or set of words. So instead of getting
a randomly generated seed you decide for yourself on a passphrase and use some basic algorithms to generate
a private key from that passphrase. However Brain Wallets
have a significant disadvantage, they have a higher probability
of being hacked. This is because people are
usually very predictable in what to use as passwords
or supposedly random text and hackers have a way of knowing that. Some tests have been done where simple passwords have been used for
brain wallets and deposited with funds. They have been quickly stolen. Also one Bitcoin user
lost 4 Bitcoins from his wallet after using a brain wallet private key
generated from an unknown Afrikaans poem. This proves that even if you think
you’ve found some obscure text for a passphrase
you’re still in danger of being hacked. Now before I show you exactly
how you should choose a Bitcoin wallet I want to talk about
one more important feature some Bitcoin wallets have – Multisig. Multisig stands for multisignature, a wallet that allows sending of Bitcoins
only with the approval of enough private keys, out of a set of predefined keys.
Don’t worry… I’ll explain. Let’s say that Alice, Bob and Charlie
all want to open a business together and invest some of their Bitcoins – but none of them actually want
only one person to have the private keys to this money. So they each get one key and use a multisig wallet that requires
two out of three of those keys. This way none of them can
run away with the money alone, but they also don’t need
all three of them to pay the expense.
For example,
if Alice wants to run with the money, she can’t because she only has one key. But if Bob is missing and Alice and Charlie
want to pay an expense, they can do it with their two keys. Multisig doesn’t have to be
only two out of three – it can be almost any combination. For example, a couple wants to have
a shared account and decide that only if both of them agree
they can spend the money, or a Company’s board of directors that
allows payments only by vote of the majority.
Multisig is often used for escrow services where 2 parties decide on a transaction
that requires 2 out of 3 keys. If the seller and buyer don’t agree, a trusted 3rd party will arbitrate
and release the funds. You did it! Now you know all there is to know
about Bitcoin wallets, so let’s see how to choose
the best wallet for your needs. The first thing you need to know is that different people will use different
Bitcoin wallets for different purposes. For example, if I need to store
a large amount of Bitcoin safely I will use a different wallet than if I just want to have
some small Bitcoin change to pay for a cup of coffee. Usually wallets vary on a scale of
security vs convenience and you need to decide
where you want to be on that scale.
Some of the questions
you should ask yourself include: How many Bitcoins will I be storing? How frequently will I use the wallet? Can I afford to pay for a hardware wallet?
Do I need to carry the wallet around with me? Do I need to share
the wallet with someone else? Am I tech savvy?
How much do I value my privacy? Do I trust myself to safeguard my wallet or do I want to give some 3rd party
the task of doing so? Depending on the answers to these questions it should be easier
for you to choose a wallet. Most of the popular Bitcoin wallets are listed on our Bitcoin
wallets page on the site, so now it’s just a matter of choosing
the best wallet for your needs. Before we conclude keep in mind that you may want to
use more than one wallet.
For example, you can use a hardware wallet
for large sums of Bitcoins and also have a mobile wallet
with a small balance on it for daily payments. This way even if your mobile phone
breaks or gets stolen you’re not risking a lot of money. So I hope you’ve enjoyed today’s lesson of
Bitcoin Whiteboard Tuesday and I can’t wait to see you in our next video.
If you still have any questions
or comments on the video feel free to leave them
in the comment section below and I’ll see you… in a bit..
