What is a wallet?
A Bitcoin wallet is a piece of software or hardware where Bitcoin is 'secured'.
Bitcoin is not technically held in a wallet, as Bitcoin movements and balances are noted, logged and balanced on its blockchain.
What a wallet is, is a private key/s that allow you to access Bitcoin in a public address/es on the blockchain.
This private key is essentially the underlying value to your Bitcoin and if it were lost, you would lose the ability to access your Bitcoin.
When Bitcoin is held on exchanges or with third parties, they are custodying the private keys on your behalf and the Bitcoin is essentially not yours, but an 'IOU'.
Bitcoin wallets facilitate the sending and receiving of Bitcoins and give ownership of Bitcoin to the user and owner of the wallets private key/s.
Types of Wallets
Bitcoin wallets can be broadly categorised into four wallet types:
- Exchange Wallets
- Hot Wallets
- Hardware Wallets
- Multisig Wallets
Whenever you purchase Bitcoin on an exchange, your Bitcoin accumulates in a wallet linked to your exchange account. This is nothing more than an IOU from the exchange, agreeing that they owe you the balance of Bitcoin that you purchased. This is the least secure way to hold your Bitcoin, since you are not in control of the private keys of the Bitcoin. Thus, you are relying on the exchange to make good on releasing your Bitcoin to you, should you try to withdraw it to another wallet. The risks involved with keeping your Bitcoin on an exchange are not trivial. Exchanges get hacked regularly. Regulators put pressure on exchanges to freeze accounts and some exchanges go bankrupt, leaving their customers with nothing but a worthless IOU. Ultimately, if you do not control the private keys to your Bitcoin, then it is not really your Bitcoin. The best practice is to keep your coins on an exchange for the shortest possible time to limit your exposure to these risks. Always remember, “not your keys, not your coins”.
A Hot Wallet is typically the type of Bitcoin wallet that is connected to the internet. This is the type of wallet that you would have on your cell phone such as Blue Wallet. These wallets allow you to create your own private keys (seed-phrase,12 or 24 words) giving you self-custody of your Bitcoin. Wallets such as this are a better solution than Exchange Wallets, but are not as secure as a hardware wallet or multisig. The reason why they are not as secure is because they are connected to the internet. This means that hackers or scammers are able to try their best to access your wallet or trick you into typing your passphrase into a place that you shouldn’t. These risks are low, and far lower than Exchange Wallets, but they still exist. Any large amount of money (>0.1 BTC) should not be kept on a Hot Wallet.
A Hardware Wallet is a dedicated device that superficially may look similar to a flash drive. They allow you to create your own private keys and securely store them on the device. These devices are only connected to the internet when making a transaction (or with some, never at all). Since these devices have a physical manifestation and are not connected to the internet (rather than an app on a cell phone) they are more secure from hackers and other phishing attacks. They can be safely stored in vaults or safety deposit boxes, or hidden somewhere secure. These devices are extremely secure and generally suggested if you are storing more than 0.1 BTC.
All of the wallets mentioned above are single-sig wallets, meaning that they rely on a single private key to move any Bitcoin in the associated address. However, should you forget or lose access to your passphrase, you will also lose access to your Bitcoin. This is the single largest risk to any Bitcoiner, far more likely than losing them via hacking, physical attack or even phishing. At highest risk to losing their passphrase are novices or non-technical individuals. A significant portion of Bitcoin that has been lost by individuals has been due to them losing control over their private keys themselves.
Multisig wallets introduce the concept of multiple keys to a single Bitcoin address. For example, a 2 of 3 multisig wallet requires any 2, of a possible set of 3 keys, to move Bitcoin from the address. This is far more secure than a single sig wallet, since it means that any 1 set of keys can be lost and the other 2 keys can be used to grant the owner control of the Bitcoin in the address. Consider this scenario: Paul has a multisig wallet with a 2 of 3 setup. One key is held on his mobile phone, in an application that runs his Bitcoin wallet. The other is held on a hardware wallet, in a safety deposit box with his bank. The third is held by his wealth manager on another hardware wallet, in the case of an emergency. Under normal conditions Paul is able to move his Bitcoin without involving his wealth manager, since he controls his mobile phone and the hardware wallet in his safety deposit box. However, should Paul lose his phone, or should his bank freeze his accounts and safety deposit box, he can reach out to his wealth manager to sign the Bitcoin transaction using the 3rd key. This creates a far more robust security model than if Paul only had a single key.
Multisig configurations are customizable and range from a 2 of 2 setup, through to 3 of 5, 5 of 7, 7 of 9, or even 12 of 15. Using large multisig setups means that an individual can create a hyper-secure Bitcoin storage solution, similar to what you would expect from a Swiss Bank. A company could secure a portion of their corporate treasury in a 5 of 7 multisig for example, where 7 directors each have a set of keys, and 5 are required to sign a transaction in order to move any Bitcoin out of the corporate address. This means that even if some directors were kidnapped in order to steal the Bitcoin, the kidnappers would need to kidnap at least 5 of the directors and force them to sign the extortion transaction, to achieve their goal.
For any amount over 0.5 BTC we suggest using a multisig. Contact us at email@example.com if you need assistance in setting up a multisig wallet.
Other more DIY alternatives include Casa, Caravan, Blue Wallet, Electrum or Glacier Protocol.