bitcoin wallet
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How Does a Bitcoin Wallet Work?

As you dive deeper into Bitcoin, you must understand how a digital wallet works. A digital wallet is an application on a mobile device or a piece of hardware that can hold your Bitcoin as well as other cryptocurrencies. 

Holding cryptocurrencies in a digital wallet is different from holding your coins on an exchangeExchanges keep your Bitcoin and other cryptocurrencies in their custody. They are prone to the risk of being hacked or shut down, preventing you from accessing your funds. With a digital wallet, you will always have custody of your own coins.

Most digital wallets will hold multiple cryptocurrencies, but we will refer to Bitcoin for the remainder of this guide.

Types of Wallets

There are two types of wallets to hold Bitcoin: a hot wallet and a cold wallet.

A hot wallet is an application on a mobile device where you can hold and store your Bitcoin. It is connected to the internet and makes transferring funds fast and easy. A hot wallet is free and can be downloaded from the Play Store or App Store. We cover a few wallets that we have used below.

A cold wallet is an offline USB-like device that is not connected to the internet. It is only connected when you transfer funds around. Cold wallets can be purchased from manufacturers like Trezor and Ledger.

A cold wallet is generally safer than a hot wallet because it is disconnected from the internet. However, they do require a few more steps than a hot wallet to set up and transfer funds such as setting up a pin number.

Holding Bitcoin in a wallet is always safer than holding it on an exchange because you always control your crypto. Although exchanges offer flexibility and speed to buy and sell cryptocurrency, digital wallets are best for long-term storage.

When using hot or cold wallets, you must always remember your own private keys.

What is a Private Key?

A private key is a unique “password” that gives you access to your Bitcoin. It consists of a unique 12 or 24-word passphrase as you will see below.

When you own this unique private key, you actually own an “account” on the Bitcoin network. This private key is also linked to a public key, a unique “address” where people can send Bitcoin to. The public key is kind of like an email address. Those that know it can send you an email, or in Bitcoin’s case, those that know your public address can send you Bitcoin. 

This public and private key pair works together to ensure you control and manage your own crypto.

The public key address is made up of a random combination of letters and numbers that is unique for each wallet. Below is an example of a public and private key pair. The private key gives you access to your Bitcoin, while the public key can be shared with others to receive Bitcoin.

Example Public Key: 1A1zP1eP5QGefi2DMPTfTL5SLmv7DivfNa

Example Private Key: dog collapse road cat fire again egg banana alligator apple lake close

NEVER share your Private Key to anyone as they will have full access to your Bitcoin. DO NOT lose your Private Key as you will lose access to your Bitcoin.

With a private key written down and stored in a secure location, you will always have access to your Bitcoin. You do not have to worry if you lose or move between devices because your private key can be entered into any device to regain access to your funds. 

How do I Setup my Bitcoin Wallet?

Hot Wallets

Hot wallets are simply applications from the Play Store or App Store that can hold bitcoin and other cryptocurrencies on your phone. Always do your research when choosing which wallet to download because there have been cases of fake applications. We recommend reading the reviews and looking into the company and their social media presence before downloading any wallet.

After installing a digital wallet onto your phone, you will be given the option to create a new wallet or to import an existing wallet. When you create a new wallet, you will receive a unique private key passphrase. Write the passphrase down and store it in a secure location. The application will never store this private key on their own servers. Do not share this passphrase with anyone else.

If you choose to import a wallet, simply enter a private key that you already own. This will provide you full access to your crypto again.

Some hot wallets that we personally use are below. Each wallet is different and can hold multiple types of cryptocurrencies. Visit their websites below to see their unique features and which coins each can hold.

Cold Wallets

Cold wallets are USB-like hardware devices that hold your cryptocurrency. They must be purchased directly from the companies that created them. Two of the most trusted cold wallet companies are Trezor and Ledger. Both have been in the space for a while and provide great products to hold your cryptocurrencies.

Similar to hot wallets, cold wallets also have their own private key phrase. Cold wallets also require a pin number to access funds, providing another layer of protection.

How do I Add Bitcoin to My Wallet?

The first step to transferring Bitcoin into your digital wallet is to purchase Bitcoin. The easiest way to buy Bitcoin is through an exchange. Our guide on exchanges provides some options on where to buy Bitcoin in Canada. After buying cryptocurrencies on an exchange, you will be able to move them into a digital wallet.

To transfer Bitcoin from an exchange to your wallet, you will need your digital wallet’s Public Key Address. The user interface of each wallet will be different, but the concept is the same.

  1. In your wallet, click Bitcoin, then click “Receive”. Your public key address will appear. Copy this address. DO NOT attempt to copy this by hand as errors can be made
  2. Return to the exchange where you have purchased your Bitcoin. Locate the Bitcoin in your exchange account (usually under “Funds” or “Assets”), and click “Withdraw” or “Send”
  3. Paste your wallet’s public key address that you have copied and click send. A fee will be incurred when sending cryptocurrencies and will take a few minutes to appear in your wallet.

The method of sending any cryptocurrency, whether to an exchange or a wallet, is the same. Always double-check that the public key you are sending to is correct. Do not send your funds to a public key that you do not own as you will lose them forever!

How do i send bitcoin to someone else?

To send Bitcoin to someone else, you will require their public key. Simply open your wallet, click “send”, and paste their address and amount to send.

After your Bitcoin is sent, you can confirm the transaction by entering that person’s public key, the transaction ID, or your public key into the search bar of a blockchain explorer. The blockchain explorer tracks all transactions within the network.

How do I Protect my Bitcoin Wallet?

When your Bitcoin or cryptocurrencies are in your digital wallet and your private keys are securely stored, there are additional methods to keep your funds safe, including:

  1. Password protecting your phone to prevent unauthorized usage of your apps
  2. Storing your private keys in at least two different locations on pen and paper.
  3. Don’t tell people you own Bitcoin.