Bitcoin 101

How to choose a Bitcoin wallet

Nowadays there is an ungodly number of Bitcoin wallets options available to pretty much any platform. Before you choose a Bitcoin wallet, it’s important to understand the differences between the main wallet types and classes.

It’s easy for a beginner to get lost in this veritable maze of features, so we have put together a rough guide to help you understand the main criteria and choose the one that best suits your needs.

If you are in a hurry to get started and would rather just jump right into the action, we offer our recommendation below, as well as a guide on how to set it up and start transacting right away.

Security vs. Convenience

Broadly speaking, Bitcoin wallets belong anywhere in a spectrum whose extremes are security and convenience. That is not a bad thing - it just means you should understand your options to allocate your money in a way that is optimal for you.

Security vs Convenience: the bitcoin wallet spectrum
The Bitcoin wallet spectrum

Usually, the more security features a wallet has, the more hoops you must jump through in order to operate it (and vice-versa). That helps define each wallet’s main purpose. You don’t want to have to head to a safe deposit box every time you feel like a cup of coffee. But you also might prefer that the money you are saving to buy a house won’t disappear after that third beer led you to forget your phone unlocked in the pub counter.

That doesn’t mean you can’t have a convenient to use wallet that is reasonably secure, but there is definitely a trade-off between the two when you aim for one of the extremes. It’s just like your hard-earned fiat money at different investments in a bank. Except that, with bitcoin, you set the rules.

As you’ve learned in our previous article, wallets don’t really hold bitcoin (or cryptocurrencies in general), only the keys that grant control over them in a distributed shared online ledger. However, since in its most basic state a wallet is nothing but a string of characters, it doesn’t necessarily need to be online. Or even digital, for that matter.

Hot wallet vs cold storage

This is the broadest, most basic subdivision of wallets. Basically, it depends on them being connected or not to the internet.  

A hot wallet is any wallet on a device that is connected to the internet, even if only occasionally. An “online wallet” may sound like a pleonasm, but remember you don’t need an internet connection to hold what’s fundamentally just a string of characters (although you do need one when sending coins). These have the advantages of being easier to set up, access and transact, but at the expense of being more vulnerable to hacking, malware, technical problems and attempts at tracking by malicious agents.

Cold storage are wallets that are not connected to the internet, and thus safe from online threats. They offer security in exchange for limited usability. Cold storage includes paper and hardware wallets, as well as wallets that run on devices kept permanently offline. Although safe from online threats, always try to keep copies of these, in case wear, tear, loss or the odd meteor strikes your savings.

It is generally considered best practice to never keep large sums at a hot wallet; instead, use a cold storage for that.

When it comes to usage, most (although not all) wallets can be set up to work both online and offline, so that says very little. Let’s narrow it down a little.

Types of Bitcoin wallets: transaction validation

There are two ways for a wallet to interact with the Bitcoin blockchain: either as a full node or as a lightweight client.

The overwhelming majority of wallets work as lightweight clients, which means they access the blockchain via a third party server or node that is directly connected to the bitcoin network. This method is called SPV (Simplified Payment Verification), and the choice of connection varies for each wallet. Some (like Electrum or Bread) use a server from a random list, while others (like Blockchain.info or Copay) always use their own servers as a gateway to interact with the network. This type of wallet requires at least some trust that the server will be an honest one.

A full node wallet, on the other hand, works as its own server - meaning it connects directly to the network and keeps an updated copy of the blockchain locally. It’s the only really trustless way to verify transactions, since you don’t need to rely on a third party and care able to verify transactions straight from your own, untampered copy of the blockchain.

However, bear in mind that to run a full node you will have to download the whole blockchain (around 200GB as of August 2018) and a good, stable internet connection to keep the ledger up-to-date. For those reasons, currently the only class that supports a full node are desktop wallets. Although there are a couple of other implementations, the only full node wallet that is guaranteed to follow all the protocol’s rules is the official Bitcoin Core.

Wallet classes

The most noticeable division between wallets concerns the range of platforms they run in. We will refer to these as classes, and wallets can fit in one or more depending on their supported platform.

Since reviewing every single wallet would be a pointless exercise, as software is always evolving and even within a single class features vary considerably, we will draw a broader picture of the main classes to find the good, the bad and the ugly in each. We’ll also link some of the most popular in each class so you can check what each of them have to offer and hopefully pick the one that is best suited to your needs.

Desktop wallets

Desktop computer
Coffee mug entirely optional

The original Bitcoin wallet was designed before smartphones or cheap cloud environments were ubiquitous, so it ran straight from users’ desktops - henceforth giving birth to the desktop wallet class. These were not that user-friendly at first, especially since regular backups were needed (see the section on deterministic wallets on our previous article) and hardware malfunction could lead to the loss of all your funds.

Even if today’s desktop wallets are much friendlier and secure, they have lost some of their prominence to more portable competitors. Desktop wallets have probably the biggest range of features, and are the only class that offer full node client. They are the most battle-hardened of all classes, and when used properly can offer a great level of security and anonymity.

Since most desktop wallets ensure your private keys never leave your computer, you are also responsible for keeping your wallet's seed words backed up and your system secure. The reason for that is desktop operating systems allow for applications to run alongside each other, so if you happen to be contaminated with malware (such as a keylogger), your wallet’s keys - and your funds - may be compromised.

✅ Pros

❌ Cons

- Best range of choices/features

- Not portable unless multi-platform

- Relatively secure

- Vulnerable environment (desktop OS)

- Full node and lightweight client

- Some options require advanced knowledge

- Can be used as cold storage

Verdict: Not the best for everyday transactions but a good all-rounder, better suited for storing medium to large amounts if you are a frequent trader.

Examples: Bitcoin Core, Armory, Copay, Electrum

Mobile wallets

Mobile wallets are - well, mobile. These are apps designed for smartphones and/or tablets, and their main advantage is that they are quite portable. Much like debit cards or cash you carry in your pocket, you can use them to spend or receive bitcoin on the go (provided have access to wifi or mobile data from your carrier).

It’s important to note that while some mobile wallets are native to mobile devices, others are merely a gateway a to web service. They may look and feel the same, but they work differently - mainly in regards to where the private keys are kept. On the former, keys never leave the device and are controlled entirely by the user, while the latter store your keys on their own servers, effectively acting as a custodian. This section describes native mobile wallets only (web wallets are covered below).

Their interface is much like any banking app, so using one should be quite intuitive to most smartphone users. Another advantage lies in their security - or more precisely, on the security of their operating environment. Mobile devices’ operating systems usually run each app in isolation, making it much harder for any malicious application to change or capture data from another app.

On the downside, the mobile wallet’s portability also means that if you lose or break your device, you may also lose your coins - so make sure you keep a backup of your wallet in a safe place.

✅ Pros

❌ Cons

- Portable

- Prone to device damage or loss

- Very secure

- No full node support

- Private keys are kept on device

- Many choices and features, easy to use

Verdict: Best choice for everyday use, as you can keep it always at hand. As it is tied to a device, it’s probably better used to store smaller amounts, leaving the bulk of your funds in the safety of your home.

Note that some wallets are Android-only, while others are exclusive to Apple’s iOS.

Examples include: Copay (all), Bread (iOS), Mycelium and Samourai (Android).

Web wallets

As bitcoin adoption grew and tales of lost fortunes multiplied, some companies started offering dedicated in-the-cloud services to keep private keys safe from oblivion. These are called web wallets: services that offer a web interface to help users manage their keys and access their funds from any connected device.

There are two kinds of web wallets: custodial and non-custodial. 

Custodial wallets effectively act like custodians of the associated coins. These services keep funds accessible to clients via a username-password scheme and a friendly interface, usually coupled with precious customer support and recovery.

As long as the service provider is honest and remain online, users can access their coins even if they lose their password - as the service can always reset their password, much like any bank. Most cryptocurrency exchanges, escrow marketplaces and services where you can spend bitcoin, such as Cloudbet, create web wallets in order to accept users’ deposits.

Non-custodial wallets are like a cross-breed between a desktop and a web wallet. They may take care of the key generation, instead encrypting the private key with a password which you may be able to reset (as in the case of Guarda, or recently BTC.com). The user is ultimately responsible for keeping the keys, and the wallet acts as a web interface between the keys and the blockchain. Since users have control of their private keys, the service can never deny them access or steal their funds.

The advantages of web wallets are increased mobility and flexibility (as they can be accessed from any connected device), and reduced risk of losing one’s private keys, since established web wallets often have redundant servers and may even offer some form of insurance in case a hack or bug compromise your funds.

This convenience comes at the cost of privacy, since you must associate at least part of your identity to use these services, and also requires trust that the third party will remain honest and secure. Even if established providers like Cloudbet generally offer cutting-edge security, it is still considered good practice to always keep the majority of your funds in a wallet for which you control the private keys.

So, when you are done betting for the day, withdraw your funds to your own wallet. When you’re ready to play again you only need a few minutes to transfer your bitcoin back into Cloudbet!

✅ Pros

❌ Cons

- Users can recover wallet if they lose password

- Users don’t control private key

- Accessible from any connected device/computer

- Attractive to hackers / surveillance

- May offer dedicated mobile app

- Servers can go offline, preventing use

- User-friendly and customer support

Verdict: Use it for small amounts, or for the time you are using an associated service.

Custodial: Cloudbet, Blockchain.com, Xapo, Coinbase

Non-custodial: Guarda, BTC.com

Hardware wallets

With bitcoin reaching highs in the tens of thousands, security became the main concern for the currency’s holders, as hacks and exploits quickly reached the millions of dollars mark. To tackle this growing threat, a couple of specialised companies have created dedicated hardware wallets, devices that are immune to malware and online threats and portable enough to be used in most computers and smartphones.

These clever devices look like simple USB keys and work by keeping private keys on their own safe, write-protected environment - effectively always offline. Each has a web interface, usually accessible via an internet browser like Google Chrome, which is used to access funds and start transactions. The signing, however, happens inside the device itself, and they offer very strong security settings by including backup, pins, two-factor authentication and on-device physical confirmation of transactions. More advanced options include multisig wallets and support for most popular forks and currencies, turning these little things into a Fort Knox - should we call Fork Knox?

The only real downside to hardware wallets are their price. Expect to pay anywhere from 70 to 300 dollars plus shipping, depending on your choice.

✅ Pros

❌ Cons

- Best security available

- Can be expensive

- Highly portable and flexible

- Can safely be used in any device

- Offer Multisig and fee setting

Verdict: By far the safest way to keep your bitcoin, and also quite convenient to use. If you hold large amounts, we highly recommend investing in a hardware wallet.

Examples: Trezor, Ledger Nano, Keepkey

Paper wallets

Alone amongst shiny and cutting-edge competitors, there stands the only low-tech entry on the wallet rooster: the good old paper wallet. Despite its simplicity, paper is still one of the safest and most reliable ways to keep bitcoin, provided you keep it away from water and bookworms. On the flipside, paper wallets are not really convenient to transact with online.

Bookwork behaving badly
Don't let the book bugs bite

Another downside is that you need to spend or import all the bitcoin from a paper wallet when using it, as it can’t be reused.

There are some websites where you can generate as many keys as you want and save or print them in a easy to use format. To ensure security, use these services while offline or download the entire webpage and run it on a disconnected computer. Also avoid printing it on a printer that has an internet connection.

✅ Pros

❌ Cons

- Very secure if carefully generated

- Not practical for transacting

- Easy to hide and carry

- Single use - must import all funds when using

- Can be given as gift or payment

- Susceptible to physical damage and fade

- Fully anonymous

- Easily compromised if left exposed

Verdict: Use it for storing or create one to make a one-time payment/gift. Not well-suited for general transacting.

Examples: Bitaddress, Walletaddress

What to look for in a wallet

Finally, wallets are ever-evolving beasts, with lines between classes becoming more blurred by the day. There is a clear trend towards multi-currency (wallets that hold keys to multiple crypto assets) and multi-platform (software that can run in sync through different operating systems) wallets.

Also noteworthy, there are special features that can give wallets yet another turn: multisig capability, which turns the wallet into something comparable to joint accounts, requiring more than one individual (two out of three, three out of five, etc) to sign with their private keys in order to allow transactions, adding another layer both to security and complexity; in-wallet currency conversion/integration with exchange services make others akin to a FOREX account; while a couple wallets even offer a decentralised P2P marketplace in case you want to buy bitcoin directly from a fellow wallet owner.

The criteria for choosing a wallet should meet your personal preferences and needs, and you should never pick a wallet you don’t trust. That said, the main questions you should ask are:

  1. Security: are the private keys stored locally or remotely? Does the wallet rely on a centralised servers? Does it offer password protection? Does it offer two-factor authentication (2FA)?

  2. Validation: Does it require you to download the whole blockchain or is it a light client?

  3. Ease of use: is the wallet interface intuitive? Is it simple to send and receive your coins? Does it calculate the miners' fees automatically? How many steps do you need to send a transaction?

  4. Anonymity: does using the wallet require you to reveal any personal data?

  5. Transparency: is the wallet’s code open source or proprietary?

  6. Supported currencies: if that matters to you, does it offer support for currencies other than Bitcoin?

  7. Services and features: does the wallet offer convenient features like in-wallet currency conversion, or decentralised P2P marketplaces? Does it allow users to set miners’ fees?

  8. Price: is the wallet free to use? Does it charge for extra features?

Our recommendation

If you are a beginner or just want start right away, our recommendation is the Copay wallet, as it is free, open-source and works in sync on most mobile and desktop platforms. It also supports both Bitcoin and Bitcoin Cash, and integration with Shapeshift means you can convert currencies from inside the wallet. 

We put together a guide on how to set it up and start transacting, as well as how to use Copay to deposit bitcoin into your Cloudbet account.

Summary

Choosing a Bitcoin wallet depends on personal requirements and intended use. There is a general tradeoff between security and ease of use, but some options offer a good overall balance.

Generally speaking, it is best to keep large amounts in cold storage, and never leave them in an online service once you are done using it. Hot wallets are best for frequent transactions and smaller amounts. Hardware wallets offer the best all-round security if you can spare the money for one, and mobile ones are the most practical if you can’t. By all means, you can - and are encouraged to - have more than one.

Once you have picked your favourite and deposited bitcoin into it, you can then make a deposit into Cloudbet and start betting in a matter of minutes. Give it a try!

About the Author
Thiago Earp

Thiago Earp

Content Manager

Posted on 2018-08-10

What a silly speck of carbon, it thinks it's conscious.

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