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Understanding Bitcoin Wallets: How Cryptocurrency Wallets Work and the Different Types Available


Bitcoin remains as the most popular cryptocurrency. In fact, it garners almost 40% of the playing field for cryptocurrencies. Of course, traders need to put their bitcoins in a safe place, which is where crypto wallets enter the picture.

If there’s one thing you should know before you get into crypto, it’s that you’re more responsible for your belongings than ever. Since cryptocurrencies run on decentralised finance (DeFi), buyers and sellers hold their cryptos against the world. A crypto wallet gives you better security when holding them.

So, what exactly are crypto wallets and how do they work?

What is a Bitcoin Wallet?

A Bitcoin wallet is very similar to a physical wallet used for fiat currencies. Only digitised, a Bitcoin wallet allows you to buy and store bitcoins, as well as send them to others. As a heads up, this wallet can come in different forms, providing varying levels of safety to the user.

But going back, your Bitcoin wallet doesn’t hold your actual bitcoins. Instead, it works like a keychain and holds pairs of public and private keys. Like physical keys, they allow you to verify and sign transactions involving your bitcoins. It’s also a way to prove that you do own the cryptocurrencies in the transaction. And if you lose your wallet, you get a mnemonic phrase or a seed to restore it. 

How Do Bitcoin Wallets Work?

Bitcoin wallets are the same with physical wallets. But since we’re talking about cryptocurrencies, the technologies behind it make it more complex. So, how does crypto wallet work? 

There are two things behind a Bitcoin wallet: blockchain technology and the cryptographic key pairs. These help you transact with your bitcoins in not only a more efficient, but also a safer way. 


Blockchain is a public ledger that puts transactions public, while keeping them anonymous and private through unique codes. It’s still relevant in a Bitcoin wallet because of precision. You can use blockchain to request a specific amount of bitcoin from the other end. The said technology will then make a unique address that the other end can send the amount to.  For more bitcoin articles like this, check out Nigeria Bitcoin Community.

Cryptographic key pairs

As mentioned above, you use the public and private keys to transact with Bitcoin. Because they’re a pair, there’s a respective public key for a private key. And as their names suggest, you keep your private key’s information to yourself. On the other hand, you use the public key to share to others when transacting.

If you’re sending bitcoins to another user, you get the amount they asked for and send to the address they gave. Then, you use your private key to sign and verify those transactions.

Different Types of Bitcoin Wallets

Bitcoin wallets are easy to define, but it’s hard to choose one when you’re there. The reason is it gets more complicated once you know the options you have for the said wallet. In fact, there are more than one type to choose from, for every device frequented. But the more choices you have, the better, at least for crypto wallets. 

Categories of wallets

Crypto wallets go beyond your ordinary wallet when it comes to variety. Before you look at the types of Bitcoin wallets, you need to look at their categories. The first difference has to do with whether the wallet is a  custodial or non-custodial one.

Custodial wallets

A custodial wallet refers to the type of Bitcoin wallet where you log into a platform who will have your private key. The main rule of crypto wallets is to hold your private key to yourself only. But there are reasons why putting it on an exchange, for example, works better. The pros of a custodial wallet includes the following:

  • It’s a lot more convenient to put your private key in the crypto exchange you use the most.
  • If you’re afraid to forget your private key, the crypto exchange can save it for every transaction.

Even though there’s a lot of convenience that comes with having a custodial wallet, there are also prones to it, including:

  • You risk your Bitcoin’s safety because a crypto exchange has access to your private key. So, it can verify and sign transactions on behalf of you.
  • If the crypto exchange turns out to be fake, consider all your bitcoins gone.

Non-custodial wallets

Contrary to a custodial wallet, a non-custodial wallet is one where only you know your private keys. This allows you to eliminate all fears of losing your bitcoins because of an exchange. But there are more reasons to have a non-custodial wallet, such as:

  • Having a lower risk of a platform breaching your data.
  • You can transact faster because there’s no “third-party” app that needs to approve aside from you and the other person.

Of course, not everyone devotes their time to their bitcoins. So, problems may arise with using non-custodial wallets. Some of the examples are:

  • If you forget your private key, it might be hard to retrieve it back on your own. 

Aside from these two categories, you can also define wallets by hot or cold.

Hot wallet

A hot wallet refers to a wallet that functions online. So, you can only access your Bitcoin wallet through the internet. Since cryptocurrencies. On a positive note, everyone uses the internet and Bitcoin is a digital asset, so all goes great in accessibility. But it’s the same way vulnerable to hacking.

Cold wallet

Cold wallets are crypto wallets that are not online. It’s a hardware wallet that you need to open online to approve a transaction. It’s definitely better than a hot wallet since it’s less prone to hacking. But it has its limitations in convenience, as well as the chances of losing the hardware.

Types of a Bitcoin wallet

Mobile wallets

Mobile wallets are crypto wallets where your private keys are on your mobile device. There are also layers of security measures found like the Two-Factor Authentication (2FA) and biometrics verification. But when someone steals or destroys your phone, it can be hard to retrieve it back.

Desktop wallets

Desktop wallets are Bitcoin wallets where your desktop has unique codes to it to send or transfer bitcoins using the internet. So, it’s not as open as when you use a mobile phone or a crypto exchange because you’re the only one who has your desktop. But since it runs on the internet, and hacking doesn’t require getting physical storage, the concerns stay.

Web wallets

Web wallets are the third-party servers like crypto exchanges. You can put your private keys to transact there. Of course, it would be more convenient and you can even get perks when you sign your tokens there. But you need to make sure the platform is well-known and doesn’t have relations with hackers.

Hardware wallets

Hardware wallets are cold wallets in the form of a universal serial bus (USB). You have to connect it to an online device to access your bitcoins. It can be a hassle having a device and still have to get a USB to access your wallet. But it’s a good choice for preventing cyberattacks and for saving your wallet if your device crashes.

Paper wallets

Paper wallets are the least favored type of Bitcoin wallet. It involves writing your private key on a piece of paper then storing it somewhere safe. It’s as accessible as a hardware wallet. For older people, this would work fine. In fact, writing on paper helps you remember something better. But paper is easy to break, so it might be a good backup wallet but not the primary one.


Holding Bitcoin is a whole new dimension from having it. Not only does it require you to know how to trade your bitcoins, but also what is a crypto wallet. It works like any other wallet – to keep your Bitcoin safe and accessible to you when you need it. But the nuances that come with it connect more to technology than bitcoins.

The burden of a decentralised space for cryptocurrencies like Bitcoin is being more accountable for them. This is why a Bitcoin or crypto wallet is important: it adds another layer of security for your said token. Because one thing remains: hackers and scammers will continue doing what they do and you’re on your own. 

But more than the bad parts of the space, a crypto wallet makes the transaction-related functions of your bitcoins more efficient. Imagine only needing to see the address of the other person to send or receive bitcoins. For more news on online casinos, sports wagering, and cryptocurrencies, check out Crypto Club Site today.

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