Introduction
The world of cryptocurrency has come a long way since 2009 when it was launched into the world. The word “cryptocurrency” is thrown around nowadays by almost anybody, for some people it is a way to sound smart or even cool to their peers or colleagues.
The concept of cryptocurrency has been around for almost four decades. Its first practical use was in 1983 when an American cryptographer, David Chaum, created ecash cryptographic money, which provided an upgrade on security for customers who do not want their transactions to be monitored by banks, the government or any third party. It prevented third parties from accessing personal information through electronic transactions.
The subsequent years that followed saw some publication of research papers and books on cryptocurrency, however, it was the white paper, Bitcoin: A Peer-to-Peer Electronic Cash System, published by the pseudonymous Satoshi Nakamoto that revolutionized cryptocurrency as we know it today, leading to the first cryptocurrency known as Bitcoin.
Underlying Technology of Bitcoin
The idea of Bitcoin as a digital asset was conceived in part as a way to eliminate censorship and control of any central authority, financial institutions like banks, have in meddling with people’s accounts. It introduced a decentralized way of managing cash electronically, which grants users absolute control over their accounts. Transactions can be initiated between two parties without the involvement of a middleman. But for this new system of managing and transacting money to remain robust, a type of digital ledger that records and keeps track of all the transactions that have been initiated from day one will be needed. This is where blockchain comes in.
Blockchain is the technology that powers Bitcoin and other cryptocurrency coins like Ethereum, Litecoin, Ripple etc. It is a distributed ledger available to all participants, called nodes which are essentially computers connected to a cryptocurrency network. Blockchain technology is the main value offering in cryptocurrency, its mechanism of immutability through cryptography provides optimum security for your stored bitcoin.
Mechanism of Blockchain
Understanding the inner workings of blockchain technology will provide deeper insights into the durable security of bitcoin. For the decentralized nature of cryptocurrency to be successful and trusted, an inherent problem known as the Byzantine generals’ problem had to be solved. The Byzantine generals’ problem is a form of analogy applied in parallel to decentralized systems, which is a situation where four Byzantine generals besiege a city to execute an assault and a consensus needs to be reached for them to attack the city simultaneously which will ultimately lead to a victory. However, some traitors among them might be willing to sabotage the operation just for personal glory. The generals are far from each other, without a way to come together and decide on a singular course of action, plus they don’t trust one another so how do they proceed?
Distributed systems or decentralized systems have a similar problem, participants on a cryptocurrency network are miles apart from each other, and no form of trust has been established among them, so how can they initiate transactions with each other when there is no direct communication among the nodes on the network?
Blockchain solves this problem by providing a consistent means of communication where a network of nodes reaches a consensus by coming together to agree on a singular truth before it is recorded. The generals, which are the nodes in the network in this context, can decide to verify the substance of any information by checking their copy of the singular source of truth that was recorded earlier during their consensus. With this strategy, any trustless party in the system that conveys information negating the source of truth can be removed.
Blockchain is a recording ledger that contains synchronized and secure records of transactions known as blocks which are sealed by a cryptographic fingerprint known as a timestamp. Each block contains something known as a hash pointer which links it to the preceding block. All the transactions that have occurred on the network from the very first transactions to the latest transactions are made available to all the involved parties, or nodes, in the blockchain network.
I mentioned earlier that the blockchain network is immutable, what this means is that all the transactions that have been recorded on the blockchain cannot be modified by any party on the network. Once a transaction is added to the blockchain, it can never be reversed or tampered with, for any singular party to change anything on the blockchain they will need to obtain approval from all the parties on the network, which would be impossible to achieve as the individual would have to convince all the parties.
Bitcoin Security at Rest
Bitcoin security at rest means how you can secure your bitcoin while it is stored in a digital wallet. Even though we have established the durability and robustness of the blockchain, there are still steps you need to take to secure your stored bitcoins.
A digital wallet has three vital components: a public key, a private key and an address. Think of your public key as synonymous with your account number which can be given to people that want to send you money, while the private key is like the PIN or password to your mobile banking app. If anybody ever gets a hold of this, your account would be vulnerable to theft.
To avoid this, it is your responsibility to protect whichever way you deem fit. So yes the blockchain network is extremely secure and robust, but unethical hackers could still wreak havoc on users’ wallets if they get careless. The address is the wallet address which is a randomly generated set of numbers and letters, something like 0x197X5FbCkev7ksVDpRtjNNi4zX6Wy4r. The wallet address is where you send your BTC to, say after receiving bitcoins from another party.
Although bitcoins aren’t stored in digital wallets per se, what is stored in the wallet is your private key associated with a specific amount of bitcoins on the network. Since every transaction that occurs is recorded on the blockchain, the number of bitcoins that are sent to and from any address will be evident on the bitcoin blockchain, this way every party on the network can keep track of the number of bitcoins associated with any address.
Bitcoin Wallets
Two types of wallets are available for crypto coin owners: a software wallet and a hardware wallet.
Software Wallets
Also known as hot wallets are connected to the internet and can be accessed through desktop, mobile, or web applications. They are typically used for easy access and quick transactions as a result of the convenience they provide, however, they can be vulnerable to cyber-attacks, such as hacking or phishing attempts. There are several types of hot wallets, including desktop wallets, mobile wallets, and web wallets. Desktop wallets are installed on a computer and offer a high level of security, while mobile wallets are designed for use on smartphones and offer greater convenience.
Desktop wallets: Desktop wallets are software programs that are downloaded and installed on your computer. They provide a high level of security as they are not connected to the internet unless you are using them. Desktop wallets allow you to control your private keys and seed phrase, ensuring that you have full ownership and control of your Bitcoin. Some popular desktop wallets include Exodus, Electrum, and Bitcoin Core.
Mobile wallets: Mobile wallets are designed for use on smartphones and other mobile devices. They offer convenience and easy access to your Bitcoin holdings, allowing you to make quick transactions on the go. Mobile wallets are typically more vulnerable to security threats as they are constantly connected to the internet. However, many mobile wallets offer advanced security features such as biometric authentication and PIN protection. Popular mobile wallets include Mycelium, BRD, and Edge.
Web wallets: Web wallets are online wallets that can be accessed through a web browser. They are convenient to use as they can be accessed from any device with an internet connection. However, web wallets are considered less secure than desktop and mobile wallets as they are stored on a third-party server. As such, it’s important to choose a reputable web wallet provider and ensure that you enable two-factor authentication and other security measures. Popular web wallets include Blockchain.info, Coinbase, and GreenAddress.
Hot wallets are a convenient option for Bitcoin users who require easy access to their cryptocurrency holdings. However, it’s important to carefully consider the type of hot wallet you choose and ensure that you take appropriate security measures to protect your Bitcoin. By following best practices for securing your hot wallet, you can ensure that your cryptocurrency holdings remain safe and secure.
Hardware Wallets
These are widely known as cold wallets in the crypto-verse, they are Bitcoin wallets that are not connected to the internet and are therefore considered to be more secure than hot wallets and are typically hardware devices or paper wallets. They offer a higher level of security compared to hot wallets, as they are not vulnerable to cyber-attacks. Hardware wallets are small devices that are plugged into a computer or smartphone and allow users to store their private keys offline.
Paper wallets, as the name suggests, are physical pieces of paper with the private key printed on them. While cold wallets are more secure, they can be less convenient to use and require a bit more technical know-how. With that said, there are several types of cold wallets available, including USB Wallets, Hardware Wallets, Paper Wallets, Smart Card Wallets, Brain Wallets, and Offline Computer Wallets.
USB Wallets: These are small USB devices that you can plug into your computer or mobile device to access your cryptocurrency holdings. They are easy to use and transport, making them a popular choice among crypto traders.
Hardware Wallets: Hardware wallets are physical devices that store your Bitcoin private keys offline, making them one of the most secure types of Bitcoin wallets. These wallets usually require you to input a PIN or passphrase to access your funds. Hardware wallets are also portable and can be connected to a computer or mobile device to make transactions. Popular hardware wallets include Ledger, Trezor, and KeepKey.
Paper wallets: Paper wallets are a form of cold storage where you print out your Bitcoin private keys onto a physical piece of paper. This type of wallet is considered to be very secure as it is not connected to the internet. However, it’s important to ensure that you store your paper wallet in a safe and secure location. Losing a paper wallet can result in the permanent loss of your Bitcoin holdings. Popular paper wallet generators include BitAddress.org and WalletGenerator.net.
Brain wallets: Brain wallets are a type of cold wallet where you memorize your Bitcoin private keys instead of storing them on a physical device. This type of wallet is not recommended for beginners as it requires a high level of security and can be difficult to use. Additionally, if your passphrase is compromised, your Bitcoin holdings may be lost forever. As such, it’s important to choose a strong and unique passphrase when creating a brain wallet.
Smart Card Wallets: These are similar to credit cards and contain a chip that stores your cryptocurrency holdings. They are easy to use and transport, but they are not as secure as other types of cold wallets.
Offline Computer Wallets: These are cold wallets that are installed on a computer that is not connected to the internet. They are highly secure, but they can be difficult to set up and use.
Cold wallets are a secure way to store your Bitcoin holdings. While hardware wallets are considered the most secure, paper wallets and brain wallets can also provide a high level of security if used properly. It’s important to carefully consider the type of cold wallet you choose and ensure that you follow best practices for securing your Bitcoin, such as storing your wallet in a safe location and backing up your private keys.
How to set up a Bitcoin wallet
Setting up a Bitcoin wallet can seem daunting, but it’s a necessary step for anyone looking to enter the world of cryptocurrency. Below are some steps to help guide you through the process:
Creating a Wallet: The first step in setting up a Bitcoin wallet is to choose a wallet provider and create an account. There are various types of wallets to choose from, including hardware, desktop, mobile, and web-based wallets. Once you’ve chosen a wallet provider, follow the prompts to create an account and set up your wallet.
Backing Up Your Wallet: Once you’ve created your Bitcoin wallet, it’s crucial to back it up. This involves creating a copy of your private keys or seed phrase and storing it in a secure location. This ensures that if your device is lost, stolen, or damaged, you can still access your funds. Some wallets offer automatic backups, while others require you to manually save your private keys or seed phrase.
Funding Your Wallet: To start using your Bitcoin wallet, you’ll need to fund it with Bitcoin. You can purchase Bitcoin through a cryptocurrency exchange or buy it from a friend or acquaintance. Once you have Bitcoin, you can send it to your wallet address by copying and pasting the address into the sending field on the exchange or person-to-person transaction.
Sending and Receiving Bitcoin: Once you have Bitcoin in your wallet, you can use it to send and receive payments. To send Bitcoin, navigate to the wallet’s send function and enter the recipient’s wallet address and the amount you wish to send. To receive Bitcoin, share your wallet address with the sender, and they can send Bitcoin to your wallet.
Setting up a Bitcoin wallet involves choosing a wallet provider, creating an account, backing up your wallet, funding it with Bitcoin, and sending and receiving payments. It’s important to follow best practices for securing your wallet, such as backing up your private keys or seed phrase and staying vigilant against potential security threats. By following these steps and staying informed about the latest developments in Bitcoin wallet security, you can ensure that your cryptocurrency holdings remain safe and secure.
Factors to consider when choosing a Wallet
Security: Security should be your top priority when choosing a Bitcoin wallet. As Bitcoin wallets store private keys that give access to funds, it is crucial to choose a wallet provider with a strong security track record. You should look for wallets that offer two-factor authentication, multi-signature functionality, and backup and recovery options. Additionally, consider the reputation of the wallet provider in the Bitcoin community and look for reviews and feedback from other users. Be sure to choose a wallet that uses strong encryption to protect your private keys and keep your funds safe.
Ease of Use: The ease of use of a Bitcoin wallet is another important factor to consider. You should choose a wallet with a user-friendly interface and straightforward setup process, especially if you are new to Bitcoin. More advanced users may prefer wallets that offer greater flexibility and customization options. It is also important to choose a wallet that is compatible with your devices and operating systems. A user-friendly wallet can make the process of sending and receiving Bitcoin much smoother and more efficient.
Compatibility with devices: Another important factor to consider is compatibility with devices. You need to ensure that the wallet is compatible with your devices and operating systems, such as desktop, mobile, or hardware wallets. Some wallets may only work with certain devices, so it is important to research which wallets are compatible with your specific devices. Additionally, consider whether the wallet supports multiple cryptocurrencies if that is important for you.
Transaction Fees: Transaction fees can vary widely between Bitcoin wallets. Some wallets may charge higher fees for faster transaction processing, while others may have lower fees but longer processing times. You should consider your specific transaction needs and budget when choosing a wallet, and be aware of any hidden fees or charges. It is important to choose a wallet that offers transparent and reasonable fees, and that allows you to choose the fee level you are comfortable with.
Customer Support: Customer support is an often-overlooked factor when choosing a Bitcoin wallet. Look for wallets with responsive customer support that can help you troubleshoot any issues or answer any questions you may have. Consider the availability of customer support channels, such as email, live chat, or phone support. It is important to choose a wallet provider that offers reliable customer support to ensure that you can access your funds and resolve any issues that arise.
Reputation: Finally, reputation is an important factor to consider when choosing a Bitcoin wallet. Look for wallets with a positive reputation within the Bitcoin community, and read reviews and feedback from other users. Consider the longevity of the wallet provider and the number of users who have trusted them with their funds. It is important to choose a wallet that is well-regarded and trusted by other Bitcoin users to minimize the risk of security issues or other problems.
Best practices for using a Bitcoin wallet
While choosing a secure Bitcoin wallet is important, it’s equally important to follow best practices when using your wallet to ensure that your funds remain safe. Below are some best practices for using a Bitcoin wallet:
Keeping your wallet updated: One of the best practices for using a Bitcoin wallet is to keep it updated. Wallet developers regularly release updates to fix bugs and enhance security features. By keeping your wallet software up-to-date, you can ensure that you have the latest security measures in place to protect your funds.
Using strong passwords and two-factor authentication: Another important best practice for using a Bitcoin wallet is to use strong passwords and two-factor authentication (2FA). Use a complex password that includes a mix of upper and lower-case letters, numbers, and symbols. Additionally, enable 2FA, which adds an extra layer of security to your account by requiring a code from your phone or another device before accessing your wallet.
Avoiding public Wi-Fi networks: Public Wi-Fi networks are notorious for being insecure and can be easily hacked. Avoid using public Wi-Fi networks to access your Bitcoin wallet, as it can expose your private keys and make your funds vulnerable to theft.
Avoiding phishing attacks: Phishing attacks are common in the cryptocurrency world. Scammers use various tactics to trick you into revealing your private keys or sensitive information. Be cautious of emails, social media messages, or other unsolicited requests asking for your private keys or other sensitive information.
Using multi-signature wallets: Multi-signature (also known as a multi-sig wallet or shared wallet) wallets are another great best practice for using a Bitcoin wallet. A multi-signature wallet requires multiple private keys to authorize a transaction, adding an extra layer of security. This means that even if one of your private keys is compromised, your funds will remain secure.
While a Bitcoin wallet can be a great tool for managing your cryptocurrency, it’s important to follow best practices to ensure that your funds are kept secure. By keeping your wallet updated, using strong passwords and two-factor authentication, avoiding public Wi-Fi networks, avoiding phishing attacks, and using multi-signature wallets, you can minimize the risk of losing your funds to hackers or other security breaches.
Conclusion
Bitcoin wallets play a crucial role in managing and securing your cryptocurrency holdings. They allow you to store, send, and receive Bitcoin and can provide varying levels of security and convenience depending on the type of wallet you choose.
However, it’s important to note that with great power comes great responsibility. While Bitcoin wallets can offer strong security features, it’s ultimately up to individuals to take personal responsibility for their wallets and practice good security habits.
This includes choosing a wallet that fits your needs and offers strong security measures, such as two-factor authentication and multi-signature functionality. It also means staying vigilant against phishing attacks, avoiding public Wi-Fi networks, and keeping your wallet software updated to ensure the latest security measures are in place.
Finally, it’s important to recognize that the world of cryptocurrency is constantly evolving, and new security threats may emerge. As such, it’s crucial to stay informed and keep up with the latest trends and best practices for securing your Bitcoin wallet. By taking personal responsibility for your wallet and staying informed about the latest security developments, you can ensure that your cryptocurrency holdings remain safe and secure.
PS: A seed phrase, also known as a mnemonic phrase or recovery phrase, is a sequence of 12, 18, or 24 words that are randomly generated and used to restore access to a cryptocurrency wallet or other digital asset account.
When creating a new wallet or account, users are typically prompted to write down and securely store their seed phrase, as it is the only way to recover their account if they lose their password or device.
The seed phrase is usually generated using BIP39 (Bitcoin Improvement Proposal 39), a standard that specifies how to create a human-readable and memorizable set of words that can be used as a seed for generating cryptographic keys.