If you’re reading this, it means you’ve begun your journey into the world of Bitcoin self-custody, and you’re ready to manage your own funds.
First of all, well done! A core part of the Bitcoin ethos is separating yourself from the fiat system in which you have zero say in the monetary policy, and as we’ve seen in recent years, it’s becoming increasingly clear that the old guard will kick-and-scream on its way out.
This makes it doubly important for you to take control over your own funds, which bitcoin wallets allow you to do.
As any experienced bitcoiner will tell you: simply holding BTC in an exchange, derivative ETF, or other variant of “IOU” custodian is not going to cut it if you’re in Bitcoin for the long haul. Bitcoin wallets make self-custody possible in a few easy steps.
What's a Bitcoin wallet, anyways?
A Bitcoin wallet is somewhat analogous to the floppy leather kind, the main differences being:
- It interfaces with the Bitcoin blockchain instead of your bank account.
- It doesn’t “hold” any funds in itself, but rather the cryptographic information (called keys) used to make transactions and check your on-chain balance.
Imagine you reached into your pants pocket right now, opened your physical leather wallet, and instead of having a mess of cards, wrinkly monopoly money and oily coins, it simply contained one secret key. And using this code, you could plug into your phone to transact with anyone, anywhere on earth, without needing to go through any government or third-party.
Why Should You Create A Bitcoin Wallet?
For the first time, Bitcoin gives you the ability to hold your money as property and be your own bank while reserving the ability to send it anywhere globally. Once you have generated your own wallet, your Bitcoin cannot be digitally confiscated, hacked, or frozen. You have complete control over your money and where it goes. Securing $100 is equally as trivial as securing $1,000,000.
Luckily, unlike in other financial assets like fiat currency or gold, making the transition to self-custody is a simple process. Fiat cash? Gotta stuff it under your mattress. Gold bars? Gotta make room in a shoebox or safe.
But Bitcoin? All you need to do is safely protect a secret string of words (known as a “seed phrase) to have your hard-earned asset locked away in a blockchain fortress.
What makes a wallet a wallet?
Unlike traditional wallets, Bitcoin wallets do not hold your Bitcoin – they simply hold your key – i.e. your ability to manage your bitcoin (sending/receiving payments, signing transactions, and checking your on-chain account balance).
Every wallet contains two kinds of keys: public and private keys.
Public keys: These are visible to the world and are the inbound address people will use to send you money.
Private keys: Never share your private keys. Much like your bank account login and password, you don’t share your private keys with anyone, unless you fully understand that your money will become as much theirs as it is yours.
The private key for your bitcoin wallet is not intended to be memorized, or even transcribed by the user. It’s an alphanumeric string of characters which would be quite tricky to reference, so instead, you will be given a more human-readable version called a seed phrase.
Seed phrase: The more eyeball-friendly version of the private key, which takes the form of a string of 12-24 words.
Sample seed phrase:
witch collapse practice feed shame open despair creek road again ice least
The technical breakdown of how this seed phrase represents the same cryptographic data as the private key.
Let’s try a basic example of a Bitcoin transaction using a standard digital wallet, both sending and receiving. For this example we’ll be using Atomic Wallet, one of the more popular digital wallets.
As we pull up our Bitcoin balance, we see two buttons front and center: receive and send.
Click the receive button. You’ll be given a screen with a QR code as well as an option to copy the public key address, which you’ll be sending to whomever will be sending you the bitcoin:
To send, click the send button on the right. On the following screen, input the address for whom you’ll be sending the bitcoin to, along with the correct amount. You’ll also be given the option to choose a higher network fee.
Network fee: A fee paid to miners for every Bitcoin transaction in order to be included on the blockchain. If the sender wants their transaction to be completed faster, they can voluntarily increase their fee in order to incentivize miners to include their transaction ahead of others.
Once the transaction is complete as laid out above, both parties will receive a notification in their wallet that a transaction has been made.
To summarize, Bitcoin wallets are a critical piece of the Bitcoin ecosystem, as it allows you, the user, to take full control of your own funds. Next, we’ll be exploring the different types of wallets available for you to choose from.