Bitcoin Wallets | How Do Bitcoin Wallets Work?
You know how some people say the hardest part of University is actually graduating and putting your degree to the test? Well, Bitcoin is kind of like that. An individual can learn and master all of the digital currency’s basics, but it is an entirely different story when venturing out to get your “hands” on some bitcoins. But don’t worry – this guide will tell you everything you are going to need to know.
Perhaps the most important thing for a potential bitcoin investor to know is that they have the option of purchasing bitcoin, a digital currency, from an exchange, or directly from other people through various marketplaces.
Paying for bitcoins is a fairly simple process as an individual can do so in a number of ways. But how, you ask? Well, you could, for instance, pay for your bitcoins with hard cash or a credit and debit card, or you could pay for them with wire transfers or even with other cryptocurrencies. Keep in mind it will all depend on who the individual is buying the bitcoins from and where the sender is located.
However, if you are looking to purchase bitcoins with your PayPal account or credit card, you might run into some trouble. Why? Because such transactions have the potential to be reversed with just one simple phone call to the card company. As a result, most cryptocurrency exchanges avoid this method of payment as it is extremely burdensome to prove that any goods changed hands in a transfer of bitcoins.
That said, not all hope is lost, as consumers in some countries are starting to see more and more options for bitcoin payment methods.
To elaborate, Coinbase, and Circle (all operated in the United States) offer bitcoin purchases with credit cards, while CoinCorner and Bittylicious offer their services in the United Kingdom, taking both 3D Secure-enabled credit and/or debit cards. It is important to keep in mind that these services will not accept credit or debit cards unless they are on the MasterCard or Visa networks.
If, however, you are an underbanked consumer in the United States, then you can look to expresscoin, which accepts personal checks, wire transfers, and money orders.
Setting Up Your Bitcoin Wallet
Before we dive into actually setting up a bitcoin wallet, it is important that we do a quick vocabulary review in order to avoid confusion.
Remember that “Bitcoin wallet” and “Bitcoin exchange” are not the same thing. A bitcoin exchange is essentially a place where you can trade Bitcoin for a fiat currency, and while exchanges offer some sort of wallet capability to the individual, it is not its only function. Most exchanges will suggest to users that it is best to transfer their currency to a secure wallet as exchanges try to shy away from the storage of bitcoins for long periods of time. Therefore, the best option to take is moving your coins to a wallet.
Got that? Great – let’s move on.
Some might find it beneficial to think of your bitcoin wallet as your go-to place to store your new bitcoins. This will help you get into a routine of putting all of your eggs into one basket, which will help tremendously with the organization when you actually want to purchase items with those stored bitcoins.
One of the great aspects of bitcoin wallets is that the user is able to choose the level of security that they want. What does this mean? Some wallets will take on the form of an everyday spending account (you can compare this to a leather wallet), while others provide top of the line protection.
Here are the top 5 options for bitcoin wallets:
- Desktop Bitcoin Wallets
- Mobile Bitcoin Wallets
- Internet-Based Bitcoin Wallets
- Paper Wallets
- Hardware Wallets
Let’s look at those five in a little more depth, shall we?
There are a number of desktop wallets available, all of which come with different features. Some of the more popular options include MultiBit (if you use Windows or Mac OSX), Hive (which is an OS X-based bitcoin wallet), Armory (which focuses on enhanced security), and DarkWallet (which focuses primarily on anonymity).
If you are someone who finds themselves standing in brick-and-mortar stores, drooling, and wanting to purchase hundreds of items, then a mobile bitcoin wallet might be the option for you!
Essentially, the mobile wallet will run as an application on your mobile device. The wallet will store your private keys for your bitcoin address, as well as allow you to pay for items directly with your smartphone.
Internet-Based Bitcoin Wallets
Perhaps one of the main advantages of using an internet-based wallet is that the user can access it from anywhere, no matter which device they are using. How does it work? Well, internet-based wallets store your private keys online, on a computer that is controlled by a third-party and connected to the WWW.
It’s okay if you are looking for the cheapest option for keeping your bitcoins safe – most people are. That’s why we have something called a paper wallet. In fact, there are numerous sites that offer paper bitcoin wallet services.
The gist of a paper wallet is that it will create a bitcoin address for you, as well as an image that contains two QR codes: the first is the public address that a user can use to receive the digital currency; the second is the private key, which the user uses to spend bitcoins that are stored at that address.
As of right now, hardware wallets are pretty sparse in number. But, if you are lucky enough to get your hands on one, you should consider yourself lucky: these are extremely dedicated devices that have the ability to hold private keys electronically as well as facilitate payments.
Like most things, however, bitcoin wallets have both pros and cons. And while to date, there seem to be more pros than cons, one cannot completely ignore their known vulnerabilities. For example, anyone storing bitcoins locally on their computer will have to back up their wallet regulatory – just in case the drive spontaneously corrupts.
In the end, it’s just going to depend on how you manage your bitcoin wallet. One of the most important things to remember is not to lose your private key (which, as mentioned, is stored in your wallet)
A Closer Look: Bitcoin Exchanges and Online Wallets
It’s a well-known fact in the cryptocurrency sector that bitcoin rookies will be swarmed by a number of exchanges and wallets in an attempt to persuade the user into using their service.
Similar to most things, the exchanges will vary in terms of what they offer. For instance, some exchanges are primarily for institutional traders, while others cater to the simple side of life, offering more limited purchasing and selling capabilities.
That being said, the majority of wallets and exchanges will hold copious amounts of fiat or digital currency for you, taking on the form of a traditional bank account.
If you are looking to engage in regular trading and speculation, then your best options are bitcoin wallets and exchanges. Additionally, if you do not need 100% anonymity and don’t mind long drawn out processes that ask for proof of identity, then again, exchanges and wallets are your guys.
For the most part, this is the law in the majority of countries. In fact, no regulated exchange can work its way around this law. Why? Any company that is interfacing with the system is obligated to meet “know your customer” requirements.
Here’s a quick list of some of the best bitcoin wallets/exchanges around the globe:
- Unocoin: This is an exchange that primarily targets the Indian marketplace. Unocoin allows for an individual to sell, purchase, and store bitcoins. If you are looking to make a deposit, you can do so through any national online bank.
- Coinjar: This is worth adding to your “To-Watch” list as it was Australia’s market leader back in 2015. In fact, the Melbourne-based wallet and exchange provider raised $500K AUD in venture funding and won an award at Finovate Europe two years ago for its user experience.
- Coinbase: You might have heard of this wallet and exchange service before as it is quite popular. Originally a United States-based service, Coinbase has recently opened up to a variety of European countries.
- Xapo: Offering deposits in fiat currency that are converted to bitcoin, this wallet and bitcoin debit card service has made a name for itself as of late.
Keep in mind that after you set up your account, and have a bitcoin wallet, you will likely be asked to connect your existing bank account to your wallet. It will be during this step that you move funds between the two accounts through wire transfer. Generally speaking, this step will include a fee.
Even though the majority of people in most countries around the world have the ability to move money to overseas accounts, these fees tend to be extremely high and the user might experience long delays when turning their bitcoins back into fiat currency.
Risk to Keep in Mind
It is essential to keep in mind that, despite the positives, a bitcoin wallet or exchange does not have the same protections that conventional banks do. What do I mean by this? Well, a wallet or exchange does not tend to have insurance for your account if the exchange were to be robbed or go out of business.
Due to the fact that the digital currency isn’t seen as a legal tender in most of the world, authorities tend to be stumped when it comes to how they should approach thefts.
Here are some banks that have been known in the past to be biased against bitcoin:
- The Royal Bank of Canada
- Commonwealth Bank of Australia
- Bank of Nova Scotia
- Commerzbank (Germany)
- Barclays (United Kingdom)
- Bank of the West (United States)
- Chase (United States)
Yet another problem is that if a thief enters your personal wallet due to a password or security slip on your exchange, the user does not have a way to recover their funds.
Can You Make Face-To-Face Trades?
The short answer to this question is yes. Some people might opt out of dealing with the hassles of the bank and go straight to acquiring the digital currency through face-to-face trade.
Keep in mind that if an individual is preparing to meet face-to-face with a local seller, they will be required to have access to their bitcoin wallet. Additionally, you will need to bring a mobile device or laptop that is connected to the Internet in order to confirm the bitcoin transaction.
If, however, you are shy in nature and do not want to take the ‘one-on-one’ trading route, you can take a meander over to Meetup.com, which is a site that allows you to see where in your area has a bitcoin meetup group.
While every seller is different, it is still very likely that the user will be asked to pay a premium of roughly 5 % to 10% over the exchange price for an over-the-counter trade.
A Brief Overview: Bitcoin Mining
Before we conclude this guide to purchasing bitcoin, it is worth mentioning a word or two about bitcoin mining.
While you used to be able to mine your own bitcoins, there are now mining-specific devices that have been added to the network, which has increased the difficulty required to mine a significant amount of bitcoin.
If you are told that you can mine the digital currency with a PC or a graphics card, don’t listen to them. Their information is either from 2014, or they may be trying to dupe you into purchasing outdated equipment.
Can I Turn to Investment Trusts?
Some people might not be attracted to the idea of purchasing and storing copious amounts of bitcoins, and that’s totally okay. If you find yourself in this position, check out an investment trust, such as The Winklevoss ETF or the Bitcoin Investment Trust.
Are There Bitcoin ATMs?
Yup! However, this is still a relatively new concept. With a bitcoin ATM, an individual will insert their cash and scan their mobile wallet QR code in order to receive the codes needed to load the digital currency onto your wallet.
Keep in mind there will be an exchange rate, which could range from 3-8%.
While purchasing bitcoin can be a lengthy or difficult process for some, there are a number of options that help make the process a tad bit easier for the user.
If you purchase but don’t spend your bitcoins or exchange them with other currency, it can be very easy to forget about them. The best way to avoid this is to start using your wallet immediately. And as always, make sure you read reviews and the fine print before finalizing any purchases or exchanges with your Bitcoin!
Featured Image: twitter