It is very important to manage your Bitcoin safely. All transactions are final and whoever has access to the private keys or the wallet seed holds the power to transfer your Bitcoins. Therefore, managing your own wallet is a huge responsibility that requires specific knowledge as well as the proper hardware and software to master the task.
In this article, we will show you how it’s done, what a Bitcoin wallet is, and also like to introduce you to LiteBit wallet, which makes a couple of things easier if you are not a tech-savvy person.
What is a Bitcoin wallet?
In order to hold, receive and send Bitcoins you’ll need a wallet. A wallet is software that makes a connection to the Bitcoin network and allows you to interact with it. Unlike the wallet in your pocket, a Bitcoin wallet doesn’t hold actual Bitcoins in it. Instead, it holds a secret private key that allows controlling the Bitcoin that is held on its counterpart, the public key.
Here is an example of a public key:
And this is the corresponding private key that controls the BTC that is held on the address shown in the example above:
What a Bitcoin wallet essentially does is manage all your key pairs and make it fairly easy to generate new addresses (public keys) and secure the private keys that control those addresses. The difference between the wallet solutions that are available on the market lies in the way the software establishes a connection to the network and the devices that can be used to run the wallet software.
Which wallets are available?
There are five types of wallets available and each category comes with an upside and a downside:
- Desktop wallets: These wallets are available for a variety of operating systems. Among them are Windows, macOS, and Linux. You can choose to use a client that will either download the whole Bitcoin blockchain or just simply makes a connection to a remote node.
- Mobile wallets: Using a smartphone is quite popular and mobile wallets make it possible to use crypto everywhere you go. Most of these wallets are thin clients and only a few are downloading the whole blockchain since it takes roughly 360 GB of disk space.
- Hardware wallet: Those wallets need to be bought and add an additional layer of security by storing the private keys in a secure device. Without physical access to that device, it is not possible to interact with that wallet other than sending funds to it.
- Offline wallet: It is possible to create a desktop or a mobile wallet and keep it offline as cold storage. However, the offline wallet category applies to paper wallets or any other wallet where the keys are written down and in some cases are provided with a QR code to transfer funds more easily.
- Online wallet: This is a wallet where you don’t hold the keys yourself and trusts a third party holding it. LiteBit wallet is such an online wallet solution.
In order to install a wallet, you either have to download it from the app store or download it from its website. For your own safety, you should only use trusted parties for downloading this software from the internet. Once the download is finished, please follow the appropriate installation process according to the wallet’s manual.
Make sure to understand the implications of using each wallet type. A smartphone can be lost, a desktop wallet might be subject to loss of data and an offline wallet might even get destroyed when a glass of water gets spilled or any other minor accident happens. An online wallet is not fully under your control but it takes away the burden of creating and maintaining backups by yourself.
How to create backups
A standard method to create backups is the so-called seed phrase. It consists of between 12 and 24 words and is the human-readable form of a secret from which a wallet software can derive all keys that belong to that wallet.
Usually, you want to store this valuable information on a piece of paper. It is considered to be more secure than storing it online since unauthorized people could gain access by hacking. On the other hand, each and every person that finds the piece of paper with the seed written on it also gains access.
In order to have a backup, you will also need several copies that need to be stored in different locations. This ensures that in case of an accident there is still at least one other copy available.
Another option to backup your wallet is simply saving the encrypted wallet file on several different data storages or hard drives in different locations. This option is only available with desktop and mobile wallets. You could also try to export all private keys or the master key and put them in a list, but this is very complicated and also carries the risk of losing funds. This is also the reason why the seed phrase was invented in the first place because it makes exporting and importing private keys a lot easier.
How to send and receive Bitcoin
Receiving BTC is fairly easy. While the menu in that wallet of your choice may vary, the steps stay the same:
- Select the option to receive Bitcoin
- Depending on the wallet that you have chosen you can now select to generate a new address or copy an old one
- Share the address with the party that is supposed to send you BTC
- Once the other party involved has sent the transaction it will be shown as pending in your wallet’s dashboard
- After getting one confirmation from the network, you received your Bitcoins. If like to make sure that the transaction is indeed secured wait for at least 3 confirmations
Please note that an unconfirmed transaction does not mean that you hold the BTC yet. Always wait for the confirmation!
In order to send a Bitcoin transaction, you have to follow these steps:
- Select send from your wallet main menu
- Enter the wallet address of the receiving party
- Enter the amount of BTC that you would like to send
- Determine the network fees
- Press “send” to confirm the transaction
Please note that most wallets will determine fees according to the network’s current activity. Some of them will let you set fees manually but you need to make sure that you don’t overpay or select a fee that is too small.
Once the transaction has been sent the amount of BTC will be deducted from your wallet’s funds and the transaction is shown as pending on the dashboard which will change once the network confirms it.
How to stay safe using a wallet
The first step to ensuring safe usage of a wallet is having backups and making sure to maintain them properly. But there are also other things that you need to consider when using a Bitcoin wallet:
- Generate a strong password: Generating strong passwords can be easily done using a password manager. It will allow you to generate random passwords and store them securely. Your wallet’s safety is basically only as good as your password.
- Two-factor authentication (2FA): This is especially important when using an online wallet since only your login credentials might be not enough to protect your funds. A 2FA solution can be as simple as setting up a mobile phone to receive SMS or using the Google Authenticator app which is a very popular solution.
- Don’t type addresses: When sending or receiving Bitcoin, always copy & paste the address that is used. A typo might result in a valid address and you risk sending your funds into limbo.
- Only interact with trusted parties: Please be wary of any request by strangers whether by e-mail or on social media to send them Bitcoin or invest in any financial product that is offered unsolicited.
- Keep keys, credentials, and seeds a secret: Never share vital information that allows access to your wallet with any third party. LiteBit will never ask you for your credentials, seed, or private keys. The same can be said about any other established business in the crypto industry. If anybody attempts to obtain that information online you should break up contact with that person for your own safety.
- Never neglect a wallet: Cryptocurrencies are highly volatile. That also means that an altcoin or token that is now only worth a few Euros might be worth a fortune at some point in the future. Don’t make the mistake and neglecting wallets or coins in your possession. This could create a substantial loss in the future.