What Happens After Bitcoin is Purchased?

(source: https://www.ig.com/en/bitcoin-btc)

With extensive experience as an electrical/software/coding engineer along with having a diverse financial background, Thomas Wettermann’s areas of interest include Machine Learning (ML), artificial intelligence (AI), and Financial Technology (FinTech). For the past few years, Thomas Wettermann has focused on the underlying technologies that support and promote all phases of cryptocurrency ecosystems.

So now that an amount of Bitcoin has been purchased or mined, how or where can this cryptocurrency be stored?

A cryptocurrency wallet is a location where you can securely store cryptocurrencies. You do not store your crypto coins in such a wallet since these coins do not physically exist.

Rather, you store the keys that provide access to your purchased crypto on the blockchain. Crypto wallets come in a variety of different configurations. These wallets generally break down into two main wallet types: a “hot” wallet (“software”) or a “cold” wallet (“hardware”).

There are two types of hot wallets. There are software wallets and online wallets. These two types of wallets require an internet connection that allows a user to gain access to the funds that are stored in their online wallet, hence the name hot wallet. This internet connection can be a disadvantage. Because they are connected to the internet, these wallets may be subject to potential attacks and hacking.

It is relatively easy to download software wallets to a computing device, such as a laptop or mobile device. These often take the form of a downloadable application. Once downloaded, these online wallets function much like a website.

There are many benefits to using a software wallet and the online wallet. For example, a user will find it easier to transfer currencies to and from these online wallets. So, if you intend to trade your cryptocurrencies often, a hot wallet may be a convenient option. However, keep in mind that connecting your wallet to the internet creates a potential threat. Having such an internet connection may expose your cryptocurrencies to a certain risk of hacking.

In contrast to a hot wallet, a cold wallet is a digital wallet that stores your private keys offline on a physical device, such as a USB drive. Cold wallets, unlike hot wallets, are not actively connected to the internet.

With a cold wallet, a user retains full control over access to the wallet with all your cryptocurrencies stored offline. Versus online hot storage, cold storage makes it difficult for hackers to have unwanted access to your storage medium. However, these are not the most convenient storage options. This may be true where access to the currencies may be needed quickly or if access to these currencies is required when you are away from internet access.

There are two categories of soft wallets: there are hosted wallets and there are non-custodial wallets. The primary hard wallet is a hardware-based wallet.

HOSTED WALLETS

Investors can interact with hosted wallets much as they would interact with a browser-based website of a trusted third party. With custodial wallets, it is this trusted third party that holds or maintains custody of your private key and keeps the assets safe on your behalf. Two of the more popular custodial wallets are offered by Coinbase and Exodus.

Online wallets are very popular since they are perhaps the easiest cryptocurrency wallets to use. An obvious disadvantage to using an online wallet is that these wallets are hackable. For example, there have been some reports that certain exchanges have been hacked for over $1 billion to date, with more unreported hacks suspected.

NON-CUSTODIAL WALLETS

Non-custodial or software wallets include applications that can be downloaded to your mobile device or your computer. If you own a non-custodial wallet, you are the one who owns and possesses the private, cryptographic key to your digital wallet. Mycelium and Electrum are a couple of the more popular non-custodial wallets.

HARDWARE WALLETS

Hardware wallets store keys in a small physical device that connects to a computer or smartphone for transactions. For example, some of these physical storage devices are about the size of a keychain fob that stores your private keys. Hardware wallets have certain advantages. For one, they are perhaps the most secure method to store cryptocurrencies.

Second, they are also ideal for storing large amounts of digital assets. However, in certain circumstances, hardware wallets may be difficult to use while a user is mobile. Importantly, loss of the physical device without proper backup may result in the stored cryptocurrencies being unrecoverable.

Ledger and Trezor offer popular cold storage wallets currently on the market. Selecting a digital wallet should be based on the amount of security that you are seeking for your cryptocurrencies. This choice should also take into account ease of use and the number of transactions you envision going forward.

All the views expressed on this site are those of Thomas Wettermann and do not represent the opinions of any entity with which Thomas Wettermann has been, is currently, or will be affiliated.

Trading digital financial assets such as cryptocurrencies can carry a high level of risk, and may not be suitable for all investors. Before deciding to invest, purchase, and/or trade cryptocurrency you should carefully consider your investment objectives, level of experience, adversity to risk, and volatilities. The possibility exists that you may sustain a loss of some or all of your initial investment; therefore, you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with cryptocurrency trading, and seek advice from a qualified and independent financial advisor.

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