Bitcoin wallets perform the same function as a cash wallet, it stores your money. Kind of.
The cash in your wallet is yours. You own it and you can spend it.
The money in your bank account is legally not yours. The bank custodies it for you and gives you an I.O.U. – a “we promise to pay the supermarket when you use the debit card we gave you, assuming you have enough funds”.
Normally this arrangement between your bank and you works fine and you can spend all “your” money until your balance hits £0. The debit card behaves like a “key” to the funds in your bank account.
You trust your bank and the supermarket trusts your bank. Everybody involved trusts your bank.
Bitcoin works differently. There is no bank, but there are keys and those keys are rather important. Bitcoin keys are like passwords that protect your Bitcoin wallet.
Your keys are tied to your wallet and your wallet has an address (think bank account number). Your Bitcoin is stored at an address and you need a set of keys to send Bitcoin from one address to another.
Here’s an address:
1FeexV6bAHb8ybZjqQMjJrcCrHGW9sb6uF
At the time of writing, about 80000 Bitcoins are sitting in that wallet. We can all see them sitting there, plain as day… Unfortunately, neither you nor I can grab them and send them to one of our wallets, because we don’t have the keys to access the wallet and transfer the funds.
So keys control access to Bitcoin in your wallet.
A wallet’s private key looks like this:
E9873D79C6D87DC0FB6A5778633389F4453213303DA61F20BD67FC233AA33262
It’s not exactly “Password123” and hence not something you’ll easily memorize.
Understanding different wallet types
When you signup to a crypto-exchange like Kraken, Coinbase, or an app like Bottlepay, you are given a wallet but the keys are managed on your behalf. You log into the exchange using your email, password, and two-factor authentication and the exchange manages your private key that controls access to your wallet. The exchange manages the keys of 1000s of customer wallets, which makes them a prime target for hackers. If the exchange gets hacked then you could potentially lose a lot of money in the shape of the crypto you were storing there.
Similar to traditional banks custodying your money, crypto exchanges custody your keys.
This gave rise to the most famous phrase in crypto: Not your keys, not your money.
Storing your crypto on an exchange is a trade-off between ease-of-use and risk. Exchanges have become extremely security-focused, especially the big three Kraken, Coinbase, and Binance but that doesn’t preclude them from government scrutiny or censorship.
Wallets whose keys are managed by some other third-party like an exchange or an app are known as custodial wallets. There are also non-custodial wallets whereby you manage the private keys.
If you’re just starting off with Bitcoin or crypto in general then stick with a custodial wallet. You’ve got enough to get your head around and private key management is one less thing to have to worry about.
If you start to accrue a sizeable chunk of crypto then I would urge you to look at custodial wallets. You would still buy your Bitcoin on an exchange or an app like Bottlepay, but then transfer the Bitcoin to a custodial wallet.
Best custodial wallets
So my top tip for a custodial Bitcoin-only wallet is the Bottlepay app. Its super-easy to use, you can buy Bitcoin through the app and their customer service is excellent.
If you’d rather work with a website then Kraken is my second choice. Using Kraken is not as easy as Bottlepay due to the additional steps involved in initially funding your account. Once you’re setup it becomes easy and their customer service is excellent too.
If you’re looking for a good custodial wallet for Ether and ERC20 tokens, then nothing really comes close to Argent’s app. Great user experience.
TOP TIP: Do not send Ether to a Bitcoin wallet or vice versa. They are completely incompatible with each other and you will lose your coin.
Best non-custodial wallet
My favourite non-custodial wallet is the Ledger Nano X. You get a hardware device that connects using Bluetooth or USB to its mobile app and desktop app.
The main difference with a custodial wallet is the device stores your private key and it’s beamed across to the Ledger app for the duration that you’re trying to send Bitcoin from your wallet to another.
Obviously, the Ledger Nano X costs money and you have to way up the cost of it to the amount of crypto you hold. Storing £100 on a Nano X doesn’t make much economic sense, but once you start to accumulate above £5000 I would start to consider a Ledger.
