Hey! Bitcoin is still around – and I’m sure it will stick around for long. If you are boarding the bitcoin train now, you are probably looking for a digital wallet. For you to spend and hold bitcoins or any other digital coin, you need a wallet.
In this article, we break it down for you the process of setting up a bitcoin wallet.
You will get to know what a bitcoin wallet is, how it works, how to set one up, how to send money to it, and even how to secure it. Even if you are green in digital currencies, do not stress.
Let us jump right into it.
What is a bitcoin wallet?
In simpler terms, a bitcoin wallet is a software program that allows you to manage your bitcoin balance along with the cryptographic keys associated with your bitcoin account.
Just like you have a real wallet that holds your Dollars or Euros, a bitcoin wallet holds your digital coins. A wallet makes it convenient to track and spend your coins. Let us try to understand this better for those who are not familiar with this digital currency: Bitcoin.
Already, we have published a post on how bitcoin works, and what you need to know about the blockchain technology – the technology that powers bitcoin and other altcoins.
However, to understand how wallets work, you need to know about private keys, public
keys, and bitcoin addresses.
Watch this video; it explains the basics of a bitcoin wallet.
Understanding private keys and public keys
Now, to spend any coins on the bitcoin network (i.e., send bitcoins to another account), you need to prove you are the rightful owner of that bitcoin account handing over ownership. This is where the idea of Public-Key Cryptography or Asymmetric Cryptography gets involved. In Asymmetric Cryptography, a pair of keys is used – the two keys are known as the private key and the public key. One key is used to encrypt data while the other key decrypts the data, and vice versa.
Bitcoin uses this same concept to sign transactions and verify the authenticity of the bitcoin addresses. Whenever you initiate a transaction on the blockchain, your wallet automatically signs the outgoing transaction using your private key to create a unique digital fingerprint of data for that particular transaction. Only the corresponding public key (anyone can see it) will be used to unlock the contents of the digitally signed data, and therefore, verify the private key holder authorized the transaction.
Your private key is like your secret key to a mailbox; the public key is the address. Plus, you can give anyone your address (public key); you are the only person who can unlock the mailbox to see its contents using your secret key. The private key gives you control of your bitcoin account; it is the key that makes it possible to spend your coins. That is why it should remain secret. The private key can be represented in many formats.
Bitcoin addresses and how they work
A bitcoin address is simply an identifier that allows people in the blockchain network to send bitcoins to one another. It is like an account that you use to receive funds. Addresses serve the purpose of identifying who owns a particular BTC amount.
A bitcoin address has at most 35 characters, and it always starts with either a 1 or 3. It looks something like this:
When you create a wallet, it automatically generates the key-pair together with the associated bitcoin wallet address(s). By using Elliptic Curve Digital Signature Algorithm (ECDSA), a typical wallet first derives the private key and then it generates the secret key from the public key. After derivation of the public key, the wallet hashes it through two algorithms – first using the SHA-256 algorithm and the resulting output through the RIPEMD algorithm – the final output generated is a bitcoin address.
In case that sounds confusing, you can think of your bitcoin address as your public key presented in another form. The real difference between the two is that an address is a hash function of the public key. There was a time you could send bitcoins to a public key – Pay to Public Key (P2PK). Nonetheless, that changed because of the possibility of middleman attacks exploiting the public keys to steal the funds. Because of this, the bitcoin protocol upgraded to Pay to Public Key Hash (P2PKH); this typically means you are sending bitcoins to a “hash of a public key.”
Because addresses are like bank accounts, they work the same way. If you want to receive bitcoins from someone else, all you need is to share with them your address; they will send bitcoins straight from their account to yours.
How to create a bitcoin wallet
It is now time to get a bitcoin wallet and set it up.Wallets come in different types: non-deterministic, deterministic, hierarchical deterministic, brain wallets, paper wallets, online wallets, mobile wallets and hardware wallets. Also, we can categorize wallets as either hot or cold; a hot wallet connects to the internet while the latter does not. For this reason, cold storages are considered more secure compared to hot storages.
Paper wallets and hardware wallets fall into the category of cold storages. Even so, web wallets, desktop wallets, and mobile wallets are hot storages. Your choice of a wallet will depend on your needs. As a caution, you should go for cold storage if you plan to deal with vast amounts of BTC (from $500). Also, it makes sense to go for cold storage if you will be doing minimal transactions. A hot wallet is viable if you plan to do regular transactions.
Setting up an online wallet
A web wallet can be convenient to those who want to test the waters. However, because, you are connected to the internet, it is hot storage. Never leave a lot of your money in an online wallet.
Blockchain.info is one of the online wallets I recommend. It is simple to use, and your account will be ready in minutes. If you do not have an account, head over to the website and create one at https://blockchain.info/wallet/#/.
Make sure you have visited the official website as indicated by the arrow below.
Once you submit your email and a valid password, blockchain.info will create your wallet and redirect you to the dashboard.
Desktop wallets are convenient to use. Because the software connects to the Internet, they are hot storages too. Should you need a desktop wallet, there is a variety of them out here. The most popular include Bitcoin Core, Electrum, GreenAddress, MultiBit, Copay, Armory and Exodus.
Electrum Desktop wallet
Personally, I loved Electrum because it is simple to use and lightweight. Being an SPV wallet (simple payment verification), you do not have to download the entire blockchain software – currently requires at least 130 GB. Still, if you want to know what is happening in the blockchain network, perhaps because you will be transacting huge amounts of bitcoin, or you want more privacy, run a full node, like the Bitcoin Core client.
Getting Started on Electrum.
Download the application from: https://electrum.org/#download
Electrum gives the option to create a wallet with additional security layers. You can choose to create a standard wallet, a wallet with 2FA, a multi-signature wallet (one that requires two or more persons to authorize a transaction), and you can import Bitcoin addresses or private keys from another wallet.
Do not go about importing addresses and private keys if you are not familiar with all this. We are going to set up a password for the wallet once it installs.
On the next step, Electrum will ask you to create a new seed or use an existing one. If you have a seed, you would like to use, pick the first option to create a new seed.
Important: Do not lose your seed; otherwise, you will never recover your funds. Stamp it on a steel plate if you are dealing with a lot of money.
Next, Electrum will ask you to create an encryption password. Set a password you can easily remember to keep unauthorized users from accessing your wallet.
On the ‘Receive’ tab, you can view your receiving address, along with its corresponding QR Code. If you wish to see more address click on View>Show addresses.
Sending bitcoins to another address using electrum is equally simple. Click the ‘Send’ tab, and paste the bitcoin address of the receiver, the amount you want to send, and fee level.
To backup your master seed, click on Wallet > Information: you should see your seed; write it down somewhere.
See how to get started on Electrum in this video:
GreenAddress desktop wallet
GreenAdress is another convenient and straightforward desktop wallet to use. More importantly, it allows users to control their keys. For this reason, never lose your mnemonic passphrase, not even GreenAdress can help you recover funds.
To set up your GreenAdress wallet, visit https://greenaddress.it/en/ and navigate to the Create Your Wallet tab.
A Window like the one below will pop up, requesting you to note down your mnemonic passphrase.
Alternatively, you can click on the box labeled Show QRCode to take picture of the code with a Smartphone for easier access.
Make sure to write your passphrase on a piece of paper or if necessary, inscribe the words on a steel plate. Once you confirm to have written down your mnemonic passphrase and understood the terms of service by ticking the box at the bottom, the wallet will take you to the next step: to verify you backed up your mnemonic passphrase correctly.
Once you verify your mnemonic passphrase, GreenAdress will provide you with the option to set up 2FA through email, Google Authenticator, and phone.
The third and the final stage is to set up a 4-15 digits PIN. Although this is optional it is an extra security layer.
Enter your PIN and click continue to start using your wallet. There is a tab for transactions, receiving bitcoins and sending bitcoins. Navigate to Receive tab and click Show URI and address to see your receiving address or the Send tab to send money.
Because they can connect to the internet, mobile wallets are also hot storages. In addition, mobile wallets take up less storage space because they are SPV clients. The most commonly used mobile wallets include Breadwallet, Mycelium, GreenAddress, Electrum, Copay, Airbitz, and Greenbits,
Do note that some third-party wallets like Mycelium do not give users the option to control their keys. Rather, your private keys are stored on their servers; however, the private keys are encrypted with your password.
I love a wallet that gives me control of the private keys. It is not that I’m a pessimist — I like to assume the worst case scenario, and it gives me peace of mind knowing I have full control of my seed. Assuming you do not own the private keys, there is a possibility of losing your bitcoins through frauds. For instance, someone with admin privileges could try to decrypt your passwords, and in turn, retrieve your seed.
Setting up Breadwallet mobile wallet
For a beginner, Breadwallet seems like a fine option; even iPhone users love it: it is simple to use; you control the private keys; it uses BIP39 recovery; it offers a way to buy and sell bitcoins; and, there are versions for both Android and iOS devices. Nevertheless, it has some cons too: it does not support SegWit yet, and it offers only two fee options when sending bitcoins to another address.
On the plus side, because Breadwallet supports BIP39 Recovery phrase feature, you can always recover your money in another wallet that supports that feature in case the company magically disappears or if you happen to lose your device.
The recovery phrase from breadwallet only works with some wallets. That is because breadwallet uses a different mechanism to derive both the private keys and addresses from the master seed.
Download the app from the App Store. Android users can get it on Google Play store; iOs users can get it from the Apple Play Store. Alternatively, you can download the app directly from the Breadwallet official website (https://breadwallet.com) or download the source code at Github if you prefer direct installation – this is the best method to avoid malicious apps.
Once the app installs, click on Create Wallet. The wallet will give you the option to generate a recovery phrase.
Breadwallet will present a precautionary message before taking you to the recovery phrase window. Click on show to proceed. When the screen with the recovery phrase comes up, write it down on a piece of paper, and take the precautionary steps to secure it.
You will need this code to use your Breadwallet: that is, check balance, review transactions or send bitcoins.
You should see the Send and Receive options on the main screen.
Here is a demo video explaining these steps:
If you cannot afford a hardware wallet or you are not ready to invest in one, a paper wallet is the way to go. On the plus side, it is cold storage; this means your bitcoins are secure from theft through malicious apps, phishing or hardware failure. With paper wallets, you can only lose your investments if you expose the private keys/master seed or if you lose the backup to your paper wallet and you have no way of recovering it.
Let us create our paper wallet using Bitaddress.org.
Head over to bitaddress.org. You should get a screen like the one below. You can do this with your internet connection turned off to ensure no one is spying on you.
First, you are supposed to move your mouse in any direction to add more randomness to this procedure – a process known as cryptographic entropy. This will happen as you hover the cursor around the computer’s screen, automatically.
Once you hit 100% when generating the entropy, you will see the options to create your paper wallet. Click on ‘Single Wallet’ tab to see your bitcoin address and the corresponding Private Key.
As you can see below, you can choose the number of addresses you want to generate along with their corresponding private keys. You can use any of the address generated to send BTC to your wallet.
Make sure all the characters are readable, and the QR code can be scanned. Remember, if you lose it, your bitcoins are lost.
You can encrypt your private keys with a passphrase; if you lose your paper wallet, the person who has it cannot spend the bitcoins. To do this, tick the box labeled BIP38 Encrypt. Do not pick a random passphrase; set one you can easily remember.
Check out this short video to see how to set up a paper wallet with bitaddress.org.
So far, the safest way to protect your bitcoins from fraudsters and hackers is through a hardware wallet because it does not expose your private keys on the internet. If your investments are over $100 in BTC, get a hardware wallet. The most top-rated on the market are Trezor, Ledger Nano S, and KeepKey. Although it costs not less than $99 to grab one, you will have that peace of mind.
Setting up Trezor Hardware wallet
When you hold it by hand, Trezor feels tiny, but it gets the job done. It is one of the safest hardware wallets because you cannot access the Trezor online wallet without the USB dongle plugged into your pc.
Compared to the Ledger Nano S hardware wallet, Trezor offers an advanced recovery option. Also, Trezor supports Bitcoin Forks like Bitcoin Classic and Bitcoin Gold and additional altcoins like Etherium and Litecoin.
Steps to follow when setting up Trezor
Plug in the device to your PC to get started. Once the device powers up, you will see a lock icon displayed on its screen and a message asking you to visit https://trezor.io/start/. On this page, scroll down you will see the option to pick your device model.
Select your model; on the next page, you will find the option to install the Trezor Bridge – software that communicates with your Trezor hardware wallet. Alternatively, you can use the chrome extension option.
Once the hardware communicates with the Trezor bridge software, you will get a request on the web interface to update the device’s firmware.
Once the firmware has finished installing, just disconnect the device and plug it in again. Navigate to https://wallet.trezor.io/ to access your Trezor web interface.
Next, hit continue, you will get the option to create a unique pin. Now, you have to match the numbers displayed on the device’s screen with those on the web interface, following the same sequence. Do not forget this PIN; without it you cannot access your trezor wallet. However, even if you lose the PIN, but you have the seed, you can recover your money.
For instance, if your PIN is 654321, you would follow the pattern on the Trezor device to key in the digits on the web Interface just as it is in the print-screen below.
If you still do not get it, you can watch this video to see how to Enter and Verify the PIN.
After confirming your pin, the next step is to write down your seed, a string of 24 words. Trezor will generate the recovery seed, word by word. Write down the 24 words on a booklet that comes with your device. Using this seed phrase, you can always recover your money in another device in case you lose the current device or if it malfunctions.
Again, for peace of mind, get your seed stamped on a steel plate, and never backup your seed online or in a digital device.
REMEMBER: Anyone who has your recovery phrase owns your wallet” – let us say someone else has a copy of your recovery phrase – all they have to do is recover the funds in another device they own.
After confirming your recovery seed, go back to https://wallet.trezor.io/ and enter your pin. You should see an interface like the one below. You are now ready to start using your Trezor account.
Now, all you have to do is get your bitcoin address, and you are ready to receive payments. Navigate to Account #1 > Receive. You will see your bitcoin address.
Before you share the address with anyone or send bitcoin to that address, confirm it is the right address. You can do this by clicking on the ‘Eye Icon’ at the far end of the address; confirm it is the same string as the one displayed on your Trezor device.
Check out this video on how to set up Trezor hardware wallet:
Setting up Ledger Nano S
Ledger Nano S is another hardware wallet that you can trust with your bitcoin private keys because they stay offline. Just like Trezor, it is simple to set up.You can buy Ledger Nano S on this website.
Plug in the device in a USB port.
When the ledger powers up, you’ll see the Welcome screen along with some instructions on how to navigate the different options.
After this, Ledger will give you the next option: to configure the device. Select the ✓ sign to configure a new device; the other option is for recovery purposes.
The device will then ask you to set up your 8-digit PIN. You will need this PIN every time you want to access your hardware wallet – set a PIN you can easily remember.
After you have confirmed your PIN, the third step is to backup your recovery seed, a string of 24 words. The device comes with a booklet for writing down the recovery seed. If you ever lose your Ledger device or if it malfunctions, you will use this recovery phrase to restore your funds. If you lose it, then your bitcoins are gone, forever. For instance, you can recover funds using the Mycelium mobile wallet using your unique 24-word seed in case you lose your Ledger.
At this point, you can now connect the wallet with apps that support Ledger to manage funds easily.
This app will give you the option to download a bitcoin app — a lightweight software you will use to manage your Ledger hardware wallet. With the Ledger configured and a bitcoin app installed, it is simple to grab your address and share it with anyone to receive money to your ledger. This article explains how to get started with Ledger after configuring it.
Here is a video explaining how to configure your Ledger Nano S:
How to send money to a bitcoin wallet
Now that you know how to get a bitcoin wallet, the next step is probably getting some bitcoins to a wallet of your choice.
Buying bitcoins used to be a hard procedure sometime back — not anymore.
Today, you can buy bitcoins in several ways: bank-wire transfers, debit/credit cards, brokers, bitcoin ATMs, or buying straight from some wallets. Some wallets like Breadwallet, Airbitz, and Mycelium have the option to buy from the App. See our article on how to buy bitcoins.
To send bitcoins to your wallet, all you have to do is log in to the platform with your bitcoins and send the coins to one of your address. Coinbase and Kraken are a few of the favorites; you can check out this list of more exchanges.
An easier way is to buy bitcoins from Coinbase and Transfer to a wallet you want: it can be Breadwallet, Trezor, or a Paper wallet. However, when sending bitcoins to your wallet, you have to pay transactions fees. These days the sending fee is high even for small amounts. To avoid the high fees, you can use a trading platform called Gdax, owned by Coinbase. Of course, this method is not straightforward; the advantage is that it is free to move bitcoins.
Tip: It is more costly to send small BTC amounts compared to moving large amounts.
The video below explains how to buy BTC at Coinbase, and send to a bitcoin address of your choice without paying any fees.
How to secure your bitcoin wallet
Despite the blockchain network being hack-proof, cases of bitcoin disappearing are prevalent. There are many ways you can lose your bitcoins to hackers and fraudsters. Ransomware can encrypt your hard drive that has your private keys or seed; a malicious program can steal your privates from the hard drive if they are stored unencrypted; a hacker can record your keyboard strokes (through keylogging) to steal your passwords; you could lose your laptop or phone with an unencrypted wallet installed.
However, for the majority of victims who have lost their bitcoins, the problem is mismanaging the seed or password. Take this seriously because many of the victims are in a predicament because of forgetting the recovery passphrase or the password they set.
- This guy has 51 BTC locked up in a Trezor wallet; he forgot the passphrase to the device.
- Also, read this story about a guy who almost lost $30,000 worth of bitcoin (at the time) when he forgot his Trezor PIN.
- Another guy still has 10.5 BTC locked in an Electrum wallet; he did not backup the password and the seed.
Maintain good practices; that way, you will not expose your wallet’s seed or forget the passphrase that unlocks your wallet. Here are some crucial points to remember to secure your bitcoin wallet:
Never forget your seed
If you forget your recovery seed, your funds are gone, forever. Back up this seed on an steel or gold plate if you have to, especially if you are dealing with coins of immense value. You can have the seed inscribed on a steel plate that can resist even high temperatures in case of catastrophes like fire. Also, remember to keep it somewhere safe ; a location only you or a family member can retrieve it in case something happens to you.
Do not write down your seed on a piece of paper, and then leave it lying around inside your office drawer or inside a page of a book – you are going to cry alone. In case you encrypt your wallet with a password, create a backup of it, just like the seed. Without your unique passphrase, you cannot access your wallet.
Tip: Never type your seed on websites online or any electronic device.
Backup wallet regularly
Make it a habit to backup your wallet frequently, and backup the entire wallet because some wallets use hidden private keys. Remember to have several safe locations for your backups.
Encrypt wallet with a password
This simply means to set up a password for your wallet, which is another way to enhance the security of your wallet. If your device gets stolen, the thief cannot get to your bitcoins without your memorized passphrase. Set up a unique password that others cannot figure out; it should be a password you can easily remember. In Bitcoin, you have limited options to recover your password.
Warning: If you forget your password, and you have no backup of your seed, then your funds are lost, forever.
Deal with small amounts when using hot wallets
Only manage small amounts on hot wallets and exchanges, enough to make payments or execute trades; do not keep a lot of it. Never keep more bitcoins than you are willing to lose in a hot wallet or an exchange – always transfer the coins to a cold wallet that you have full control of the private keys.
Avoid fake websites and apps
With so many scams brewing of late, ascertain that you are using the official wallet, be it web-based, a mobile wallet, or a hardware wallet. If you are using a web wallet, visit the correct URL. A scam artist can put up a phishing site that looks exactly like your official wallet to trick you into giving away your seed. Of late, there have been several cases of people losing bitcoins from blockchain.info wallet, probably through phishing.
A good trick is to use a bookmark manager or password manager extension to save all the crucial links to your websites. This way, you can avoid being redirected to malicious or fake websites. Also, do not click on links posted on social forums like Reddit and Google ads when you want to visit your wallet or download one.
Make sure to install the official app. A developer can upload a fake app to the store, and if you dared to use it to receive bitcoins, they would sweep your account. A while ago, there was a case like this that involved Breadwallet.
Lastly, get your hardware wallet from a verified vendor. Do not make the mistake of buying from auction sites like E-bay or third-party resellers. This is real; someone lost all his crypto sometime back when he used a Ledger Nano S that he had purchased from E-bay – the guy lost roughly $34,000 in crypto. Be vigilant this does not happen to you.
When bitcoin evolved, it brought with it wonderful goodies – you are the bank. Using the electronic cash, you can now send money and pay for goods and services to any person on the face of the globe without going through a third party like a bank. Nevertheless, because we do not have to go through banks anymore when dealing with digital money, it is your RESPONSIBILITY to secure your wallet and practice good habits that do not leave your wallet’s details vulnerable. As more and more people move to the crypto space, scam artists and hackers are devising new ways to get to your hard earned cash. Only you can guarantee the security of your bitcoin wallet.
Read our article on The Dark side of Cryptocurrencies.