Original author: Hezron Karani
Original translation: BTCStudy
Bitcoin wallets allow you to be your own bank. That's the whole reason why it is revolutionary.
But the truth is, not all Bitcoin wallet software lives up to its promise. In fact, some wallets deliberately install backdoors. However, you always have to choose a wallet to keep your Bitcoin.
When choosing a Bitcoin wallet, there are two things you must know in order to make an informed choice:
1) Bitcoin wallets do not "store Bitcoin". The ownership of all Bitcoins is recorded on the Bitcoin blockchain
2) Bitcoin is not private by default and using it leaves a public record
Keeping these two things in mind, you’ll know what you might have to trade off when choosing a wallet. Instead of choosing blindly, these qualities mentioned in this article can help you:
1) Find a Bitcoin wallet that suits you
2) Safekeeping of your Bitcoins
3) Avoid possible errors when using Bitcoin. Once a Bitcoin transaction is confirmed, it cannot be reversed.
4) Use Bitcoin Privately
1. You want your Bitcoin to be safe
The worst thing that can happen to you after you’ve worked hard to earn some Bitcoin is that you lose it all.
Generally speaking, this is the price you pay for holding Bitcoin without understanding how Bitcoin wallets work.
Bitcoin wallets do not store your bitcoins themselves. Instead, they store confidential information about your bitcoins, called "private keys," which allow you to control your bitcoins. Losing these private keys means losing your bitcoins.
The security of your Bitcoin depends on who keeps your private keys and how they are kept.
(Translator's note: In summary, the ownership information of Bitcoin is recorded on the Bitcoin blockchain, not stored in the wallet. Each Bitcoin is held by a script public key. Such a script public key can be unlocked using the private key to spend Bitcoin. The wallet only keeps the private key. Losing the private key means losing the corresponding Bitcoin; exposing the private key to others means that others can transfer your money. The private key itself is a piece of data, so it can be backed up.)
Who controls your private keys?
You can keep the private key yourself, or have someone you trust keep it for you.
This distinction results in two different types of wallets (from the perspective of control):
1) Custodial wallets — someone else owns your private keys and controls your funds.
2) Non-custodial wallets — Private keys are under your control, and you alone control your funds.
This is similar to a safe deposit box for your assets. You can rent a safe deposit box at a bank or keep it in your own home.
Custodial Wallet
You don't own your safe deposit box at a bank, the bank owns the safe deposit box and provides you with a service to access what's in it. You have to trust them to know what's in there and keep it for you.
Similarly, in a custodial wallet, a third party that you trust allows you access to some Bitcoin and keeps those Bitcoins safe. A common example of a custodial wallet is a centralized custodial exchange.
Non-custodial wallets
A safe that you keep at home that only you know about and can only access. You are responsible for its security, and only you control who can and cannot open it. Similarly, a non-custodial wallet makes you fully responsible for the security of your Bitcoins.
Keep your seed words in a non-custodial wallet
Using a non-custodial wallet means you have to keep your wallet’s seed phrase safe.
This mnemonic phrase is what you use to initialize a wallet and can be used to restore your wallet. In fact, it is used to derive the private key used in your wallet.
You should understand that this seed word cannot be seen by others, because if others see it, they can use it to generate your private key (recreate a wallet that is exactly the same as yours) and then steal your money.
In addition, different Bitcoin wallets may have different mnemonics. Some wallets may use a 12-word phrase, while others use 24. Although more words mean stronger resistance to brute force attacks, 12 words will do the job.
Which should I choose? Managed or unmanaged?
Custody is a big problem because the core of Bitcoin is to remove the third party or intermediary from the process of human interaction. In addition, no matter what type of custody you choose, they only differ in degree.
When using a custodial wallet, if that centralized exchange is hacked or goes bankrupt, your money could be lost or frozen.
With a non-custodial wallet, as long as you keep that secret, your money is safe. But if you lose it (the seed words), or if it’s stolen, your funds are gone.
How do Bitcoin wallets store your private keys?
There are two ways: "hot storage" or "cold storage", depending on whether the device storing your private key is connected to the Internet.
Bitcoin wallets that run on browsers, PCs, and mobile phones are called hot wallets. Hot in the sense that they are connected to the internet, allowing you to initiate Bitcoin transactions.
Cold wallets use hardware that cannot be connected to the internet and can be considered more secure.
The choice between a cold wallet and a hot wallet depends on the length of time you want to keep your funds and the amount of funds you want to keep. The common practice is to put large amounts of funds in a cold wallet and put small amounts of funds that are often used in a hot wallet so that you can initiate transactions at any time.
Beware of Fake Wallets
Fake wallets and fake exchanges are of course targeting your Bitcoins.
Be wary of fake websites. Scammers will use similar-looking domains to impersonate legitimate websites, and may even pay search engines to boost their site's search rankings. For software installation packages, use PGP public keys to verify the authority of what you download.
2. Financial privacy doesn’t have to be sacrificed
Bitcoin wallets are not inherently private. If you are not prepared, others may be able to access your private financial data.
Your wallet will leak your financial information in the following ways:
1) Your wallet requires you to provide KYC information
2) Your wallet reuses the same address in different transactions
3) Your wallet is not equipped with any privacy-enhancing technology (such as Tor)
4) Your wallet accesses blockchain data through a third party (rather than directly through your own node)
So, what can a wallet do for your privacy?
Bitcoin wallets don't need your private information
Bitcoin is a permissionless technology. All wallets do not require you to disclose your personal information to the wallet service provider. Such information has nothing to do with how the wallet works and does not affect your access to the public ledger.
When your wallet asks for your personal information or won’t let you use it, you should know that this has nothing to do with Bitcoin, it is a unilateral request from the wallet service provider; if you accept it, you will sacrifice your privacy. This is often the case when using an exchange’s custodial wallet, but the personal information collected is used against you, not to protect you.
The wallet should generate a new address for each transaction
Wallets that do not allow you to generate new addresses for new transactions will compromise your privacy. Since all addresses are public, using the same address to receive bitcoins multiple times will make it obvious to others that these multiple transactions involve the same entity.
Even if you are the sender, address reuse will hurt your privacy, so before spending your Bitcoin, check which address you are paying to a merchant or transaction with; if it has received Bitcoin multiple times before, generate a new address immediately.
There are other risks to reusing addresses in Bitcoin.
Privacy tools can be built into wallets
Because Bitcoin implements a public ledger that keeps transaction records, privacy considerations should be put first when choosing a wallet.
For privacy-conscious users, multi-participant transactions such as coinjoins and the Lightning Network provide a crowd to hide in. That said, using a wallet with built-in privacy tools will make protecting your privacy a lot less laborious.
3. Your Bitcoin wallet should be friendly to you
The friendliness of the wallet determines whether you can experience Bitcoin smoothly. Moreover, it can also prevent you from making some unexpected mistakes.
But what is “friendly”?
Wallets help you keep track of your transactions
The pseudo-anonymity of Bitcoin transactions will quickly cause you to lose memory.
The simplest thing a wallet can do (without compromising your privacy) is to allow you to tag your deposit and spend transactions.
The wallet should help stop you from sending money to the wrong Bitcoin address
If you send money to the wrong address, you may never get it back. This means that you have to be careful when sending Bitcoin. However, your wallet can help you. How?
The wallet can detect invalid addresses and help you double-check addresses before submitting transactions.
Wallet can help you save transaction fees
If you use two $20 bills to pay for $15, the cashier will be confused because only one is needed.
Bitcoin wallets should also avoid this kind of confusion. Because using transaction inputs means paying unnecessary fees. Wallets should be smart enough to spend only the inputs that are enough to complete the payment, rather than misusing the funds in the wallet.
Wallets should provide backup options
Seed word backup is an extremely critical feature as it allows you to quickly restore your wallet after an unexpected event.
Simple and user-friendly interface
Is the wallet designed to be straightforward and easy to use? A good wallet is one that is simple to use and does not require you to be a technical expert.
There is always room for improvement in user experience
An upgradeable wallet means that any current experience you have can be improved. Moreover, new upgrades can solve some bugs, optimize functions and fix liquidity.
Index support available
Whether it’s manuals, video transactions or online customer support, good technical support always comes in handy. What’s more, your Bitcoins are valuable, and it’s always good to have a helping hand when you’re stuck.
Is there a perfect Bitcoin wallet?
There is no perfect wallet for Bitcoin. In fact, the nature of Bitcoin is that anyone can develop their own wallet if they want.
However, no matter what, the best Bitcoin wallet is always the one that can ensure the security of your Bitcoin, protect your privacy, and is friendly to you.
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