Bitcoin wallets store the private keys that you need to access a bitcoin address and spend your funds. They come in different forms, designed for different types of device. You can even use paper storage to avoid having them on a computer at all. Of course, it is very important to secure and back up your bitcoin wallet.
Bitcoins are a modern equivalent of cash and, every day, another merchant starts accepting them as payment. We know how they are generated and how a bitcoin transaction works, but how are they stored? We store fiat cash in a physical wallet, and bitcoin works in a similar way, except it's normally digital.
Bitcoin paper, coin and USB wallets
Well, to be absolutely accurate, you don't technically store bitcoins anywhere. What you store are the secure digital keys used to access your public bitcoin addresses and sign transactions. This information is stored in a bitcoin wallet.
Bitcoin wallets come in a variety of forms. There are five main types of wallet: desktop, mobile, web, paper and hardware. Here’s how they work.
If you have already installed the original bitcoin client (Bitcoin Core), then you are running a wallet, but may not even know it. In addition to relaying transactions on the network, this software also enables you to create a bitcoin address for sending and receiving the virtual currency, and to store the private key for it.
There are other desktop wallets too, all with different features. MultiBit runs on Windows, Mac OSX, and Linux. Hive is an OS X-based wallet with some unique features, including an app store that connects directly to bitcoin services.
Some desktop wallets are tailored for enhanced security: Armory falls into this category.
Others focus on anonymity: DarkWallet – uses a lightweight browser plug-in to provide services including coin ‘mixing’ in which users’ coins are exchanged for others’, to prevent people tracking them.
Desktop-based wallets are all very well, but they aren't very useful if you are out on the street, trying to pay for something in a physical store. This is where a mobile wallet comes in handy. Running as an app on your smartphone, the wallet can store the private keys for your bitcoin addresses, and enable you to pay for things directly with your phone.
In some cases, a bitcoin wallet will even take advantage of a smartphone’s near-field communication (NFC) feature, enabling you to tap the phone against a reader and pay with bitcoins without having to enter any information at all.
One common feature of mobile wallets is that they are not full bitcoin clients. A full bitcoin client has to download the entire bitcoin blockchain, which is always growing and is multiple gigabytes in size. That could get you into a heap of trouble with your mobile service provider, who will be only too happy to send you a hefty bill for downloading it over a cellular link. Many phones wouldn't be able to hold the blockchain in their memory, in any case.
Instead, these mobile clients are often designed with simplified payment verification (SPV) in mind. They download a very small subset of the blockchain, and rely on other, trusted nodes in the bitcoin network to ensure that they have the right information.