How Bitcoin Wallets Work – What You Need to Know

A Bitcoin wallet is just a software program that stores your Bitcoins (digital currency). Technically, Bitcoins don’t get stored anywhere. If you have a balance in your Bitcoin wallet, you get a secret number (private key) that corresponds to that Bitcoin address within the wallet.

Bitcoin wallets make it easier to send and receive Bitcoins, giving ownership to the user of the Bitcoin balance. There are different forms of Bitcoin wallets.

Sometimes, it’s called a digital wallet, and you must have one to trade Bitcoins. In a sense, though, a Bitcoin wallet is just like a physical one. It doesn’t store physical currency, but it holds relevant information, such as your private key used to access the Bitcoin addresses and make transactions.

Paper Wallets

Paper wallets contain documents with the public address to receive Bitcoin and your private key, which lets you transfer or spend Bitcoin stored at the address.

They are often printed with QR-codes, which let you quickly scan them and add your keys to the software wallet when making a transaction. You can generate a paper wallet when using services, so the user can create a random Bitcoin address using their private key. Generated keys are printed with holographic labels or a tamper-resistant design.

The main benefit of a paper wallet is that your keys are stored offline, so it’s immune to hacker attacks, such as malware that can count your keystrokes. However, you must still take precautions with a paper wallet. Before you generate it, you need to ensure that no one’s watching you.

With that, you should use a clean operating system, run it from a DVD, or use a USB flash drive.

Once you set up the paper wallet, the website code must run offline, so you can disconnect it from the internet before generating your keys. Also, it’s good to use a printer not connected to any network.

Remember, you’re printing private, valuable information on paper. Therefore, you must protect this piece of paper like you might traditional currency. Some people like to laminate them or put them in sealed plastic bags to prevent water damage.

Physical Bitcoin

Physical Bitcoin is preloaded onto a plastic credit-like card with a fixed amount of Bitcoin. You can’t spend it if the private key is hidden, often with a tamper-evident seal.

Bitbill was the first of its kind and shaped like a credit card. However, alternatives that followed had a round medal shape. In 2011, Casascius was created by Mike Cadwell. The private keys were hidden under a hologram that, once removed, left the tamper-evident mark. Once it was redeemed, the coin lost all its worth.

Though physical coins are convenient and great for offline use, they’re not as popular. With that, some countries claim that it is counterfeit money and try charging people with crimes.

Mobile Wallets

Though you might be wondering, “how do I setup a Bitcoin wallet?” you have to know about all of the options. If you regularly use Bitcoin to pay for goods or trade face-to-face, you want a mobile BTC wallet. It’s an app that runs on your smartphone and stores private keys, allowing you to buy things right from your phone. Some apps allow users to use the near-field communication feature, so they can tap the phone on the terminal without giving any information.

Full Bitcoin wallets require access to the blockchain ledger, which is huge and requires many gigabytes of storage. Therefore, mobile wallets often use simplified payment verification technologies and work with a small subset of the blockchain.

Though they are convenient, mobile wallets are more prone to hacker attacks. Plus, you could lose the wallet if someone gets access to your device. While Apple banned Bitcoin wallets in 2014, it reversed the decision months later.

Web Wallets

A web wallet stores your private key on a service, so it’s constantly controlled by a reputable third-party and online all the time. Each service offers different features, so they might link to a desktop or mobile wallet and can replicate addresses across all the devices you own.

Much like a mobile wallet, an e-wallet lets its users access funds on the go from any internet-connected device. If it isn’t protected properly, the organization running the site could access your private keys and gain control of your funds. Some e-wallets even operate on an exchange, and there have been stories where the exchanges shut down and stole their users’ funds.

Desktop

A desktop wallet is downloaded and then installed onto a laptop or computer, which stores the private keys on the hard drive. They’re often more secure than mobile and web wallets because they don’t use third parties to keep track of data, making them harder to steal.

However, they are connected to the internet, so they are less secure. Still, they’re excellent solutions for people who trade small Bitcoin amounts from a computer.

Hardware Wallets

Hardware wallets are a unique Bitcoin wallet type that stores your private keys in a secure device. It’s actually the most secure way to store Bitcoin in any amount. There haven’t been any verifiable incidents where money was stolen from a hardware wallet.

While paper wallets have to be imported to software, hardware wallets are used interactively and securely. Plus, they’re immune to a computer virus, the software is open-source, and the funds can’t be transferred out of that device using plain text.

Sometimes, you can find hardware wallets with screens, adding more security layers because you can use them to display and verify wallet details. For example, a screen can generate a recovery phase or confirm the address and amount of the payment you want to make. As long as you use an authentic device from a competent and trustworthy manufacturer, the funds are safe and secure.

How Do I Setup a Bitcoin Wallet?

The easiest to set up is the hosted wallet. If you buy your Bitcoin from Coinbase or another app, the crypto is held in the hosted wallet, which means a third party holds it for you, just like a bank does in a savings or checking account. You don’t have to worry about losing your keys with this option.
To set up a hosted wallet, you must choose a trustworthy platform and create an account. You can then transfer crypto you already own or buy it with a credit card/bank account.

Those who prefer a noncustodial wallet where there are no third parties involved must:

• Download the wallet app they like
• Create an account
• Write down the private keys (usually a 12-word phrase)
• Transfer crypto to the wallet (sometimes, you can’t buy crypto with traditional currency while using a noncustodial wallet)

 

To set up your hardware wallet, you must buy the hardware, install it on your computer, and then transfer crypto to it.

Some people prefer to have multiple wallets set up so that they’re not keeping all their “eggs” in one basket. This is a good idea if you plan to have a lot of Bitcoin, but it can get confusing, as well.

How Do I Withdraw Money from My Bitcoin Account?

Now, the question people have is, “How do I withdraw money from my Bitcoin wallet?” It’s already in there, and you want to use it or put it somewhere else.

Though it isn’t complicated, it is time-consuming. It’s possible to use third-party or peer-to-peer exchanges. Plus, you are charged for doing so, which means it’s best to check out all the possibilities before deciding.

Most exchanges let you withdraw Bitcoins and put them in your preferred currency, such as Japanese Yen, USD, and GBP.

Before cashing out the Bitcoin, here are some factors to consider:

• Transaction fees
• Steps required
• Amount to withdraw
• Where to deposit it
• Time it takes to reach the account
• Local laws

 

Depending on those factors, some methods might be more convenient. For example, if you plan to use PayPal to withdraw the funds, you must find the cryptocurrency exchanges that support the payment platform.

Sometimes, local tax regulations and the account require a freeze on the account for a short period, especially when cashing out large amounts of Bitcoin at once. Call your account holder to determine how much you can safely transfer/withdraw before account freezing occurs.
The most common way to withdraw Bitcoin is using a third-party exchange, such as Kraken or Coinbase. Most exchanges have decent fees and various security measures in place to protect your cryptocurrency without risk.

You must create an account with the exchange, send the appropriate identification documents, and then deposit or buy BTC for your account. Once the exchange receives your Bitcoin, you can cash it out to a fiat currency.

Each exchange has specific rules in place, so read through the policies before depositing anything.
Typically, these platforms allow you to withdraw Bitcoin with the account you used for the deposit. Therefore, you should deposit small amounts of traditional currency first to ensure that a withdrawal is possible.

This does slow down the transactions, but it prevents money laundering and also ensures that the exchange complies with AML regulations.

Depending on where you live and the platform, it can take up to five days to withdraw Bitcoin. However, most third-party exchanges accept PayPal, speeding up the process.
You can also use P2P exchanges to withdraw Bitcoin. Though crypto exchanges are secure and reliable, there’s no anonymity. Plus, you don’t control the prices and can’t negotiate your transactions.

Peer-to-peer exchanges allow more anonymity and control over the funds, and they’re secure. However, it can take more time to close the transaction.

The transactions occur privately, and there is no intermediary. You can choose from different payment methods, such as cash deposits, bank transfers, Skrill, gift vouchers, Neteller, Payoneer, and others. Each method requires transaction fees and different waiting times.

To use P2P exchanges, open an account with the platform. Once you’ve verified your identity, you can find a buyer and make that transaction. Typically, these exchanges have rating systems so that you can choose a buyer based on their online reputation. Always make sure it has an escrow service, which means the Bitcoin is locked up until confirmation of the buyer’s payment.
The processes listed above are primarily for cashing out Bitcoin and turning it into fiat money. You may want to withdraw Bitcoin and move it to an exchange or use it to buy goods. How Do I withdraw money from my Bitcoin wallet to add to an exchange or buy items?

Ultimately, you move Bitcoin to an exchange or buy goods the same way, but you move it directly from your wallet to the other person or the exchange.

To do that, sign in to your wallet (whether it’s online or hardware). Go to the withdraw section of the wallet. Enter the Bitcoin amount you want to withdraw.

Now, you must paste the address of what you’re withdrawing. This can be a BTC or BCH address, but don’t send BCH to BTC or BTC to BCH addresses. Tell it where to go, and you’re done.
Most wallets have an online resource center to help you understand their processes. Be sure to read about the transaction fees involved.

Can I Transfer Bitcoins to My Bank Account?

Technically, you cannot transfer Bitcoins directly to a bank account. If you want to deposit the Bitcoin amount into your checking account, you must first go through an exchange. It converts the cryptocurrency to fiat money, which can then be deposited into the bank account.

Be aware that most exchanges can only withdraw funds to a bank account if that’s the one you used to deposit money into the platform. Make sure you’re using the same bank as before to avoid confusion and issues later.

Conclusion

Learning how a Bitcoin wallet works is crucial if you want to enjoy all that this cryptocurrency has to offer.

How do I setup a Bitcoin wallet? There are many ways to do that, based on the type of wallet you want.

You then asked, “How do I withdraw money from my Bitcoin wallet?” Again, this has many methods attached to it, based on where the funds are going and what you’re doing with it.