What is a Bitcoin Wallet?
Just like with paper currency you need a wallet to keep them in, it is the same with Bitcoins, you need a wallet to house or custody your Bitcoins. Because it is all online, your wallet is kind of like an email address, but especially encrypted with your private key. It means you can send and receive Bitcoins, as easy as sending and receiving an email. Therefore your wallet will allow you to send and receive Bitcoins, store your Bitcoins, and you can check what your current Bitcoin balance is. Technically speaking your Bitcoin wallet acts as the interface between you and the Bitcoin blockchain, which monitors all of the global transactions in Bitcoin.
The most important thing to understand with Bitcoin wallets is they control your private key, which is the encrypted key which allows access to your Bitcoins, and therefore the ability to move them to any other wallet. It is therefore paramount when selecting a Bitcoin wallet that security is the number one priority, both in the type of Bitcoin wallet you choose and the quality of the provider.
Types of Bitcoin Wallets
Hot wallet
This is any kind of Bitcoin wallet that is connected to the internet, which could be a wallet from an online service provider, or a wallet housed on your computer which is connected to the internet, or could even be a wallet as a program on your phone that is connected to the internet.
Obviously being connected to the internet makes it very easy to use your Bitcoins in your Hot wallet, which makes them highly popular, but they also are the most prone to security risk. Therefore it makes sense to keep some Bitcoins in a hot wallet for ease of everyday use, a bit like you would use cash for everyday purchases, but then the rest more securely.
Cold Storage wallet
This is any kind of Bitcoin wallet that is not connected to the internet, therefore it is the most secure from cyber crime or hackers. This can be in any dedicated hardware device such as a USB stick, or even a wristband, but you will need to keep this device safe as it effectively is the private key to your Bitcoins, and the only way of gaining access to move your Bitcoins, and if it is lost, then so are your Bitcoins. You also have a paper wallet, which is literally just that, it is the private key to your Bitcoins written on a piece of paper, so again must be kept absolutely safe. Also there are Brain wallets, which are literally you the owner, using a memorable phrase or acronym to memorise your entire encrypted private key.
The best option
Is to have two Bitcoin wallets, one Hot for a small portion of your Bitcoins for ease of everyday use, and one Cold for the rest of your Bitcoins to have the most security. Then as you spend your Bitcoins, you can simply transfer more from Cold Storage into your Hot wallet. Many online Hot wallet providers provide a Cold Storage option.
This option is a little bit like how you have cash in your money wallet, and the rest of your money is in a bank account, then as you spend you simply withdraw money from your bank account.
Multisig wallets are another good security function with Bitcoin wallets. Increasingly some have the option for multiple signatures of private keys to authorise transactions. So it could be used with partners in a business to authorise transactions, or in an escrow transaction, whereby only once all the parties are in agreement and input their respective private keys will the transaction complete.
