Bitcoins are stored on the Bitcoin blockchain network. A special program – a “wallet” – is needed to access and use one’s coins.
The wallet safeguards the secret code you need to use your bitcoins and helps manage transactions, something like an internet banking account. The code, which serves as a password, is called a “private key” and is vital to the security of your money. Anyone who gets your private key can steal your bitcoins. And if you lose your key, your bitcoins are gone, too. So it’s important to protect private keys against accidental loss and back them up.
There’s also another code called a “public key” – that’s the address where others can send you bitcoins.
Online (“hot”) wallets, where the private key is stored online or on devices connected to the internet – e.g., on exchanges or other websites, computers, tablets, or smartphones.
Offline (“cold”) wallets, where the private key is stored on paper or offline hardware like a password-protected USB, or simply in one’s brain (when you memorize a special phrase to access your funds).
Online, or “hot”, wallets are less secure due to the threat of hacking. Website wallets are especially vulnerable as you must reveal your private key to a third party. But hot wallets are more convenient for daily use.
It’s thus recommended to use both types of wallets – hot wallets to hold small amounts of bitcoin for daily transactions, and cold, or offline, wallets for storing larger sums. In any case, you can have as many wallets as you want.
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