bitcoin in wallet

Your bitcoin is not in your wallet (explanation)

6th June 2024

The term “wallet” is omnipresent in the Bitcoin world, but it can be misleading in certain cases. In reality, contrary to what you might imagine, a Bitcoin wallet does not contain your bitcoins. To give you a picture, it functions more like a key keeper rather than a safe, as we tend to think of.

Indeed, imagine your bitcoins as precious gold coins. A Bitcoin wallet provides you with the keys to access and use these coins, while ensuring their security while you are away.

From there, you will understand that your bitcoins reside neither in your software wallet nor in your hardware wallet. This article aims to clear up this confusion and enlighten you on how wallets actually work. You will also know where your valuable digital assets really are.

Where is your bitcoin actually located?

Unlike physical wallets which store tangible money, Bitcoin wallets do not contain bitcoins. In reality, all bitcoins, including yours, exist on the blockchain, a public ledger accessible to everyone and not physically located. Copies of this blockchain are stored by millions of computers around the world, making the Bitcoin network decentralized and secure.

To put it simply, imagine the blockchain as a huge public ledger where every Bitcoin transaction is recorded immutably. Your Bitcoin wallet is actually just a private key, which gives you the right to access bitcoins associated with a specific address on the blockchain. This address acts like a bank account, but without the intermediary of a bank.

To visualize this, let's take the example of a locker at a train station with your name on it. The locker (the Bitcoin address) contains your assets (bitcoins), and the key (your private key) allows you to access and remove them. Simple isn’t it? However, it is important to note that:

  • Bitcoins are never stored in a physical or digital wallet. They only exist on the blockchain;
  • Your private key is the key to your Bitcoin. Keep it secure, because anyone who has access to it can control your bitcoins;
  • You can have multiple Bitcoin addresses, like multiple lockers at different train stations;
  • “Off-chain” transactions do not affect the position of bitcoins on the blockchain. They simply change ownership between addresses.

In short, your Bitcoin wallet is not a vault containing bitcoins, but rather a set of keys that allow you to manage your bitcoins on the blockchain.

What exactly is a bitcoin wallet?

Bitcoins can be defined as unique bank notes, each bearing a unique identification number (address). These tickets are stored in a large public ledger called the blockchain (or the time chain to be more precise). To use your bitcoins, you need a way to manage and track them. This is where the Bitcoin wallet comes in. In fact, the latter is not a place where bitcoins are stored. Instead, think of it as a bank note manager.

To know what a wallet is and its functions, particularly note these points that characterize it:

  1. Generate Bitcoin addresses: These are like bank accounts for your bitcoins. Every address can receive bitcoins.
  2. Keep track of your bitcoins: The wallet tracks the addresses associated with your private keys and calculates the total balance of your bitcoins.
  3. Send and receive bitcoins: The wallet uses your private keys to authorize transactions, ensuring the security of your bitcoins.

The different types of bitcoin wallets that exist

There are five categories of bitcoin wallets, namely: 

  • Mobile wallets: Practical applications for storing and managing your bitcoins on your smartphone or tablet.
  • Web wallets: Accessible from any web browser, but less secure than mobile wallets.
  • Desktop wallets (desktop wallet or software wallet): Software installable on your computer for increased security.
  • Hardware wallets: Dedicated physical devices that provide the best security for long-term storage of your bitcoins.

How to choose the right Bitcoin wallet?

The choice of wallet depends on your needs and your comfort level in terms of security. And, it will also depend on your tastes and preferences. For beginners, a mobile or web wallet can be a good option. For more experienced users, a desktop wallet like samourai wallet or material like the bitbox provides increased security. The most important thing is to stay vigilant. For that :

  • Secure your private keys: These are the keys that give you access to your bitcoins. Never share them with anyone.
  • Be aware of scams: There are many fake wallets and websites out to steal your bitcoins. Be careful and do your research before using a service.
  • Back up your keys: If you lose your device or wallet, you risk losing your bitcoins. Make sure you have a backup of your private keys.

A Bitcoin wallet is an essential tool for managing and securing your bitcoins. Understand the different types of wallets, choose the one that suits you best, and use it responsibly to protect your precious bitcoins.

Why are we talking about a hardware wallet?

The term “hardware wallet” is a misnomer for devices used to manage cryptos. In reality, these devices, such as Trezor, Bitbox or cold card, do not store bitcoins themselves. 

What is their real function?

Hardware wallets are actually physical devices that are used to protect the private keys associated with your bitcoins. These private keys are essential elements for accessing and spending the assets you have. By storing them offline in a secure environment, “hardware wallets” make them much more difficult to hack or steal by hackers.

Why is the name “hardware wallet” misleading?

A real wallet must be able to store funds and carry out transactions. However, “hardware wallets” do neither. Rather, they act as digital safes for your private keys.

In fact, to interact with the Bitcoin network and carry out transactions, it is necessary to use additional software, such as Trezor Suite, Ledger Live or Sparrow Wallet. These software connect to a Bitcoin node, monitor the balance and allow sending and receiving funds.

Devices like Trezor, Ledger and Coldcard are essential elements for bitcoin security, but it is important not to confuse them with full wallets. Rather, they are “key managers” or “signing devices” that store private keys securely and allow them to be used to sign transactions.

While the term “hardware wallet” has unfortunately become commonplace, however, it is important to keep in mind that it does not truly reflect the functionality of these devices.

Software wallets

We more reasonably speak of a wallet when it comes to a software wallet. In fact, it's actually the closest thing to a physical Bitcoin wallet. However, this term often implies a hot wallet, that is to say that the private key allowing funds to be withdrawn is stored on the same internet-connected device as the wallet software. This is a less secure way to hold bitcoins.

Furthermore, there are also read-only wallets (watch-only wallets). It is in fact a software wallet that does not store a private key on the same machine. The private key is stored elsewhere, for example in an offline device such as a Trezor, a Ledger or a Coldcard (we also speak of a cold wallet when the key is protected offline). For example, Trezor Suite and Ledger Live are examples of read-only wallets.

However, this term “read-only” can be confusing. If someone has the corresponding private keys, they will certainly be able to spend funds from a read-only wallet. Likewise, any wallet can permanently become a read-only wallet if the private keys are lost or destroyed.

When do we talk about “self-hosted” and “unhosted” or “custodial” and “non-custodial” wallets?

The terms “self-hosted wallet” and “unhosted wallet” are often used interchangeably, but they can be confusing. It is important to understand their exact meaning to avoid misunderstandings.

Origin and lack of relevance of the term “no”

The expression “self-hosted wallet” appeared in the context of Bitcoin regulation. It was not invented by the Bitcoin community and does not really reflect the realities of how Bitcoin wallets operate. Indeed, all bitcoins are hosted on the blockchain, which is an irrevocable principle.

All bitcoins are “hosted” on the Bitcoin blockchain: this public and decentralized ledger keeps the history of all bitcoin transactions, without exception. The registry is not owned by a third party but rather operates through a global network of computers, called nodes.

Hosting is irrelevant for Bitcoin wallets

Therefore, it is not relevant to talk about a “self-hosted wallet” for a Bitcoin wallet. In fact, bitcoins are not stored in the wallet itself, but on the blockchain. The wallet simply serves as a tool to interact with the blockchain and manage your bitcoins.

What matters: holding private keys

What really sets Bitcoin wallets apart is the question of who owns the private keys. Private keys are cryptographic codes necessary to access and spend bitcoins in a wallet.

Wallets with private keys: control and freedom

In a so-called “unhosted” (or “self-hosted”) wallet, the user holds their own private keys. This means that he has full control over his bitcoins and does not need any third-party permission to use them. It's one Bitcoin Fundamentals : user empowerment.

Hosted wallets: intermediaries and risks

Conversely, in a hosted wallet, the private keys are held by a third party, usually a cryptocurrency exchange or custody service. This means that the user must trust this third party to access their bitcoins. Although hosted platforms can be convenient and user-friendly, they carry an increased risk of hacking or loss of funds.

In addition, it is important to use clear and precise terminology when talking about Bitcoin wallets. The terms “self-hosted” and “unhosted” are inappropriate and can cause confusion. Therefore, it is best to focus on the issue of holding private keys to understand the level of control and security of a Bitcoin wallet.

Final Thought

In summary, Bitcoin wallets do not store the bitcoins themselves, but rather the private keys that allow you to access your bitcoins on the blockchain. These private keys are essential for controlling your funds and making transactions. It is therefore essential to protect them diligently and to choose a wallet adapted to your needs and your level of security.


ZoneBitcoin Editorial

Passionate about Bitcoin, our editors try to democratize their knowledge through varied articles touching on different subjects.

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