Are you new to Bitcoin, or Ethereum, Litecoin and are looking for a way to store your coins? All you need is a wallet to manage the address and an address to store your coins. Wait!? Is it wallet, address or wallet address? The term wallet creates unnecessary confusion and beginners often think they are the same. Recently one of our users asked “Is a Bitcoin wallet same as Bitcoin address? If not then how do they differ?”.
In short: “Wallet” and “Address” are two different things. A wallet is a piece of software used to manage address. It offers a convenient way to store, maintain and control multiple addresses. Whereas an address is an unique key or ID where you hold your Bitcoins. Since many users tend to confuse both wallet and address we decided to make a post explaining them. Here, in a very simple manner; without getting into any technical details we’ll explain the difference between wallet and address. We’ll use Bitcoin as an example but the concept applies to Litecoin, DASH, Monero and almost any cryptocurrencies.
So what is a Bitcoin address and what is a Bitcoin wallet?
Bitcoin address or simply address is a combination of alphanumeric characters which usually begins with number 1 or 3.
An address represents the public key of an asymmetric key pair and is a destination for a Bitcoin payment. Each address (public key) has a corresponding private key which is used to move Bitcoins out the associated address (public address or public key).
Bitcoin address (public key) and private keys
Now compare Bitcoin address (public key) to your bank account number or your email address. Just like how you share your email address and bank account number to receive email and payments; you can also share your Bitcoin address (public address) to anyone to receive Bitcoin payments.
However to send Bitcoin’s out of that address you need a private key which is confidential and it shouldn’t be shared with anyone. Consider private key as your bank account password or email password. Without the password you cannot access your email or bank account. Without the access you cannot send email from your email ID or make transactions from your bank account, right? Likewise the private key in Bitcoin is used to sign transactions and prove ownership of an associated Bitcoin address (sign message).
You can share your Bitcoin address publicly and anyone can send Bitcoins to your address. However as we said to send Bitcoins from that address you need a private key of that particular address. Only by using the correct private key you can create a valid signature. It is named private key for a reason. Keep it private and remember that anyone with access to your private key will be able to access your cryptocurrencies associated with that public address. It is just like how anyone with your password can access your bank account and withdraw your funds or access your email account and send emails using your ID.
Creating Bitcoin address
Unlike email ID or Bank account number; you can create as many Bitcoin address you want and the addresses can be generated at no cost. Also Bitcoin white paper recommends that you create a new address for each and every Bitcoin transaction. Okay, but how do I create an address and how do I ensure that I hold the private keys of the address. Is it not difficult to manage multiple key pairs (public and private keys)? Now this is where Bitcoin wallet comes into play.
Bitcoin address reference: https://en.bitcoin.it/wiki/Address
What is a Bitcoin Wallet?
Bitcoin wallet is an application that contains a collection of public (Bitcoin address) and private keys. As we explained; the public address is the key which you need to receive Bitcoins and private key is the data needed to spend Bitcoins associated with that public address. So is a wallet only used to collate multiple addresses or it also conducts transaction? It is actually both. A wallet offers a convenient way to manage multiple keys and it is also used to create transactions.
Compare Bitcoin wallet to an email software where you manage multiple email accounts and that also allows you to send emails from multiple accounts that you control.
Whenever you wish to send Bitcoin from your wallet; the wallet first communicates with the network. Then it checks the list of addresses in the wallet that contains balance and combines them. Then it creates signature using the corresponding private keys and broadcasts the transaction to the network.
Note: Your coins are not actually stored in your wallet, but on blockchain. Just like how the emails are actually stored in the email server and not stored locally in users computer. Also Bitcoin transactions works similar to the way email works. Once it is send, its sent and you cannot take it back. It’s just like a one way trip. You’ll only get it back if the person whom you sent the coins voluntarily sends it back. The same applies to you as well. Once you receive Bitcoin to your wallet address then only you who own the private keys can use them.
Types of Bitcoin wallet
The crypto wallet format is usually a non readable text file or .dat file (Data file) on disk. The file format differs based on the wallet clients and most wallets usually have features such as wallet encryption, backups and address labeling.
Now not all cryptocurrency wallets contain private keys. For example there are watch only wallets which is only used to check balance and verify transactions. It does not contain a private key and so you’ll not be able to sign a transaction. Also there are exchange wallets and some online wallets where you don’t have the control of the private keys but the one who operates it does.
There are many different types of wallets such as online wallet, hardware wallet, desktop wallet, mobile wallet etc. Also there are many open source and closed source wallet applications available out there. Whichever wallet it is; just remember this one thing: “Not your keys, not your Bitcoins”. If you don’t own the private keys of the address in which you’ve stored coins then the coins doesn’t belong to you.
Always use wallet in which you control the private keys. Also anyone who owns a serious amount of crypto should consider using hardware wallet like Ledger as it provides better security.
Bitcoin wallet reference: https://en.bitcoin.it/wiki/Wallet
Now that you’ve learned the difference between Bitcoin wallet and address here are few guides which you may find helpful.