Module 2 of 4
Wallet Types
Hardware wallets, software wallets, paper wallets, and brain wallets — what each one is, when to use it, and what the trade-offs are.
Film · Wallet Types · 1:38
Block ———A short film in the language of this site's homepage: an exchange that holds the keys while you hold its promise; a wallet that holds keys, not coins, which live on the chain; hot wallets on online phones and computers, for spending money; cold storage, where the key stays offline on a signing device; why one key is one point of failure; multisig, two of three keys from unrelated vendors kept in different places, and its own honest risks; which wallet for which money; and fiat currency in a bank, a promise, against bitcoin under your own keys. It loops while on screen; use Pause to stop it. Turn on Narration to hear it explained aloud. A transcript follows.
Read the film, with its sources
- Module 2 of 4Wallet types. What does a bitcoin wallet actually hold, and which kind should hold what?
- Held for youLeave bitcoin on an exchange and the exchange holds the keys. What you hold is a balance on its books: its promise to pay you. If it fails, freezes withdrawals or is robbed, that promise is all you have. Hence the saying: not your keys, not your coins.
- Keys, not coinsWith your own wallet, you hold the keys. A wallet does not hold coins at all: the coins live on the chain, which the white paper describes as “a chain of digital signatures”. The wallet holds the private keys that sign to move them, and lets you authorise payments.Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System (2008), §2 Transactions
- Hot walletsA hot wallet is software on a phone or computer that is connected to the internet. Its keys are encrypted, but they are on an online machine, so a compromised phone or malware can reach them. It is handy for small amounts you spend, like the cash in your pocket, not for savings.
- Cold storageCold storage keeps keys offline, on a dedicated signing device where they are generated and never leave. The payment is built on an online computer or phone, passed to the device to sign, and the signed transaction comes back. The key never touches a networked machine.
- Older ideasTwo older ideas are not recommended. A paper wallet is a key printed on paper: it must be made on a secure offline machine, it can burn or rot, and spending from it puts the key on an online machine. A brain wallet is a key made from a phrase you memorise: phrases people choose are weak, and automated tools try them.
- One keyBut a single key on a single device is one point of failure. If that key, or its backup, is lost or stolen, or the device has a flaw no one has found yet, there is nothing else standing behind it. One thing has to go wrong.
- MultisigA multi-signature wallet needs several keys to sign, say two of three. That kind of spending has been a Bitcoin standard since 2011. For cold storage, this site recommends the arrangement, not a product: keys generated on devices from unrelated vendors, running open-source firmware, seeded with randomness you make yourself, and kept in different places. Lose one key, or one place, and the other two can still sign; a flaw in any one vendor's device is not enough on its own.BIP 11, M-of-N Standard Transactions (Gavin Andresen, 2011)
- Its own risksMultisig has real risks of its own. Lose the wallet descriptor, the record of how the keys fit together, and the seeds alone will not recover the wallet: given just the private keys, a restored wallet cannot know which addresses to look for. Lose more than one of the three keys and you are locked out for good. There are more steps to get wrong, and it is harder for your heirs. Practise a full recovery with a small amount first.BIP 380, Output Script Descriptors General Operation (Pieter Wuille and Ava Chow, 2021)
- Which wallet for which moneySo, by amount: spending money in a hot wallet; then practise multisig, recovery included, with small amounts; and savings in cold storage, as multisig. A setup you will actually maintain beats a cleverer one you won't. If multisig is more than you'll keep up, that is a fair answer, and it should change how much you keep in cold storage.
- Fiat or bitcoinFiat currency in a bank is not money you hold: it is the bank's promise to pay you, and the bank can freeze it. Bitcoin under your own keys is yours: it sits on the chain, no one stands in between, and no one can freeze it.
- The Bitcoin TransitionSpend hot, save cold, hold your own keys.
A Bitcoin wallet is software or hardware that manages private keys and signs transactions. All wallets do the same fundamental thing: they hold your keys and let you authorise transfers. The differences are in where the keys are stored, how they are protected, and what attack surface they expose.
Hardware Wallets
A hardware wallet is a dedicated physical device whose sole purpose is to store private keys and sign transactions. The keys are generated on the device and never leave it. When you want to send bitcoin, the transaction is constructed on your computer or phone, sent to the hardware wallet for signing, and the signed transaction is returned. At no point does the private key exist on a networked device.
A single hardware wallet is a sound place for money you expect to spend. It is not enough for savings. The attack surface is small but it is not zero: an attacker would need physical access to the device and knowledge of the PIN, or they would need to compromise the firmware or the supply chain. One device means one thing has to go wrong.
We do not name specific devices. Prices range from approximately €50 to €300, and the differences between them are in user interface, firmware transparency, and features like air-gapped signing (via SD card or QR code). Judge a device on whether its firmware is fully open-source, whether it can operate air-gapped, whether you can buy it direct from the manufacturer, and whether it recovers via a standard BIP-39 phrase. Confident recommendations of particular products have a poor track record in this industry, and a device can be open-source, well reviewed and still carry a defect nobody has looked for yet.
For savings, the question is not which one to buy. It is which three to combine. Our recommendation for cold storage is a multi-signature wallet whose keys are generated on devices from three different vendors, all running open-source firmware, seeded with entropy you generate and verify yourself, and stored in three geographically separate locations. A vulnerability in any one vendor, or the loss of any one location, then costs you nothing.
Software Wallets (Hot Wallets)
A software wallet runs on your computer or phone. The private keys are stored on the device itself — encrypted, but present on a machine that is connected to the internet. This is called a "hot" wallet because the keys are online.
Hot wallets are appropriate for small amounts that you spend regularly — the equivalent of a physical wallet in your pocket. They are not appropriate for savings. A compromised phone or a piece of malware that captures keystrokes can extract the keys.
Choose an open-source wallet that shows you its seed phrase, so that you hold the keys. An app where the company holds the keys is not your wallet in this sense: what it shows you is a balance on its books, a promise to pay. We do not name apps, for the same reasons we do not name devices. On a desktop, wallet software adds coin control, and can coordinate signing devices in a multi-signature wallet.
Paper Wallets
A paper wallet is a private key printed on paper. It was a common early method of cold storage. It has largely been superseded by hardware wallets because it introduces problems: key generation must happen on a secure, offline machine; the paper itself is vulnerable to water, fire, and physical deterioration; and spending from a paper wallet requires importing the key into a hot wallet, which re-exposes it.
Paper wallets are not recommended for new users. Hardware wallets are strictly better for the same use case.
Brain Wallets
A brain wallet is a private key derived from a memorised passphrase. The theory is attractive: no physical device to lose, no paper to be found. The practice is dangerous. Human-chosen passphrases are weak against brute-force search. Automated tools systematically try common phrases, literary quotes, and dictionary combinations. Funds stored in brain wallets have been stolen within minutes of deposit.
Do not use a brain wallet for any amount you cannot afford to lose.
Which Wallet for Which Purpose
- Cold storage as multisig — savings, long-term holding, amounts you care about: keys on devices from unrelated vendors, kept in different places, with the wallet descriptor backed up and a recovery practised first with a small amount. If that is more than you will maintain, that is a legitimate answer, and it should change what you keep in cold storage.
- Mobile hot wallet — spending money, Lightning payments, daily transactions. Keep only what you would carry in a physical wallet.
- Desktop wallet — advanced users who want coin control, UTXO management, and to coordinate signing devices in a multi-signature wallet.
- Paper/brain wallets — not recommended for general use.
The next module covers the most important part of any wallet setup: securing the seed phrase that can reconstruct it.