Adapted in part from section 7.2 of the Bitcoin Diploma.
To start using Bitcoin you will need:
- A wallet.
- A way to acquire Bitcoin.
1. Wallets
Wallets are used to send and receive Bitcoin.
Unlike physical money, bitcoin is not actually present in your Bitcoin wallet. Instead, it lives on the distributed, public ledger that the Bitcoin network constantly verifies and secures.
You have true ownership of your bitcoin only when you hold the private keys which allow you to sign transactions and transfer ownership to someone else. This is the act of sending bitcoin.
An important distinction between wallet types is whether they are:
- Self-custodial – The user holds their own private keys.
OR - Custodial – A third party custodian holds the private keys.
| Type | Benefits | Risks |
|---|---|---|
| Self-custodial | User has complete control over funds and transactions, no approval process or account freeze, no corporate or government control, protected against arbitrary confiscation, like keeping money in a safe at home. | Full responsibility falls on the user, no recovery if recovery phrase is lost, less customer support. |
| Custodial | Ease-of-use, easy recovery if access is lost, easier customer support. | Funds are always connected to the internet, more vulnerable to hacking and breaches. Custodians can freeze accounts or rehypothecate users’ funds. |
SELF-CUSTODIAL vs. CUSTODIAL
Self-custodial wallets
The user holds the private keys, which means they are in true possession of their bitcoin.
Custodial wallets
A third party holds the private keys.
Some currently popular mobile wallet recommendations are:
| Wallet | Type | License |
|---|---|---|
| Blink | Custodial* | Open source |
| Wallet of Satoshi | Custodial* | ⚠ Closed source |
| Aqua | Self-custodial | Open source |
| Phoenix | Self-custodial | Open source |
| Breez | Self-custodial | Open source |
| Zeus | Self-custodial | Open source |
| Muun | Self-custodial | Open source |
| BlueWallet | Self-custodial | Open source |
| Blockstream Green | Self-custodial | Open source |
OPEN vs. CLOSED SOURCE
Open source software
Users can see, modify, and distribute the source code. This transparency gives better security assurances.
Closed source software
Users cannot see the source code, only the official developers can modify it. This requires trusting the developers.
* While custodial wallets are typically feature-rich, easy to use, and frequently cheaper for some use-cases than self-custodial alternatives, their convenience comes at a cost. By giving up custody of your coins you are trusting a third-party to secure them for you.
It is inadvisable to store large amounts of bitcoin with a custodian. If using a custodial service to send and receive payments frequently, it is recommended to transfer excess funds to self-custody on a regular basis, preferably to cold storage.
Explore the available options to determine your own favorite wallets, avoiding projects without an established reputation.
When choosing a Bitcoin wallet, there are several things to consider:
- Security: Make sure that the wallet has strong security measures in place.
- Privacy: Consider whether the wallet allows you to remain anonymous or not.
- Ease of use: Choose a wallet that is easy to use, especially if you are new to Bitcoin.
- Fees: Compare fees of different wallets to make sure you are getting the best deal.
- Reputation: Research the wallet’s reputation to make sure it is trustworthy.
- Control: Some wallets give you control over your private keys, which can be a security advantage.
- Features: Some wallets allow for advanced features, such as custom fee and coin control.
HOT vs. COLD WALLETS
Hot wallets
The private keys are stored on an internet-connected device, such as a mobile phone or computer.
Cold wallets / Cold storage
The private keys are generated and stored on a dedicated hardware device that isn’t connected to the internet.
When you analyze the trade-offs, you will find that no single wallet satisfies all needs. Some wallets are better suited for day-to-day spending, while others are better suited for savings. Some wallets cater to beginners, while others are designed for more advanced users.
⚠ To secure significant amounts of bitcoin it is a good idea to explore the various bitcoin-only hardware wallets using the same criteria outlined above in order to determine which is best suited for your individual situation.
Some currently popular hardware wallet recommendations for cold storage are:
More advanced setups and their respective tradeoffs (such as singlesig with passphrase vs. multisig), are worth exploring for those with sufficient technical understanding. However, avoid overcomplicating your setup unnecessarily, especially if you lack the requisite knowledge of backup and recovery procedures.
LIGHTNING vs. ON-CHAIN
Lightning transactions
The lightning network is designed for near instant, low-cost transactions. Ideal for day-to-day transactions.
On-chain transactions
On-chain transactions are ideal for high-value, highly secure, less time-sensitive transactions. Best for long-term savings.
2. Acquiring Bitcoin
Read section 7.1 of chapter 7 of the Bitcoin Diploma to familiarize yourself with different ways of acquiring bitcoin.