Wallet

No wallet contains bitcoin. Coins exist only as unspent outputs recorded on a chain that every full node holds a copy of, and a wallet is the keyring plus the bookkeeping that tells you which of those outputs answer to you. That is why 12 words on a card can rebuild a wallet, and why deleting the app does not delete your money.

How it works

A wallet does three jobs, and every product in the category is a different arrangement of the same three.

The first is holding keys. Modern wallets do not store a pile of unrelated secrets. They start from one random number, encode it as a recovery phrase drawn from the 2,048 word BIP-39 list, and derive every key they will ever need from it, which is why a 12 word backup made on day one still covers an address you generate five years later.

The second is watching. Your balance is not a stored figure; it is the sum of the unspent outputs your addresses control, recalculated from chain data. To get that data the wallet has to ask someone: your own node, a public Electrum server, or the vendor's backend. That choice is invisible in the interface and decides who learns your entire address history, which is the strongest argument for running a node once your holdings matter to you.

The third is signing. When you send, the wallet selects which unspent outputs to consume, calculates a fee from a rate in satoshis per virtual byte, builds the change output back to itself, signs, and broadcasts. Everything a user thinks of as "sending bitcoin" happens in that one step, and it is the only step where a key is used.

What ends up on disk is smaller than people expect. A Bitcoin Core descriptor wallet is a SQLite database holding descriptors, address labels, and the encrypted key material. It is not a copy of the blockchain, and it is not a ledger of your money. The ledger is public and shared, and your file is just the index into it.

Why this matters when you buy bitcoin

The account where you buy is not the wallet where you should keep. An exchange balance is a row in a company's database, backed by coins under keys its staff control, and that arrangement is fine while you are trading and poor as a place to leave savings. FTX filed for Chapter 11 bankruptcy on November 11, 2022 with customer balances showing on screens that no longer meant anything, and its creditors spent years in a claims process rather than minutes in a withdrawal screen.

Withdrawal is the moment ownership actually moves. Pick the wallet before you buy, not after, because the withdrawal screen is a bad place to be choosing software. Set it up, write down the recovery phrase on paper or steel, and send a small test amount first, something in the range of 20,000 satoshis, so a mistyped address costs a few dollars instead of your position.

Two details save real money and real time. Check the address formats the exchange will send to, since a handful of platforms still cannot pay a bc1p Taproot address and will simply reject it. And check the withdrawal fee, which every exchange sets differently: some charge a flat amount in bitcoin regardless of the network, some pass the network cost through, and the difference is worth more than the price spread on a small purchase. Our exchange reviews list the current fee model for each platform we rate.

The wallet you need depends on the amount, not on your ambition. A phone app for spending money, a signing device for savings, and multisig only once losing the whole balance would genuinely change your life.

Setting up a wallet in the right order

Order matters more than product choice, and the sequence is short.

Install from the vendor's own domain, not from a search advertisement, and verify the download signature if the wallet publishes one. Create the wallet offline if the software allows it. Write the recovery phrase by hand, on the card supplied or on steel, and never photograph it, type it into a phone, or store it in a password manager alongside the wallet itself. Confirm the phrase when the app asks; that prompt exists because people mis-copy words and only find out years later.

Then test the whole loop before it carries weight. Receive a small amount, wait for one confirmation, delete the wallet from the device, and restore it from the words alone. A restore you have performed once is a backup. A restore you have never performed is a hope.

Wallet vs address

A wallet is the keyring; an address is one slot on it. A single wallet derives billions of addresses and hands out a fresh one for each payment, so seeing a new string every time you press receive is correct behavior rather than a bug. Reusing one address does not endanger the coins directly, but it links every payment to a single public identity that anyone can watch, and it defeats the main privacy benefit the wallet gives you for free.

Wallet vs custodial wallet

A custodial wallet is an account, and the word wallet is doing marketing work in that phrase. The provider holds the keys, you hold a login, and what you can do with your coins is whatever their terms and their solvency permit on the day. The distinction is invisible while everything works and total when it does not. If the product offers you a recovery phrase, you have a wallet; if it offers you a password reset, you have an account with a company.