Getting Started with Bitcoin, Part 1: What is a Wallet?Submitted by JixMainstream on Tue, 03/26/2013 - 18:10
So you're curious about getting into Bitcoins! Now comes the hard part: swimming through the mounds and mounds of information and opinion that stands between you and getting started... and there is a lot of it!
Before diving head-first into unfamiliar websites or downloading something to your computer, there are many important things you should learn about Bitcoin. In this series of articles, I hope to break everything down into smaller, conceptual blocks so that you can learn about the functionalities of Bitcoin, the options you have as a user, the risks associated with those options, and finally, the security precautions needed to mitigate your risks.
The first step in getting started with Bitcoin is procuring a wallet. This article will help you learn what a Bitcoin wallet is, and how it works.
A Bitcoin wallet is composed of two parts: your public address and your private key. Together, these two things are much like a post office box: it has an address that you can share with anyone, but a key that only you hold. Owning the key is what enables you to spend the Bitcoins that are located at your address.
Unlike a P.O. Box, your Bitcoin wallet is not necessarily stuck in one place. Like any computer file, it can be copied to a USB Stick, sent to another computer, or uploaded to (and accessed via) "the cloud". Duplicating your wallet, however, DOES NOT duplicate your Bitcoins. To explain this, allow me to modify the P.O. Box analogy:
Imagine that the space behind your P.O.Box is a cache which is located far, far away. And imagine that the door to your P.O.Box is actually a portal to that cache. Whenever (and wherever) you copy your Bitcoin wallet, you are creating a new door to your cache. You can create an unlimited number of doors and place them wherever you want, but you will still only have one cache, with the same number of Bitcoins inside. All these doors still have the same address, and they all open with the same key.
Now, just as doors can be created, they can also be destroyed. If the only door is located on your home PC, and your computer is hacked or your hard drive crashes, you *could* lose access to your Bitcoins forever.
The devil, of course, is in the details. What I am about to say in INCREDIBLY IMPORTANT, so LISTEN UP: Your private key is the DNA of your Bitcoin wallet. From the private key alone, one can determine your P.O.Box number (Bitcoin address), and create a doorway to your cache (access & spend your Bitcoins). Since the private key is the genesis of all this information and power, the only way to protect your Bitcoin wallet is to protect your private key. Determining how you will protect your private key is where your options come into play. But there's a little more you need to know about wallets before you make this decision.
Your wallet interacts with the rest of the Bitcoin network through a piece of software called a Bitcoin Client. As I mentioned in my article, "Why Bitcoin CANNOT be Controlled by Government", when a user sends Bitcoins to another user, the transaction goes through a number of audits. The very first audit is done by the Bitcoin client to ensure that the sender actually holds the Bitcoins he or she is trying to spend. In order to perform this audit, every client has to have a copy of what is called the "Block Chain", which is a lot like a general ledger for a business. It is a COMPLETE LIST of every single Bitcoin transaction, and the balance of every single Bitcoin Address. The public distribution of the Block Chain is at the very core of why Bitcoin works (but I will save the details of that for another article).
The Block Chain, as you might have guessed, is a VERY large file, and it is downright impractical for some situations (mobile devices). Luckily, third parties have helped make Bitcoin a very versatile technology. You have options for the type of client / wallet service you can select, depending on how you plan to use Bitcoin. In the next section, I will elaborate on these options, the different technology & knowledge sets required, and the different levels of security & trust needed. (On to Part 2!)
Please leave your comments and questions below, as well as ideas for articles that you would like to see!