Subtitle: A complete review of bitcoin wallets and challenges to their increased popularity
Bitcoin spreads like a virus. It is the leading digital asset and still represents nearly 70% of the entire market cap of cryptocurrencies, and its beautiful mathematical form and system design promise a bright future of decentralization and programmable money. Bitcoins have featured in my investment for a while as a representative of cryptocurrencies, but I’ve not been able to use them in my daily life as I’d hoped.
To own, exchange, and spend bitcoins, you need a bitcoin wallet. A typical bitcoin wallet is probably the “smartest” wallet available today. Most of them offer enhanced safety and privacy features, and some also offer innovative e-banking features. In light of the functionalities they provide, you’d expect many tech fans to adopt them, evangelize their merits, and chase after the newest release, but that hasn’t happened. Many people who own one use it merely as an investment account rather than as a true wallet.
So, why? What’s working, and what prevents their broader adoption?
First, a bitcoin wallet is not a wallet of bitcoins. Instead, it helps users manage their keys to access and use their money. The easiest way to understand keys is to imagine public keys as addresses to which others can send you stuff (e.g., moneys) and private keys as your means of opening the locks to receive that stuff. To fully exploit Bitcoin’s security and privacy, one needs to use more than one pair of keys and ideally as many as one per transaction. The wallet generates keys, creates and signs transactions, tracks balances, etc. Normally, users keep the master keys (known as the mnemonic seed, a sequence of 12 randomly generated words) for their wallets. There are multiple types of wallet that are defined primarily by where the keys are stored and how they are accessed.
| Offline storage (cold storage) | Online storage (hot wallet) |
| Hardware wallet (Trezor, Ledger) | Web wallet (Xapo) |
| Paper wallet (BitAddress) | Desktop wallet (Electrum, Copay) |
| Mobile wallet (Coinbase Wallet, BRD) | |
| Universal wallet for all major platforms (Jaxx, Blockchain) |
Cold storage keeps the keys offline without internet access while a hot wallet manages them online. Following the general principle that increased difficulty of access improves security, cold storage systems generally present less risk of theft but are more difficult to access. Nevertheless, the owner must manage the safety of the offline medium (the device or the paper), including the master key/seed, in order to recover it in case of damage.
At their core, bitcoin wallets combine the features of modern digital wallets (such as PayPal) with those of traditional wallets (the ones you buy at the shop). They offer the benefits of flexible access and transactions while keeping control in the user’s hands instead of those of a custodian. Unlike physical wallets, however, they depend on the internet to complete a transaction. While providing functionalities similar to those of digital wallets, they demand that users assume more responsibility for the safety of their money while giving them more power to move their money around (across banks, countries, etc.).
The question is how many people will accept that responsibility for the extra flexibility that a bitcoin wallet offers.
It’s fair to assume that, the more flexibility and functionality a bitcoin wallet offers, the more users may want to own a wallet and take on the corresponding responsibility. What extra flexibility do current bitcoin wallets provide compared to common, non-crypto digital wallets?
Payment is the main promise of bitcoin. Bitcoin wallets grant users more flexibility in the transactions they can make, such as by enabling offshore payments and eliminating boundaries between traditional banks. They incur fewer fees and have shorter delays. Also, they don’t have chargebacks, so people cannot cancel existing payments.
Bitcoin wallets achieve a degree of anonymity by generating new keys for different transactions and through many other techniques. However, many experts have pointed out the weakness of Bitcoin-based solutions. For example, although transactions don’t contain user identities, the wallet addresses in transactions are unique and can be linked to specific people or entities. New kinds of altcoins have been proposed to offer enhanced privacy, but that often comes at the cost of scalability or security. Popular bitcoin wallets do provide exchange services for a variety of crypto assets—diverse types of coins—that serve different purposes and provide their own investment opportunities.
Investment has become a more dominant motivation for bitcoin owners because the value of bitcoins has seen almost 10 years of exponential growth. The growing number and popularity of digital assets represent a lucrative investment opportunity for many. Coinbase, which provides the most popular crypto wallet, has become a popular exchange platform for buying, selling, and managing cryptocurrency portfolios. The company even offers a dedicated Pro version of its product for professionals who wish to trade digital assets.
To become a genuinely popular choice for daily payment purposes, however, bitcoin wallets must further expand their usefulness for more applications. This includes achieving parity with common digital wallets for paying regular bills, retail shopping, social payment, online payment, searching transactions, bill statements, and the like. Some of the more popular bitcoin wallets have been catching up rapidly, many with a clean UX for beginners, various customization controls, spending limits, easy integration with other tools, and other features, significantly increasing the common scenarios for using a bitcoin wallet.
The promise of bitcoin wallets may be delivered by decentralized applications (dApps), which are not supported by a central authority but by the distributed blockchains that enable Bitcoin and all other types of cryptocurrency. dApps can drive a paradigm shift for online software models that will become open, anonymous, incentivized, decentralized, and auditable. They are envisioned to power a wide range of applications from traditional transactions to those of decentralized autonomous organizations. They are not tied to Bitcoin, but most common bitcoin wallets support a wide range of alternative tokens that may power these applications. However, we are still awaiting the emergence of really popular dApps that will drive users to the ecosystem.
While the bitcoin and overall crypto community try to build more utilities and flexibility into the stack, users who become interested still need to acquire and set up their wallets before they can purchase, store, and enjoy all the benefits that crypto offers.
How does the onboarding experience feel for a normal user? Intimidating!
Before users consider getting a bitcoin wallet, they should remember the risks of storing and managing their own assets. People first need to get familiar with how to secure their wallets. This entails different practices when choosing among the various types of wallet discussed above. The information for this initial step is sufficiently overwhelming. Users need to learn all the information and choose the right wallet for their needs. Many users, having set up their first wallet, may still not quite understand their responsibilities and best practices. We’ve all heard the frequent sad news that someone got hacked and lost their money, which may be why more users choose to acquire bitcoins on the Coinbase app, a custodian that holds private keys for users, rather than using their actual wallet app.
To make the onboarding process easier, many wallets, especially hot wallets, try to make the user experience more friendly by mimicking existing digital wallet apps. They offer features such as UI customization, nicknames for payments, instant transactions, and multi-language support. To ease concerns about accidentally losing money, users can enable email or push notifications for any action happening to the account. Popular wallets mostly adopt a clean UI for an easy start, and it has indeed become very easy for anyone to create a wallet nowadays.
However, I’ve found that most wallets stop short of offering educational materials to their users. Many users may stall for a long time at this phase before they figure out what to do with the wallet. Constant education, with high-quality content, can keep users learning and engaging before they become advanced users.
Another issue is that password/key management is often left entirely to users, which is by design for Bitcoin, but we all (including users themselves) know that users are bad at managing passwords, not to mention keys and mnemonic codes. The risk of losing the keys and being unable to recover them is so high that it often prevents people from shifting more of their assets to the wallet.
Now that you have a wallet, it’s time to acquire some coins.
One important feature that a wallet should offer is a way of acquiring bitcoins and other types of coin using traditional money. Popular wallets allow users to link to their bank accounts, debit/credit cards, PayPal, wire transfers, etc. Indeed, it is easy enough for people in the United States to acquire bitcoins if they have already been using online banking. A typical approach is to acquire the coins through a popular exchange, such as Coinbase, and transfer those coins to another wallet. Some wallets provide integrated exchanges for acquiring coins directly from your wallet.
It is important to allow users to move funds easily across wallets, including transfers between hot wallets and cold storage. The various wallet types offer distinct security and privacy promises, and it is recommended that people use them for various purposes. The interchangeability allows users to move their funds freely without triggering a transaction, which normally incurs fees charged by the network.
However, it’s still either too risky or too expensive to acquire bitcoins using cash directly. This is important for people without bank accounts and those in developing regions. In an ideal scenario, people could walk into a trusted local office (bank branch, supermarket, etc.), provide cash, and get coins in their wallet in return for reasonable fees.
Although awareness of Bitcoin has grown rapidly in recent years, the impression remains that it’s mainly a volatile asset for investors or a currency for black market uses.
After all these hassles and with coins in their wallets, users still need to learn the utility framework or services (such as MetaMask) to use their coins.
Many people, including myself, instead treat the wallet as merely another investment. I haven’t had any real chance to use it in local or online stores, mainly due to the inconvenience or to concern about potential fraud. Setting up MetaMask or similar services requires additional knowledge about browsers, extensions, MetaMask wallets, their relationship to the user’s own wallet, etc. The learning curve is so steep that only the most advanced users are tapping into that world.
As we can see, there are three major phases in a typical user’s journey to a bitcoin wallet: onboard, acquire, and utilize. At each phase, various features are offered by many wallets to encourage users to move to the next phase. Below are some of the more helpful features that I’ve found among popular wallets (including links to the features that I believe are currently unique to a specific wallet).
Features that improve the accessibility (acquire, move, and use) of crypto and collectibles
- Easily buy and sell various types of cryptocurrencies in a local currency
- Easily send, receive, and exchange other types of cryptocurrency. (Most wallets nowadays support multiple types of coins although they differ in coverage)
- Store and trade other types of digital collectibles in the same wallet (Coinbase Wallet)
- Easily export keys and import them to other wallets (Electrum)
- Paper wallet sweep support (BIP38)
- Integration with bank accounts and credit and debit cards
- Embedded third-party integration with dApp, colored coins, etc.
- Get paid in cryptos by doing tasks, answering questions, etc. (Coinbase Wallet)
Features that make the UX easier to use
- Clean, easy-to-use UX for beginners
- Email notifications for activities, transactions, payments, etc.
- Push notifications on the apps for account activities, transactions, payments, etc.
- Customization of wallet name, colors, etc.
- Multi-language and local currency support
- Instant transactions using servers that index the blockchain
- Nicknames supported for friends to pay each other using the same type of wallet
- Daily blockchain headline news and updates from a range of trusted sources
Business friendly features
- Shared accounts (requiring multiple users to sign one transaction; good for business)
- Escrow-protected business transactions
Security features
- BIP32 HD wallet management (creation and backup)
- Device-based security (private keys are stored locally, not in the cloud)
- Keep your private keys offline and go online with a watching-only wallet (Electrum)
- Bitcoin-only firmware specifically designed to contain code enabling only bitcoin wallet operations (cold storage only)
- Two-factor authentication as additional security
- GPG encryption (Trezor)
- Use the wallet as your password manager for other applications (Trezor)
Privacy features
- Full node verification (bitcoin core; better privacy)
- Connecting through Tor (Electrum)
Features to make payment better and easier
- Secure payments through USB, offline signing process, etc.
- Ability to set spending limits
- Smart fee estimation for transactions
- Send crypto coins or even traditional currencies to other users of the wallet for free
- Send traditional currencies to bank accounts in many countries around the globe (Xapo)
- View current balance, search transaction history, and even find detailed coin information
Bitcoin or crypto unique features
Advanced e-banking features
- Billing and invoicing support
- Advanced investment features, such as portfolio management and hedging
- Fast customer support, sometimes with promises of responding within two hours, etc.
According to the latest stats, 42 million bitcoin wallets had been set up globally, with 7.1 million active users, by December 2019. According to the user journey above, 42 million users (not unique given that one user can own multiple wallets) went through the onboarding phase and acquired some coins while only 7.1 million of them use the coins they acquired. Much room remains for both improving the experience (so that more people can set up a wallet and acquire coins) and adding new utilities to encourage more activity.