Wallets and Custody

An address is a shareable identifier that tells wallet software where to direct a cryptocurrency payment. In Bitcoin, it usually encodes information used to construct the spending conditions for a transaction output, rather than identifying an account maintained by a central operator. Different address formats support different output types, including legacy, SegWit, and Taproot. An address is not the same as a private key: sharing an address allows someone to send funds or inspect associated public activity, but does not normally give them spending authority. One wallet can generate many addresses, and using a fresh receiving address can reduce straightforward links between payments. Before sending, the sender must check the intended network and the complete destination. A valid checksum can detect certain typing errors, but it cannot prove that the address belongs to the intended recipient or protect against malicious address substitution.

Sources: developer.bitcoin.org · github.com

Bech32 and Bech32m are related encoding formats used for native Bitcoin SegWit addresses. They combine a readable network prefix, an encoded witness version and program, and an error-detecting checksum. Bitcoin mainnet addresses in these formats begin with bc1. Bech32 is used for witness version zero, while Bech32m provides the checksum used for later witness versions, including Taproot's version one. They should not be treated as interchangeable encodings for the same output type. Their design improves the handling of transcription errors compared with relying on an unchecked character string, but checksum validity does not establish the identity or honesty of a recipient. Wallets must decode the correct network, witness version, and program length before constructing a payment. A supported address can be used without disclosing a private key. Software that does not recognize the relevant address type should not be bypassed by manually altering its prefix or checksum.

Sources: github.com · github.com

A change address is a wallet-controlled destination used to receive the portion of transaction inputs that is not being sent to the recipient or paid as fees. Bitcoin transactions spend complete unspent outputs rather than subtracting an amount from a conventional account balance. When selected inputs exceed the payment and fee, the wallet usually creates a separate change output. For example, spending an output containing more bitcoin than the intended payment normally returns the difference to the sender's wallet. A fresh change address can make casual address reuse less revealing, although public transaction patterns may still expose relationships. Change is not necessarily shown as an incoming payment from another person. Users reviewing a transaction should verify that both the recipient output and the change destination are correct, especially when using offline signing workflows or software they do not fully trust.

Sources: bitcoincore.org · developer.bitcoin.org

A cold wallet is a custody arrangement in which the private keys needed to spend cryptocurrency are kept away from routinely connected computing environments. The term describes key management, not a separate location where coins physically reside: the assets remain represented on the blockchain. One workflow uses an online watching-only wallet to prepare a transaction, an offline device to sign it, and the online system to broadcast the signed result. This separation reduces exposure to some remote attacks but does not eliminate unsafe backups, compromised devices, malicious transaction requests, or physical theft. Recovery materials must also be protected because they can recreate spending authority without the original wallet. Moving funds out of cold storage does not inherently require importing its secret keys into an online application. The quality of the signing process, destination verification, and backup procedures matters more than the label alone.

Sources: electrum.readthedocs.io

A custodial wallet is a service in which another party controls the private keys or equivalent signing authority for a user's cryptocurrency. The user typically accesses an account through credentials, while the provider manages transfers and recovery procedures. This can simplify some tasks, but an account balance is not the same as independently controlling the corresponding on-chain outputs. Withdrawals may depend on the provider's systems, policies, available assets, and willingness to process requests. Transfers between customers of the same service may be internal bookkeeping entries rather than blockchain transactions. Custody therefore introduces risks involving security breaches, insolvency, account restrictions, and operational failures. A familiar interface or a published wallet address does not eliminate these risks. The central question is who can authorize movement of the assets and what evidence or process gives the user a dependable claim to withdraw them.

Sources: ethereum.org · bitcoin.org

A hardware wallet is a dedicated device designed to generate or protect private keys and authorize cryptocurrency transactions without routinely exposing those keys to a general-purpose computer. The connected phone or computer can prepare a payment, while the device performs signing and may display details for confirmation. The coins remain recorded on the blockchain rather than stored inside the device. Hardware separation can reduce certain malware risks, but it does not make every transaction safe. A user can still approve the wrong destination, disclose a recovery phrase, install untrusted software, or rely on an insecure backup. Device loss is usually a recovery problem rather than automatic loss of funds when the required backup remains intact. Conversely, anyone obtaining sufficient recovery material may bypass the device entirely. The security model includes the device, its software, the verification process, and the backup arrangement.

Sources: trezor.io · bitcoin.org

A hierarchical deterministic wallet derives a structured tree of cryptographic keys from a starting secret using defined mathematical rules. Bitcoin's BIP-32 standard describes a common method for creating parent and child keys, allowing a wallet to organize accounts and generate many receiving and change addresses. Because derivation is deterministic, the same starting information and paths can reproduce the same keys. An extended public key can support watching-only functions and address generation for eligible branches without revealing the corresponding spending keys. However, sharing it can expose a broad view of wallet activity and should not be treated as privacy-neutral. An HD wallet is not synonymous with a specific recovery-word format; mnemonic encoding and key derivation are related but separate standards. Successful recovery may require knowing the wallet's script type and derivation paths as well as possessing the correct secret material.

Sources: github.com

A hot wallet is a wallet arrangement in which signing keys are available to a device or service that is connected to a network during normal use. It is commonly used for frequent payments because transaction creation and signing can happen without an offline transfer process. Hot describes connectivity and key exposure, not ownership: a hot wallet can be self-custodial or operated by a custodian. Encrypting a wallet file or protecting an account with authentication helps address some risks, but malware may still target an unlocked signing environment or substitute payment details. Backups remain essential because connectivity does not provide automatic recovery. A user may keep limited spending funds in a hot wallet while using a separate arrangement for other holdings, but the appropriate setup depends on practical needs. The key distinction is where spending authority becomes available when a transaction is authorized.

Sources: electrum.readthedocs.io · ethereum.org

Multisignature is a spending arrangement that requires authorization from more than one cryptographic key. A common Bitcoin example is a two-of-three setup, in which any two designated keys can jointly authorize a transaction. The keys may be held by different people, devices, or locations, reducing dependence on one secret or one operator. Multisig is different from making several copies of the same private key or splitting a recovery phrase into informal pieces. It creates a defined authorization policy that the spending mechanism enforces. The arrangement can improve resilience, but it also increases coordination and backup complexity. Losing too many keys can make funds inaccessible, and recovery may require wallet configuration information in addition to individual secrets. Standardized partially signed transaction formats can help separate participants review and sign the same payment without first combining their private keys in one place.

Sources: developer.bitcoin.org · github.com

A seed phrase, also called a recovery phrase or mnemonic phrase, is a sequence of words used by many wallets to encode information from which wallet keys can be derived. BIP-39 defines a common scheme using a word list, entropy, and a checksum, with familiar lengths such as twelve or twenty-four words. Not every wallet uses the same mnemonic standard or recovery procedure. Some arrangements also use an optional passphrase, which changes the derived wallet rather than acting as a conventional password-reset credential. Anyone possessing sufficient recovery information may be able to recreate spending authority on another device. The phrase should therefore be treated as a high-value secret, not an ordinary support code. Recovery can additionally depend on derivation paths, script types, or multisignature configuration. A valid word sequence does not by itself prove that a particular wallet contains the expected addresses or funds.

Sources: github.com

Self-custody means that a user controls the cryptographic authority needed to move cryptocurrency rather than relying on a provider to approve withdrawals from an internal account. It can be implemented through a software wallet, hardware device, offline signing setup, or a carefully designed multisignature arrangement. The defining feature is control of spending authority, not the appearance of an application or the presence of a personal account name. Self-custody reduces some intermediary risks but transfers responsibility for backups, transaction review, device security, and recovery planning to the holder. Losing every usable recovery path can make funds inaccessible, while disclosing sufficient key material can allow unauthorized spending. It also does not protect against approving a harmful contract interaction or sending to the wrong address. A sound custody arrangement must address both theft prevention and the ability to recover access when devices or circumstances change.

Sources: bitcoin.org · electrum.readthedocs.io

A cryptocurrency wallet is software, hardware, or a coordinated system that helps users manage addresses, view assets, and construct or authorize transactions. The familiar word can be misleading because coins are not literally stored inside the application; the blockchain records the relevant balances or spendable outputs, while the wallet manages information and access. Some wallets control private keys directly, some work with external signing devices, and watching-only wallets can display activity without spending authority. Custodial services may use the same label while keeping keys under the provider's control. Wallets also differ in supported networks, recovery standards, transaction features, and privacy behavior. A displayed balance does not prove that the user has every secret or configuration detail needed for recovery. Evaluating a wallet therefore involves identifying who can sign, how transactions are verified, what is backed up, and which dependencies remain if the usual interface becomes unavailable.

Sources: developer.bitcoin.org · ethereum.org