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Other Common (and Not So Common) Bitcoin Wallet Features

In addition to features dictated by the underlying design of different wallet architectures, some Bitcoin wallets have a variety of other basic and advanced features. Some basic features you should expect to see include password protection, the ability to make backups of your private keys, QR code scanning and generation, and the ability to generate and import paper wallets.[1] A somewhat advanced feature that is common to many Bitcoin wallets is the ability to sign messages with your private key. Recall that Chapter 7 discussed how digital signatures are used to sign Bitcoin transactions with your private key. The same digital signatures can be used to sign arbitrary messages, and many Bitcoin wallets make this an easy-to-use feature because it is useful when you need to prove you are the owner of a particular Bitcoin address (for example, if you are trying to get preapproved for a loan from a bank and it wants you to prove you have bitcoins as collateral).[2]

Other advanced features you might see in some Bitcoin wallet programs include multi-signature transactions, in which multiple private keys are required to spend bitcoins from one Bitcoin address, and a feature called coin control, which provides fine-grained control over which bitcoins you use for making any specific purchase (see "An Advanced Bitcoin Wallet Feature: Coin Control" below). The number of advanced features available is too extensive to list here (and the number of features keeps increasing), but now you understand why so many Bitcoin wallet programs exist!

AN ADVANCED BITCOIN WALLET FEATURE: COIN CONTROL

Imagine you have three nickels in your pocket, and you walk into the Very-Cheap-Candy-Store to buy a chocolate that costs a nickel. Your nickels are fungible, meaning that each of your three nickels is equally valuable and useful as payment for the chocolate. Well, at least you think they are. But perhaps you didn't notice that each nickel has a different image engraved on the reverse side, and one of them is a 1913 Liberty Head V nickel (of which only five exist in the world and are valued at about $4 million each). When you pay for your chocolate, you use the nickel with the rare image, and the store owner recognizes it! To your alarm, he calls the police because the nickel you gave him once belonged to his friend (Warren Buffet? Richard Branson?) and it was stolen. After several hours of interrogation, you convince the police that you had no idea you were carrying a stolen nickel and explain that you've learned a valuable lesson about choosing your coins carefully before paying with them. This short tale is the basis for the coin control feature offered by some Bitcoin wallets.

If you have received bitcoins from multiple sources to the same Bitcoin address, then the bitcoins from each transaction can be distinguished from each other (each group of bitcoins is called an unspent output). With a Bitcoin wallet that supports coin control, when you send a payment from your wallet, you can choose to spend only the bitcoins you received from your employer, rather than the ones your friend gave you, even if the bitcoins are all sitting at the same address.

In most cases, it doesn't matter which coins you use to pay for something. However, in some situations you are legally obligated to choose a specific funding source for an expense. For instance, in most places in the United States, a landlord is required to place a tenant's security deposit in a separate bank account to ensure the money is not mishandled and can be spent only in appropriate ways. Someone may have similar obligations when managing Bitcoin funds for other people.

Additionally, because all Bitcoin blockchain information is public, if you receive and send payments from the same pool of Bitcoin addresses that comprise a wallet, your income source and purchases can theoretically be associated surreptitiously. Through the use of coin control, you can choose payment addresses that prevent this association, giving you more privacy.

Future Wallets

Future Bitcoin wallet programs may offer such features as automatic bill payments, cash flow statements, tax reporting, and tighter integration with traditional financial accounting software. Also, continued technical innovation could enable wallets to execute more complicated transactions, such as escrow transactions, or sending bitcoins to accounts that can't be spent until some external criterion is met (such as the year being greater than 2020). No doubt we will see many of these exciting features in Bitcoin wallets in the next few years.

Which Wallet Is Right for You?

Considering the preceding discussions, which Bitcoin wallet should you use? Well, keep in mind that you can use more than one. In fact, if two different Bitcoin wallets use the same private key, they can both spend the same bitcoins. You can have a lightweight, no-blockchain wallet on your mobile phone and a more sophisticated Bitcoin wallet on your home server, both managing one pool of bitcoins.

However, in practice many users keep distinct pools of Bitcoin in separate Bitcoin wallets (i.e., each wallet has its own set of private keys), because it's easy to move bitcoins between them.

A common setup that works well for personal use is to store a small number of bitcoins in a lightweight Bitcoin wallet on your phone or laptop, which travels with you, and store your savings in a separate Bitcoin wallet that is more secure (with such features as cold storage and offline transaction signing). In short, keep a few bitcoins in your hot wallet and save the rest in your cold wallet, which is similar to carrying a wallet with spending cash in your pocket and keeping your life savings in a bank account (except Bitcoin lets you be your own secure bank).

Additional Wallet Considerations

So far we've discussed Bitcoin wallets in terms of their functionality, features, and underlying design, but other considerations should be taken into account as well: Is the Bitcoin wallet open source? Has it received a security audit? Does it have a large user base? Because Bitcoin wallets manage money, it's imperative that you be more careful when choosing a wallet than when choosing other apps, such as games or office software. Be sure to research the Bitcoin wallet program you plan to use before storing significant amounts of money in it. Check with friends or colleagues to see whether they have had good experiences with the program.

Additionally, consider merchant integration. If you want to use bitcoins for transactions at certain stores or restaurants, check whether your Bitcoin wallet software is compatible with their point-of-sale systems. Any wallet app or program with a substantial user base will probably work well, but if you want to be the guinea pig for the latest and greatest Bitcoin wallet, expect to run into a few hiccups when you're trying to make a purchase.

Fortunately, it's easy to try many different wallets and fund them with a few cents of bitcoins to determine how they work and what features they offer. We suggest you experiment with several before you decide on your favorite.

  • [1] Generating and importing paper wallets is the same as generating and importing private keys, and some Bitcoin wallets use one phrase or the other.
  • [2] You think that sounds unlikely? Just wait!
 
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