Crypto Investing #36 – Bitcoin & Cryptocurrency Wallets Explained

What’s up, guys? This is Tai Zen. I’m broadcasting from Pensacola, Florida. It’s a beautiful day. I got my friend the doctor here and he’s been asking me some questions about how a Bitcoin wallet works.

For that reason, I want to take a moment to explain to you how this Bitcoin wallet works so that you understand it and maintain the security of it. It’s very important because I don’t want you to invest all your time and money into Cryptocurrencies and then end up accidentally losing it. Therefore, I’m trying to break it down, so it’s easy to understand and as simple as possible.

In my hand, I have a stack of cash. It’s $1 bills and I got it for the purpose of this video. I’ve got my doctor friend here and I will explain it to him, so you can learn from it too. I want you to look at this like Litecoin, Bitcoin and everything.

It doesn’t matter what Cryptocurrency it is. It can be the DAO tokens, the Augur’s Reputation tokens, or DigixDAO tokens that are backed by gold. It doesn’t matter what it is. I want you to always think of it as electronic cash. I don’t want you guys to think of it as digital currencies, electronic currencies or Internet money.

If you think of it as cash, it solves all the security issues that you need to be concerned with. In my other hand, I have a leather wallet. This wallet here in the real world is used to store your cash. In the world of cryptocurrencies, this electronic wallet is called a client, which is its technical term.

The nickname for it is a wallet. Satoshi Nakamoto invented the first cryptocurrency wallet for Bitcoins. He just called a wallet to help people understand where their cash is that. Any questions so far?

Doctor: No.

Tai Zen: When this cash is in here and I’m holding it, who has control of this cash?

Doctor: You do.

Tai Zen: Now if I give it to you and you hold it. Who has control of that cash?

Doctor: I do.

Tai Zen: When you hold it and you control it, you have the ability to take that cash out and give it to whoever you want.

Doctor: If I have the password.

Tai Zen: No, we’re not talking about password yet. If I have this cash, I have the ability to take the cash and give it to whoever I want and send it to whoever I want.

In the world of cryptocurrencies, electronic cash is sitting inside the electronic wallet with a password. This password goes on top of it and protects this wallet in case of somebody logs onto your computer or your phone. For security reasons, all the cryptocurrency creators or inventors put a password on it.

If I hold this wallet and I have the password to this wallet, then I have the ability to send this electronic cash-out. Now if I give the wallet and the password to you who has the ability to control that cash and to send it out?

Doctor: I do.

Tai Zen: This wallet can exist and be put in several places. Firstly, if I put it on my Dell laptop here, that wallet sits on the Dell Computer. It cannot go anywhere else. It can only sit there.

However, the password can be backed up and saved somewhere else. In case somebody steals your computer; you lose a computer or you dropped the computer and it malfunctions, the password is also saved on a separate memory stick or somewhere else. The password also comes with what’s called a private key.

When you have those, the private key and this password, then you have the ability to reinstall that wallet on a different computer or a different computing device. Make sense?

Doctor: You’re going to reinstall the wallet and the digital money

Tai Zen: because it’s backed up.

Doctor: when you reinstall, does the installation recognize just the cash or recognize the wallet?

Tai Zen: Both.

Let’s say I have an iPhone here. I install this wallet, this cash and this password on this, so there are different brands of wallets such as Mycelium wallet or the official Bitcoin wallet.

Every cryptocurrency has its official wallet. For example, Ethereum has the official wallet called Ethereum wallet. Bitcoin has its official wallet is called Bitcoin Wallet. Then there are third-party wallets or second -party wallets. There are other people that create their own wallet.

For example, on the iPhone, there was a good Bitcoin wallet called the Breadwallet, like the bread that you eat.

If you install that Breadwallet on your phone like this. Where is this wallet now?

Doctor: It’s on the iPhone.

Tai Zen: It’s on the iPhone. If I give that phone to you with a password on it, then who has control of that?

Doctor: I do because I have control of the phone.

Tai Zen: Yes, the phone, the wallet, and the password. Let’s just say, for example, you take my phone that contains the Bitcoin wallet and the cash in it, but you don’t have the password. Do you have the ability to send that cash to anyone?

Doctor: I do not.

Tai Zen: You do not right?

Doctor: No.

Tai Zen: This is just extra security that goes on here. This is called a phone wallet. For example, like Breadwallet. That’s called a phone wallet. If it’s on my laptop or my desktop computer, it’s just called a desktop wallet. Deal?

Doctor: Yes

Tai Zen: Now the other type of wallet that we want to talk about is an online wallet. There are two types of online wallets. One is the wallet that you put on someone else’s computer. For example, Coinbase is an extremely popular wallet service.

Pretending that I am Coinbase company. When you create a wallet, you asked me: “Hey Tai, can you create a wallet for me?” and I do. Then you put a password on and you put the cash in it. Now I am Coinbase. I am holding your Coinbase wallet and the password that’s in there. So who has the ability to send the money in or out?

Doctor: Only you do. You have to go to the Coinbase and put in your password to send money in and out. Coinbase is holding it.

Tai Zen: I’m Coinbase and I’m holding it.

Doctor: But they cannot transfer anything

Tai Zen: Yes, they can.

Doctor: But they don’t have your password.

Tai Zen: Yes, they do.

Doctor: I see, but there is an honor code stating not to do it

Tai Zen: No, it has nothing to do with the honor code. They are the ones who hold the password so they can move Bitcoins. They can move his cash in and out of your wallet anytime they want.

Doctor: Without your permission.

Tai Zen: Without your permission. Exactly.

However, they are a reputable company so they’re not going to do that.  Therefore, you still trust me, Coinbase, to make sure that I don’t steal your Bitcoins. When you log on to your Coinbase account and send the Bitcoins here or there, what are you actually doing?

Doctor: You are giving them permission.

Tai Zen: You’re making a request. You’re sending in a request by saying that “Hey, I want to send some of my cash to this person or to this person”. You actually don’t control the Coinbase account. Makes sense?

Doctor: You do or you don’t?

Tai Zen: You don’t.

Doctor: I understand

Tai Zen: you don’t. There’s a difference. You do not have the ability to move the cash in and out of that Coinbase wallet. You’re just sending them a request and then the people at Coinbase will move it for you.

Doctor: I understand that.

Tai Zen: Does that make sense?

Doctor: Yes

Tai Zen: Now, where is the Coinbase wallet sitting at?

Doctor: It’s sitting at the Coinbase website.

Tai Zen: No, it is sitting on their servers.

Doctor: On the Internet. Whatever it is. It’s still on Coinbase.

Tai Zen: They’re located in San Francisco. Their computers are somewhere in San Francisco, so the wallet is sitting at on a computer somewhere in San Francisco.

You have understood that this is one type of online wallet, which is Coinbase. Now they have another type of wallet that’s also online. That’s blockchain.info. Now, blockchain.info is the exact same type of wallet, but here’s the difference. Who has the password to move the cash in and out this wallet? Who has the password?

Doctor: Well I do.

Tai Zen: You do. Even though the wallet is sitting at blockchain.info computer, they actually do not have the ability to send this cash in or out.

Doctor: No, because I have to be able to do it with the password.

Tai Zen: Because you hold the password. They don’t.

Doctor: It is the same thing, but Coinbase just recognizes me to do the transfer. I need to give the password for Coinbase.

Tai Zen: No, Coinbase is holding the password to your wallet, so they have the ability to take the cash in and out. You don’t have that ability with Coinbase. What you have is an email system. When you log onto their website, it’s just basically email request. You’re sending them an email saying “Hey, I want to move the cash in and out” and that’s when they’ll do it for you.

Doctor: But you can’t transfer the money unless you put in your email and your password

Tai Zen: Your Coinbase password is different from your wallet password. You don’t have that. You don’ t even know what it is.

Doctor: No, I don’t have that.

Tai Zen: No, you don’t. That’s why I say that you don’t have the ability to send the cash-out.

Doctor: Now I understand because you’re saying Bitcoin has it, but I don’t have a wallet within Coinbase with my protected password and everything for me to direct it.

Tai Zen: No, you don’t. The only thing that you have, the password for Coinbase, is just to give you access to Coinbase.

Doctor: To tell them my requests.

Tai Zen: To request a transaction. That’s it. Does that make sense?

Doctor: Got It.

Tai Zen: Don’t mistake the password that you have for Coinbase as the password for the wallet. Does that make sense?

Doctor: Yes.

Tai Zen: So why do people use these online wallets? Why not use a wallet on your phone or the wallet that’s on your computer? Why don’t you people just use the laptop wallet or their phone wallet? Why are they using a Coinbase wallet or a blockchain.info wallet for?

Doctor: My assumption is they’re using that because it’s a little more secure. If they lose a computer or their phone, they can always get at it.

Tai Zen: It’s not more secure. It’s about accessibility. If you left the phone at home, you can always access it from any computer. What happens if you lose the computer, you can get access from another computer, phone or any computer device.

Doctor: Got It.

Tai Zen: Does that make sense? You have phone wallet, laptop and desktop wallet, and then you also have online wallets, but there are two different types of online wallets. Here’s the pop quiz. If you open up an account at Poloniex, Kraken or any of those exchanges like that, what type of wallet do they have? Who has the ability to send money in and out of those exchanges?

Doctor: Well, no, you already have a wallet to exchange it back and forth to them right?

Tai Zen: When your Bitcoins are sitting at Kraken or Poloniex, who has control of that wallet?

Doctor: They do.

Tai Zen: They have control. You don’t. Therefore, when you log into your Poloniex or Kraken exchange account and you tell them “Hey, send a Bitcoin here or there”, what are you actually sending them? You’re just sending them a request. You’re not the person that actually has the password to your wallet

Doctor: Because you trust them to do it.

Tai Zen: Because you think that Poloniex or Kraken is a trustworthy company that they’re not going to run off with your exchange account.

Doctor:  They won’t go Mt. Gox on you.

Tai Zen: They won’t go Mt. Gox on you. Exactly. Does that make sense?

Doctor: Yes.

Tai Zen: What is the advantage of having the phone wallet such as Breadwallet?

Doctor: It’s easiness of accessibility…

Tai Zen: …and you’re the ones who have control of it. You can always access to it If you’re one of those people that don’t lose phones easily. In addition, all the desktop wallets and the phone wallets allow you to back up a password onto a memory stick and you can keep that memory stick at home.

In case you’re traveling and you lose this phone and everything, you can always go home and use your backup that’s on your memory stick to create a new Breadwallet, upload the old key and the old password, then it’ll allow you to access it again. Makes sense?

Doctor: Yes

Tai Zen: If you lose the phone, the first thing you go home and do is you go get the memory stick that you backed it up to, you load it up onto a new Breadwallet and then you transfer the Bitcoins over to a different account for security reasons. Makes sense?

Doctor: Yes

Tai Zen: Is that, is that clear

Doctor: That’s clear.

Tai Zen: Crystal clear?

Doctor: So far.

Tai Zen: Any questions?

Doctor: No.

Tai Zen: All right guys. I hope that video was able to help you guys understand how a cryptocurrency wallet works, how the passwords work and how the different types of wallets work. As I said, the technical term for it is a client, but Satoshi used the nickname wallet so that it’s easier for people to understand.

Hopefully, this video helps you understand how the electronic cash is being moved and how it’s being stored, so you guys don’t lose your cryptocurrencies.

If you liked this video, give me a thumbs up on it. If you don’t like it, give me a thumbs down. If you want more videos like this, let me know.

If you have friends or family that are just getting into cryptocurrencies, and you want to make sure that they understand how the security of their wallet services work, make sure that you share this video with them and have them subscribe. I look forward to seeing you in a future video.

 

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