Custodial vs. Self-Custody
Who holds the keys, what each model implies, and when each approach fits.
How to Store Bitcoin
How Wallets Work
Key generation, balance tracking, and what happens when you click send.
Overview
Wallets derive keys from your seed, scan the blockchain for coins associated with those keys, and assemble signed transactions when you approve a send. They may connect to your own node or a provider's server for balance data.
Good wallets let you set fees, label addresses, and export transaction history for taxes. Understanding these basics helps you evaluate wallet software and spot phishing imitations.
Key derivation and scanning
Wallets generate entropy, encode it as a seed phrase, and derive a tree of keys. They scan the blockchain or query servers for relevant transactions.
Light clients trust third-party servers; full-node setups verify locally. Privacy and trust trade-offs differ.
Constructing a spend
Wallets select coins, estimate fees, and request confirmation. Hardware wallets show details on a trusted screen before signing.
Change outputs return leftover value to a new address, helping privacy when reuse is avoided.
Operational security habits
Lock devices with strong passwords. Keep recovery materials offline and separate from daily devices.
Export transaction logs periodically for accounting. Wallet labels help explain flows to a tax preparer.
