Where are bitcoins stored? Understanding what a wallet really contains

Your bitcoins are not files sitting in your phone or on a USB stick. They exist on the blockchain, a shared ledger that records transactions and makes it possible to know which amounts can be spent, and under what conditions. Your wallet is used to manage keys and, depending on its type, to prepare or sign transactions.

In other words: what you protect isn't the money itself. It's what lets you spend it.

If my bitcoins aren't in my phone, where are they?

On the blockchain, which Bitcoin.org describes as a shared public ledger. Thousands of computers, the nodes, each keep a copy and check every new transaction against the same rules. A transaction that breaks them is rejected.

But this ledger isn't a list of accounts with a balance next to each name. It contains transactions. Each one spends existing amounts and creates new ones, locked by a spending condition. The most common one says, in essence: "this amount can be spent by whoever produces a valid signature with this key".

These not-yet-spent amounts are called UTXOs, short for unspent transaction outputs. No need to remember the acronym; remember the consequence instead: your balance isn't written anywhere. Your wallet calculates it by adding up the amounts it knows how to unlock.

What is a Bitcoin wallet for?

Day to day, a wallet does three things.

Receiving. It creates addresses from your keys. You give one to whoever is paying you, and the payment is recorded on the blockchain.

Showing your balance. It checks the blockchain, directly or through a server, and adds up the amounts linked to your keys, in BTC or in sats.

Sending. It prepares the transaction, signs it with your private key and broadcasts it to the network. The signature proves you have the right to spend, without revealing the key.

These functions don't have to live in the same place. A watch-only wallet only knows your public keys: it shows the balance and generates receiving addresses, but it can't sign anything. Handy for keeping an eye on savings from your phone without putting any private key on it. Keep those public keys to yourself though: they reveal all your addresses and their history.

Address, private key and recovery phrase: what's the difference?

These words get mixed up quickly. Here's who does what.

A word on the address: it doesn't let anyone spend, but anyone can look up the balance and transactions of an address. Hence the advice to use each address only once. Most wallets offer you a new one each time you receive, by the way.

Don't confuse the recovery phrase and the passphrase either. The first is generated by the wallet and backs up your keys. The second is optional: a word or phrase you choose yourself, added on top.

And one simple rule: your recovery phrase is only for restoring a wallet, inside the wallet itself. It never gets typed into a website, a form, a chatbot or a so-called verification tool. Nobody legitimate will ever ask you for it, not even the manufacturer's support team.

What does a hardware wallet actually contain?

Not bitcoins, at any rate. A hardware wallet isn't a USB stick full of them: it contains none, for the same reason your phone doesn't.

It keeps your private keys, or the seed they can be recalculated from, and it signs. The app on your computer or phone prepares the transaction and broadcasts it. The device shows the details on its own screen, if it has one, then signs without the private key ever needing to leave it. Hence the value of checking the address and amount on the device's screen.

An image that helps: it's less a safe than a signature stamp. It doesn't contain the money, it's used to authorise spending it.

The details vary by model and by how you use it. Some connect by cable, others go through QR codes or a memory card. Some keep the seed in memory, others forget it every time they switch off and ask for it again at each use.

What happens if I lose my phone or my hardware wallet?

Losing the device and losing access to the funds are two different things.

Your bitcoins stay recorded on the blockchain, whether your phone is at the bottom of the lake or not. What you lose is a way to sign. With a compatible backup, you can usually recreate your keys on a new device. That's the idea I explored in Why Bitcoin?: what you keep isn't the money, it's the key that gives access to it.

What "compatible backup" means depends on your setup.

• Recovery phrase only. This is the most common case. The most widespread standard, BIP39, provides for 12 to 24 words. But some wallets have their own format, and Bitcoin Core, for example, is backed up with a file.
• Phrase and passphrase. You need both. A trap worth knowing: every passphrase opens a valid wallet. A typo triggers no error message; it simply opens another, empty wallet.
• Multisignature. The funds require several keys, for example two out of three. You then need enough keys, plus the description of the setup: which keys are part of it and how many signatures are required.

If the device was stolen rather than lost, the careful move is to create a new wallet, with new keys, then transfer your funds to it using your backup.

And when my bitcoins are on a platform?

Then the logic changes. On a platform or an app that holds your bitcoins for you, the provider holds the keys. This is called custody, as opposed to self-custody, where you manage your keys yourself.

The balance shown is an entry in the platform's internal books. It doesn't necessarily match an individual address holding exactly that amount: customers' bitcoins are often pooled, even when you have your own deposit address.

So to get your bitcoins out, you depend on the provider. It signs the withdrawal, under its own rules: checks, minimums, fees, delays, sometimes a temporary suspension.

That isn't necessarily a problem; it's a convenience choice to make with your eyes open. I go into the difference between owning bitcoin and holding a promise of bitcoin in Why I'd rather own Bitcoin than leave my money in the bank.

Frequently asked questions

Does my wallet need to stay online to receive bitcoin?

Not for a payment on the blockchain. The transaction is recorded in the ledger even if your phone is switched off, and your wallet will see it the next time it syncs. Lightning works differently: depending on the wallet, it has to be online at the time of payment, or a service takes over.

Can I view the same funds from several compatible wallets?

Yes, since the funds live in the ledger, not in an app. Two wallets starting from the same backup, or from the same public keys in watch-only mode, will show the same balance, provided they apply the same standards. Otherwise, one may show zero while your funds are still there. To simply look, watch-only is enough: no need to multiply copies of your phrase.

Can someone spend my bitcoins with just my address?

No. Spending requires a valid signature, and therefore the private key. With your address, people can send you bitcoins and look up its history, nothing more.

Back to the notebook