What is the purpose of a Bitcoin wallet? How does it work?

“Wallet” is a misleading name that unfortunately leads to confusion as to what a Bitcoin private key manager is. A much more intuitive way to think about it is as a keychain. Just as you can copy physical keys, you can also copy encryption keys. This is different from a “wallet” where you store your currency.

There are several ways to generate keys. The advantage of a paper wallet is that since you created it yourself offline, you can be confident that no one else can access your keys (provided you have verified that the generation code is secure). They were never online.

Since new users may see this question, it’s worth noting the common pitfalls of paper wallets. The way Bitcoin trades work means that spending less than the total balance in your paper wallet is risky if you don’t have a way in place to handle the remaining balance. When spending with a paper wallet, you must spend the entire balance.