Wallet

A Bitcoin wallet doesn't actually hold Bitcoin. Bitcoin lives on the chain. A wallet holds the private keys that authorize moving it.

What a wallet does, mechanically:

• Generates and stores keys, typically by deriving them from a BIP 39 seed phrase using a hierarchical deterministic structure.
• Tracks the on-chain UTXOs you can spend - either by asking full nodes it doesn't run itself (the light-wallet model), or, with Bitcoin Core, from the full node its wallet is built into.
• Constructs and signs transactions when you want to send.
• Generates fresh receive addresses as you need them.

Wallets come in several archetypes, each with different security/convenience tradeoffs:

• Custodial wallets - someone else holds your keys (an exchange or a payment app). Easiest to use, weakest property guarantees. Whoever holds the keys can spend the coins, so what you hold is the company's promise to pay, not Bitcoin; the linked entry records how often that promise has failed.
• Mobile wallets - you hold the keys on the phone itself. Convenient daily use, hot-wallet security model: the keys live on an internet-connected device.
• Desktop wallets - Bitcoin Core's own wallet and others. Often connect to your own node, and usually offer coin control (Bitcoin Core's GUI has had it since version 0.9.0).
• Hardware wallets - keys stay on a dedicated signing device, never touching internet-connected machines. Your computer passes transactions in and out; the device signs.
• Multisig setups - more than one key, usually on separate devices, required to authorize a transaction. Strongly recommended for significant amounts.

The right wallet depends on what you're holding and what you're doing. Spending money you'd carry as cash? A mobile wallet is fine. Long-term savings? Hardware, ideally multisig. The general rule: more value -> more friction -> more separation between keys and online surfaces.

See the Journey: Be Your Own Bank chapter for the full walkthrough.