Bitcoin started with a very rudimentary address type. In order to get transactions smaller in size and therefor cheaper, new address types got developed that reduce the amount of information necessary to spend a received transaction. Additionally, these addresses types added important new functionalities to bitcoin.
Important to know: You can use all of these addresses in the same way as they are all interoperable. If you use a BitBox02, your addresses are all stored in the same account, meaning you don't need to worry about different address types.
All bitcoin addresses in a wallet are derived by a seed phrase. This means you can create each type of address from one seed and do not need a new seed for each address type.
Legacy Adresses (P2PKH)
Legacy addresses are addresses that start with the number 1.
A legacy address is simply the hash of the public key to your private key. Back when Bitcoin launched in 2009, this was the only way to create an address. Today, this uses the most amount of space inside a transaction and is therefor the most expensive address type.
Nowadays there is no good reason to use this type of address, as new types are better in every way. Most people will use this type of address only if they have an old wallet, that used to be incompatible with newer address types.
Fot this reason, the BitBox02 does support sending to legacy addresses, but not receiving via a legacy address.
Pay to Script Hash (P2SH)
Pay-to-Script-Hash are addresses that start with the number 3.
In contrast to legacy addresses, pay-to-script-hash addresses are not the hash of the public key, but of a script that involves certain spending conditions, which stay hidden from the sender. These spending conditions can be very simple (owner of public key A can spend this bitcoin), or rather complex (owner of public key B can spend this bitcoin after X amount of time if he reveals a predetermined secret). Using this script, P2SH addresses can even make use of SegWit and save transaction fees.
Sending to a P2SH address is roughly 26% cheaper than using a wallet with legacy addresses.
Native SegWit (P2WPKH)
Native SegWit are addresses that start with bc1q.
This type of address reduces the amount of information stored in the transaction even more by not keeping the signature and script within the transaction, but in the witness.
Using this type you can save additional 16% over the P2SH addresses, adding up to over 38% savings over legacy addresses. Because of these savings, this is currently the most used standard for addresses.
Because some exchanges and wallets don't support Bech32 addresses yet, they prompt the user to send them a P2SH address instead. This is why most wallets still include the option to create a P2SH or even a legacy address wallet.
Native SegWit is the default within the BitBoxApp.
Taproot addresses start with bc1p.
Taproot addresses are not used yet. In November of this year, the bitcoin network will perform the taproot soft-fork. This will enable a lot of new smart-contract capabilities for bitcoin-addresses and improve the privacy of spending such transactions.
Regular taproot transactions are slightly bigger than native segwit, but smaller than legacy addresses. This is because they are tied to public keys instead of public key hashes. For complex transactions involving for example a multisignature script, taproot adresses save a lot of space, making them cheaper.
How to identify a bitcoin address?
You can identify the type of a bitcoin address by looking at the first letters of it. If it starts with "1", it's a legacy address. If it starts with "3", it's a P2SH address. If it starts with "bc1q", it's a native segwit and if the first 4 letters are "bc1p", it's a taproot address.
Where can I get a bitcoin address?
You can generate a bitcoin address by clicking on "Receive" within your bitcoin wallet. You can create as many different bitcoin addresses as you want. For privacy reasons it is advised to not re-use an address.
Do I have to change my bitcoin address?
You do not have to change your bitcoin address. If you want to send your bitcoin to another address, you will have to do a regular transaction to the new address you have generated in your wallet.
What bitcoin address should I use?
Most bitcoin wallets default to bech32 (native segwit) addresses, which saves the highest amount of transaction costs. If your wallet let's you choose which type you want to use, you should use native segwit addresses.
How do bitcoin addresses work?
Bitcoin addresses contain the information about who can access the bitcoin sent to this address. By for example proving that you control the private key to a bitcoin address, you are allowed to send a transaction from it. Without proving ownership of an address, you cannot send a valid transaction.
Are bitcoin addresses case-sensitive?
No, bitcoin addresses are not case-sensitive.
Don’t own a BitBox yet?
Keeping your crypto secure doesn't have to be hard. The BitBox02 hardware wallet stores the private keys for your cryptocurrencies offline. So you can manage your coins safely.
The BitBox02 also comes in Bitcoin-only version, featuring a radically focused firmware: less code means less attack surface, which further improves your security when only storing Bitcoin.
Shift Crypto is a privately-held company based in Zurich, Switzerland. Our team of Bitcoin contributors, crypto experts, and security engineers builds products that enable customers to enjoy a stress-free journey from novice to mastery level of cryptocurrency management. The BitBox02, our second generation hardware wallet, lets users store, protect, and transact Bitcoin and other cryptocurrencies with ease - along with its software companion, the BitBoxApp.