Understanding Bitcoin Address Types: A Complete Guide

Bitcoin addresses are like email addresses for money—unique identifiers that tell the network where to send your bitcoin. But unlike email, Bitcoin has evolved through four distinct generations of address formats, each introducing new capabilities and trade-offs.

Understanding these generations helps you make informed decisions about security, fees, and functionality.

The Four Generations at a Glance

Generation 1: P2PKH — The Original (2009)

Pay-to-Public-Key-Hash addresses launched with Bitcoin itself. They established the fundamental security model that protected public keys until spending.

Example Address

1BvBMSEYstWetqTFn5Au4m4GFg7xJaNVN2

How It Works

1. Your wallet generates a private key
2. The private key derives a public key
3. The public key is hashed (SHA-256 + RIPEMD-160)
4. The hash becomes your address

Characteristics

What It Introduced

• First practical Bitcoin address format
• Hash-based security model (public key hidden)
• Human-readable addresses (vs raw public keys)

Limitations

• No support for complex spending conditions
• Largest transaction size (highest fees)
• Single signature only

Current Status

• ~35% of UTXOs, holding ~6.5M BTC
• Trend: Declining as users migrate to newer formats
• Recommendation: Avoid for new wallets

Generation 2: P2SH — Programmable Money (2012)

Pay-to-Script-Hash introduced Bitcoin's first major upgrade: the ability to lock funds with arbitrary conditions, not just a single signature.

Example Address

3J98t1WpEZ73CNmQviecrnyiWrnqRhWNLy

How It Works

1. Create a script defining spending conditions (e.g., "2 of 3 signatures required")
2. Hash the script
3. The hash becomes your address
4. To spend, reveal the script and satisfy its conditions

Characteristics

What It Introduced

• Multi-signature wallets: Require M-of-N signatures to spend
• Time-locked transactions: Funds locked until a specific time/block
• Atomic swaps: Trustless cross-chain exchanges
• Wrapped SegWit: P2SH-P2WPKH for backward compatibility

Limitations

• Script complexity revealed when spending (privacy leak)
• Variable transaction sizes depending on script
• Still uses Base58Check encoding

Current Status

• ~15% of UTXOs, holding ~3M BTC
• Trend: Stable, still essential for specific use cases
• Recommendation: Use for multi-sig when compatibility is priority

Generation 3: P2WPKH/P2WSH — The SegWit Revolution (2017)

Segregated Witness was Bitcoin's most significant upgrade, fundamentally changing how transactions are structured. It introduced two address types: P2WPKH (single-sig) and P2WSH (script-based).

Example Addresses

P2WPKH (42 characters):

bc1qar0srrr7xfkvy5l643lydnw9re59gtzzwf5mdq

P2WSH (62 characters):

bc1qrp33g0q5c5txsp9arysrx4k6zdkfs4nce4xj0gdcccefvpysxf3qccfmv3

How It Works

The key innovation is "segregating" (separating) the witness data (signatures) from the transaction data:

1. Transaction data goes in the main block
2. Witness data goes in a separate structure
3. Witness data is "discounted" in fee calculations

Characteristics

What It Introduced

• Lower fees: ~38% reduction through witness discount
• Fixed malleability: Enabled Layer 2 solutions like Lightning
• Better encoding: Bech32 is lowercase-only, better error detection
• Block capacity increase: Effective ~2MB blocks via witness discount

Limitations

• Not supported by very old wallets (pre-2017)
• Two similar-looking prefixes (bc1q) for different types
• Script still revealed when spending (P2WSH)

Current Status

• P2WPKH: ~40% of UTXOs, holding ~7.5M BTC (largest share)
• P2WSH: ~5% of UTXOs, holding ~1M BTC
• Trend: P2WPKH is the current standard
• Recommendation: Excellent choice for most users

Generation 4: P2TR — Taproot's Trade-off (2021)

Pay-to-Taproot represents a philosophical shift in Bitcoin address design. It prioritizes efficiency and privacy for complex transactions, but makes a notable trade-off on public key exposure.

Example Address

bc1p5cyxnuxmeuwuvkwfem96lqzszd02n6xdcjrs20cac6yqjjwudpxqkedrcr

How It Works

Taproot combines two spending paths in one address:

Key Path (simple case):

• Spend directly with a single signature
• Most efficient, looks like any other Taproot spend
• Public key is exposed in the address itself

Script Path (complex case):

• Reveal and satisfy one of multiple possible scripts
• Uses Merkle trees to hide unused conditions
• Only reveals the path actually used

Characteristics

What It Introduced

Schnorr Signatures (BIP 340):

• More efficient than ECDSA
• Enable key aggregation (multiple keys → one key)
• Support batch verification

MAST — Merkelized Alternative Script Trees (BIP 341):

• Hide unused script conditions
• Only reveal the spending path used
• Complex transactions look simple

Privacy Breakthrough:

• Multi-sig transactions look identical to single-sig
• Time-locks, escrows, and simple payments all look the same
• Observers can't distinguish transaction types

The Quantum Trade-off

Previous generations kept your public key hidden behind a hash until you spent funds. Taproot deliberately exposes it:

Current Status

• ~5% of UTXOs, holding ~1M BTC
• Trend: Growing rapidly
• Recommendation: Best for privacy-focused use cases; consider Gen 3 for long-term cold storage if quantum concerns you

Evolution Summary: What Each Generation Changed

Transaction Fee Comparison

The practical impact of each generation on your wallet:

Wallet Compatibility

Recommendations by Use Case

Daily Spending Wallet

Recommendation: Gen 3 (P2WPKH) or Gen 4 (P2TR)

• Best fee efficiency
• Wide compatibility
• Quick transactions

Long-term Cold Storage

Recommendation: Gen 3 (P2WPKH)

• Public key stays hidden until you spend
• Excellent fee savings when you eventually move funds
• Well-supported by hardware wallets

Multi-signature Security

Recommendation: Gen 4 (P2TR) or Gen 3 (P2WSH)

• P2TR: Best privacy (multi-sig looks like single-sig)
• P2WSH: More established, hash-protected keys

Maximum Compatibility

Recommendation: Gen 2 (P2SH-P2WPKH)

• "Wrapped SegWit" works with virtually all wallets
• Still provides ~26% fee savings
• Good middle ground

Key Takeaways

Technical Appendix

Address Encoding Formats

Identifying Address Types in Code

function identifyAddressGeneration(address: string): string {
  // Mainnet addresses
  if (address.startsWith('1')) {
    return 'Gen 1: P2PKH (Legacy)';
  }
  if (address.startsWith('3')) {
    return 'Gen 2: P2SH (may wrap SegWit)';
  }
  if (address.startsWith('bc1q')) {
    return address.length === 42
      ? 'Gen 3: P2WPKH (Native SegWit)'
      : 'Gen 3: P2WSH (Native SegWit Script)';
  }
  if (address.startsWith('bc1p')) {
    return 'Gen 4: P2TR (Taproot)';
  }

  // Testnet addresses
  if (address.startsWith('m') || address.startsWith('n')) {
    return 'Testnet Gen 1: P2PKH';
  }
  if (address.startsWith('2')) {
    return 'Testnet Gen 2: P2SH';
  }
  if (address.startsWith('tb1q')) {
    return 'Testnet Gen 3: SegWit';
  }
  if (address.startsWith('tb1p')) {
    return 'Testnet Gen 4: Taproot';
  }

  return 'Unknown address format';
}

Further Reading

• BIP 16: P2SH
• BIP 141: SegWit
• BIP 341: Taproot
• BitMEX Research: Taproot Quantum Spend Paths

Disclaimer: This article is for educational purposes only. Address formats, network statistics, and security considerations evolve over time. Always verify current best practices before making significant decisions about Bitcoin storage.