Bitcoin is the most easily recognizable application of the blockchain technology. To many, it is a “decentralized peer-to-peer” made possible with blockchain technology. Everyone who owns Bitcoin and “stores” them in a Bitcoin wallet is a part of this decentralized network. This blog post will take a look at what a Bitcoin wallet is the essential things you need to know as a beginner, and broaden your understanding of Bitcoin in general. So let’s begin;
What Is A Bitcoin Wallet?
A Bitcoin Wallet is a Keychain, in the sense that a keychain is used to hold your “keys“. The “keys” are specifically referred to as private keys. So a Bitcoin wallet is a keychain or software that holds your private keys, which are used to move your Bitcoin from one public address to another.
Contrary to popular belief or opinion, a Bitcoin wallet does not “store” bitcoins, in the same traditional way that your wallet is used to store money. Your Bitcoin does not “exist” or reside inside your wallet. Your Bitcoin resides in the blockchain – not in your wallet. Your wallet is not even a part of the blockchain. Your Bitcoin wallet could be a device(a Bitcoin hardware wallet such as Trezor, Bitbox, Safepal, etc.), an application, or a program that helps you interact with the blockchain to send or receive bitcoins.
Your Bitcoin wallet works in much the same way as your bank credit card. Your bank credit card doesn’t have any money stored in it, rather, it holds certain information about you that is also with your bank. Your credit card can allow you access to your banking facilities to move your money around or make a payment for goods and services. A Bitcoin wallet does the same thing, it stores your private keys (which uniquely identifies you as the owner of some specific Bitcoin in the blockchain). It allows you access to the blockchain where your bitcoins are stored. And with your private keys, you could move your Bitcoin from one address to another.
It is important to understand that a Bitcoin wallet is a keychain for your private keys and that the security of your bitcoins depends on how well you or your wallet (device or program) secures your private keys. The goal of a good wallet is to securely store your private keys. A distinction will be made soon between your wallet security and the security of your bitcoins. But first, let’s explore your wallet a bit closer.
Bitcoin Wallets are made of Key pairs
A Bitcoin wallet (and indeed all cryptocurrency wallets) is made of a pair of cryptographic Keys. All wallet types -whether offline or online must have a key pair. The pair consists of a private key and a public key. These two are mathematically interconnected.
Private Keys
Private keys prove ownership of a given set of bitcoins on the blockchain. It is what is presented on the blockchain to “sign” a transaction or approve the sending of your assets on the blockchain. Your private keys should be kept secret and should never be revealed to anyone or stored in a place where others can have access to it -Unless you want to lose your funds. Whoever holds the private keys can claim ownership of the bitcoins associated with the corresponding public key.
Public Keys
This is like your bank account number. A public address is used to receive bitcoins from other wallets. It is also simply referred to as your wallet address. You give your friends your public key or address (not your private keys) to receive bitcoins from them. Unlike your private keys, there is no risk in making your public keys visible to everyone. Every public address that has done any transaction is visible to everyone on the blockchain. A typical Bitcoin public key or address will be something like the example given below
bc1qu74asmhdy97xycrc5h4saewdpfy9sxme9mzamy
(This is a real Bitcoin wallet – Kind donations will be appreciated)
Here is something you should be aware of- you could generate a public key (bitcoin address) from a given private key but the reverse (i.e. generating a private key from a public key) is impossible. This is what is known as Asymmetric encryption. This is a layer of security for the Bitcoin network. You cannot generate or guess the private key from a given Bitcoin address.
Your Private Keys And Your Password
When setting up a Bitcoin wallet, especially online or simply using some wallet apps. it is often recommended you follow some basic security such as a good password, setting up a second-factor authenticator (such as a Google Authenticator). and sometimes even a transaction password. You should be aware that these are wallet-level security and are often not enough if other security measures are not followed.
A Bitcoin wallet stores your “keys”. It becomes irrelevant if someone already has access to your private keys through other means. Even if you have a Second-level Authenticator, it becomes useless if your private key is compromised. They will simply use the private keys to transfer your bitcoins whether or not they have access to your bitcoins. The bitcoins are not stored in the wallet, they are stored in the blockchain or the Bitcoin wallet.
You could lose access to your wallet password and still have the Bitcoin secured (the private keys are still with you, stored somewhere else). What you should never lose or compromise is the private keys. That is why you must write to store the private keys separately when setting up your wallet- preferably offline.
Summary
Your Bitcoin wallet helps you store your Bitcoin keys. Your private keys are needed to move your bitcoins from one wallet to another. Your private keys should be stored securely as anyone who has access to your private keys can steal your Bitcoin. Your public key is what you give to your friend to receive bitcoins or other digital assets from them
Credit keys are presented on the blockchain, not stored