Private keys and wallets
While Bitcoin addresses appear to be a string of random numbers, they are actually computed from a private key. Private keys are long strings of random characters generated by your Bitcoin wallet software. There can only be one address generated from your private key, thus your private key is both the seed and password to your Bitcoin address.
Note
IMPORTANT
The private keys are normally hidden by your Bitcoin wallet, but they can be occasionally printed on paper as a physical backup. They should never be shared publicly as they control access to your funds.
Bitcoin private keys generally contain 51 characters and start with a 5, such as in the following example:
5Jd54v5mVLvyRsjDGTFbTZFGvwLosYKayRosbLYMxZFBLfEpCS7
Similar to your pocket wallet with credit cards, your Bitcoin wallet is a collection of addresses and private keys. Each address is used to receive and hold bitcoin.
|
Bitcoin Address Private Key |
Bitcoin Amount |
|---|---|
|
12yuztN6Ci1p3h334YSKDFWWuexRtGu1f6 5KgtRmuFSgqcjhiE4TLD1pPFvKVLbmfjyavrBwnGV5eW8eRgoKM |
3.14000000 |
|
1L3cM9UTdEtKVp5nMjgvdNr5wNyBon8kzB 5HrfH1Za4kNEZFmhMe3LKwbztAScAGFkiGZqpq5aGigwX8vsSAh |
0.22340000 |
|
1EKMiayzXDbLFRVCiMZowewnHNvgWEet16 5HrfH1Za4kNEZFmhMe3LKwbztAScAGFkiGZqpq5aGigwX8vsSAh |
1.22395800 |
|
1JWk1RG6hgbHCTv85eXvHWjCfebN64PHwV 5JzquBknRfsyiynxjCSho4AWBfuT3nd5LfZxT9VRoq5NCsRcedd |
0.00398840 |
|
Total wallet balance: |
4.59134640 |
Table 3 - Bitcoin addresses and private keys
In the preceding table, we can see how the balance in a typical wallet is composed of multiple Bitcoin addresses (in bold) with their corresponding private keys. Each address holds a balance that can be combined for a payout.
While most Bitcoin software holding your bitcoin are called wallets, they are technically keychains. Keychains are designed to manage and protect your Bitcoin keys. The term wallet is a convention carried over from Bitcoin legacy software.
Note
IMPORTANT
It is not possible to recover lost private keys. If you choose to manage your own private keys, be sure that you're able to backup and restore them.
Due to the risk of loss, it should also be mentioned that online wallets are subject to the same risks. Without proper security and procedures, some online wallets have been hacked, resulting in losses.
Therefore, it is advisable to choose online services that have a good reputation and offer insurance against loss. Circle and Coinbase, mentioned later in the book, both carry insurance to help protect their customers from fraud and theft.
Reputable online wallets take the necessary precautions to protect your private keys. Most online wallets use a technique called Cold storage. Holding private keys in cold storage means that your keys are physically stored offline in a vault. Access to the vault is required to interact with the keys.
Additionally, multi-signature addresses are used to protect the coins in cold storage. Typically, an address will require one key to transfer its bitcoins. Multi-signature addresses usually require two or more keys to sign a transfer. With cold-storage, there will often be a two of three requirement so that no one employee has full access to the funds.
Private keys are generated from large amounts of random data, called entropy in computer science, and are very difficult to crack. With all the computing power available today, it is not possible to find the private key of a Bitcoin address using brute force methods. Even if computing power were to exponentially increase to the point where that's possible, the Bitcoin software can be upgraded to include new cryptographic methods to match.
