While bitcoin and other cryptocurrencies have generated a large amount of excitement around a variety of financial and technical topics, the reality is that this new technology is still somewhat difficult for the average person to use. Although the software built around cryptocurrency networks is improving, there are still plenty of stories of people losing their cryptocurrency funds to theft, user error, or loss of keys. Keys, in particular, are maybe one of the most misunderstood aspects of cryptocurrency.
By: Kyle Torpey | Apr 3, 2020 | Modified Jun 25, 2020
A large amount of the difficulties associated with using bitcoin today has to do with what makes it so valuable in the first place. This is the fact that each individual is in complete control of their own money under this new financial system. Users are able to move money around in a permission-less manner with cryptocurrencies like bitcoin, but this also means users don’t necessarily have anyone to run to for help when something goes wrong.
Cryptocurrency keys are what allow cryptocurrency users to access their crypto holdings. Only the person who has the private key associated with a particular cryptocurrency address is able to spend the funds held in that address. The cryptocurrency keys are sort of like a username and password that you would find at a normal website.
Public cryptocurrency keys are used as the public-facing addresses where cryptocurrency funds can be sent. This is analogous to the public address where you reside. It consists of a country, city, street name, and house number, in short, it’s a destination. This analogy holds up, because that exactly how a public address works. Public addresses, or the Public key, is the location, or address that contains a particular amount of cryptocurrency.
Private cryptocurrency keys are basically the passwords of the cryptocurrency world. These crypto keys allow you to access your cryptocurrency inside of your wallet and be able to send the funds to other addresses.
There is a common saying in the cryptocurrency space, “Not your keys, not your crypto.” The keys that are being discussed in this phrase are the private cryptocurrency keys. For example, if you have some bitcoin on an exchange, then the exchange is actually holding the private keys on your behalf. From the bitcoin network’s perspective, it is the exchange that is actually the owner of the bitcoin associated with the private keys.
Keeping with the address analogy, private keys are much like the metal keys that gain you access to your house. You may only access, and move the items in your house, if you have the private, metal key associated with the public address.
Yes, you can definitely lose your keys. This has been a common problem in Bitcoin and other cryptocurrency networks, although more security solutions are coming online every day.
You should treat the keys associated with your Bitcoin wallet like an important legal document. There is no way to recover a lost key, so it is imperative that you write down you key multiple times, and keep them in safe locations, such as a fireproof safe. It is extremely important to understand this extra level of personal responsibility that comes with cryptocurrency.
Currently, the best and most secure way to store cryptocurrency keys is through some sort of offline setup. Of course, the level of security you want to have with your own cryptocurrency holdings will depend on how much cryptocurrency you own. Obviously, it wouldn’t make sense to purchase a $100 hardware wallet to secure $10 worth of bitcoin.
If you are someone who just wants to buy some bitcoin and then hold it for five or ten years, then you’ll want to use some sort of offline process to hold your funds, whether it be a paper wallet or a hardware wallet. You will also need to make sure that you do not have a single point of failure in your setup. For example, you don’t want to simply write down your private keys on a piece of paper and then shove it in your sock drawer – at least not if you’re putting a non-trivial amount of money into the cryptocurrency space. Instead, you’ll want to break your private key into multiple pieces that can be placed in different locations. You’ll also want to have backups available of each piece of the overall cryptographic puzzle in case something goes wrong.
For those with extremely large amounts of Bitcoin or other cryptocurrencies, there are companies, such as Casa, that can help you manage your holdings and make sure that you are able to keep them safe.
All cryptocurrencies work with the concept of public key cryptography. If a coin did not work in this manner, then it wouldn’t really be much of a cryptocurrency, and it would probably be possible for some third party to move funds around the system as they see fit.
Every single coin in a cryptocurrency network does not necessarily come with its own public and private key pair. Instead, the addresses where cryptocurrencies are held have public and private keys.
These days, there is usually no reason to see your actual private keys. In most cryptocurrency wallets, you are given a 12 or 24 word phrase to remember or store somewhere safe, and that effectively acts as your private keys.
If you want to see your real private keys, then that can sometimes be achieved through the settings of whatever wallet you are using. However, some wallets don’t even offer an option to see your private keys at this point.
Of course, if you’re using a custodial wallet, then there are no private keys to see because someone else is holding the funds on your behalf, similar to how a traditional bank works.