Bitcoin Wallets and Security

Imagine that you own gold. You need to store it somewhere safely so that no one can steal it from you. You can hide it under a mattress, bury it in the garden, or rent a safety deposit box in a bank. Bitcoin works in a similar way, but with one major difference – it is not physical.

Nevertheless, you still need a place where your bitcoins will be stored securely. That place is a Bitcoin wallet. A Bitcoin wallet does not store bitcoins themselves, because they exist only within the blockchain.

The wallet contains private keys that allow you to access your bitcoins at any time and send them to others. You can think of it as an impenetrable vault – if you have the key to it, you also have access to your money. If you lose it, you lose your bitcoins as well.

There are several types of wallets – they can be software, hardware, or even paper wallets. Paper wallets were typically used in the early days of Bitcoin, when they were the only offline solution.

However, every wallet operates on the same principle of a pair of keys – a private key and a public key.

Private and Public Key

What is the difference between a private key and a public key? What are they used for?

A private key is your “personal signature” that belongs only to you. It proves ownership of your bitcoins. If someone has access to a private account, they can control that account.

It is like your PIN code for a bank card. That is why it is important to never show your private key to anyone and never store it in an online environment, where a hacker could gain access to it.

A public key is used to generate Bitcoin addresses. If someone wants to send you Bitcoin, you simply give them your public address and they send the payment to it.

It is similar to when someone sends you money to a bank account – they only know your account number, but they do not have access to your savings. Access to your account is only available to the one who knows the special PIN code – the private key.

Whoever owns the private key owns all the bitcoins that it unlocks.

The public key is generated from the private key using a mathematical operation, but the reverse does not work – it is not possible to obtain the private key from the public key.

That is the reason why Bitcoin is so secure. Even if someone knows your public address and public key, they cannot gain access to your bitcoins.

So how does it work? As soon as you sign a transaction with your private key, a unique cryptographic signature is created that proves the transaction comes from you.

The Bitcoin network, that is thousands of validating nodes, then verifies this signature using your public key. If the signature matches your public key, the transaction is considered valid and can be included in the blockchain.

When you sign a transaction, the signature is generated locally in your wallet and only the signed transaction is sent to the network, never the private key itself.

If someone tried to forge a transaction and send your bitcoins to their own address, the Bitcoin network would detect it immediately.

A digital signature only works for a specific transaction – if even a single detail were changed, such as the amount or the recipient’s address, the signature would become invalid and the transaction would be rejected.

Since signing transactions requires the private key, losing it means that you will never be able to send your bitcoins again.

Even though they remain visible on the blockchain network, without the private key it is not possible to move them. That is why it is essential to store the private key securely – ideally in the form of a seed phrase.