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Bitcoin wallets, keys and addresses

By now you’ll hopefully have grasped that what makes Bitcoin and cryptocurrency so significant is the ability to move value online without a trusted intermediary like a bank. One party can send funds directly to the other in a secure way. The blockchain is the technology that makes this possible, maintained by a network of tens of thousands of computers, distributed all around the world.

Unfortunately getting into cryptocurrency means getting your head around a whole new lexicon of terms. Luckily, we are here to help. Here’s what you need to know about how to store and move money in the crypto world.

  • Private keys are long strings of characters that act as a password to access your cryptocurrency.
  • Each private key has an associated address, which looks like another long string of random characters. The blockchain records the balance and history of every address that has ever been used. You can only move cryptocurrency from an address if you have the private key.
  • A wallet is the software that manages your private keys and addresses, enabling you to send and receive crypto.

Because there are no third parties to keep accounts, the responsibility for the safety of your funds rests solely with you. When you transfer bitcoins out of an address, you have to prove you are the owner of that address first. You do this by means of your private key – essentially a long, complex and unique password. Without the private key, you cannot move bitcoins about – and anyone who does have the private key can move them. This is why it is extremely important to keep your keys safe: if you lose them, you lose access to your BTC, and if they’re stolen, your BTC can also be stolen.

For example, the address: 1KU8SrQhNGhnmQsoeNak68BUBTAKi5Dt8G is derived from the private key: L1pQrG2W7ix1stmWXWxYZodmTtcwSXCu9DV2ztgXdxdnEGDmpsAV. (You may also hear about public keys, but you don’t need to worry too much about them at this point.)

When you transfer coins to a new address, what you’re doing is:

  1. Proving you own those coins using the private key to their current address.
  2. Updating the blockchain to show you have registered them to a new address.

Once you have transferred the coins, only the owner of the private key to the new address will be able to spend them.

This process is managed by a Bitcoin Wallet – a piece of software that holds your private keys securely, allows you to create new private keys and addresses to receive and store bitcoins, and send your bitcoins to new addresses.

Some wallets interface directly with the Bitcoin network, downloading a complete copy of the blockchain. These are known as ‘full nodes’, and include the miners who maintain the security of the Bitcoin network and process transactions. There are also ‘lite’ wallets that simply create transactions and send them to a full node, meaning you don’t need to download the full blockchain, with all the implications that has for storage space and bandwidth. Lite wallets can run on a personal computer or mobile device, and are fast, simple and secure to use.

A wallet app will create your keys for you but you can have a go at generating your own private keys and Bitcoin addresses using the site BitAddress.org. Have fun!


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