What is a private key?
An address is a Bitcoin public key to which transactions are sent and is also part of a “key pair“. The private part of the key pair is used to sign transactions and prove ownership of an account. That necessary signature can only be created if the correct private part of the key pair is used, but it can be verified by anyone using the public key. You never share your private key with anyone.
This public key cryptography, or asymmetric cryptography, is what Bitcoin uses to control funds. A public key can be generated from a private key, but not vice-versa as it is computationally too difficult. The asymmetric part means something encrypted with a private key, can be decrypted with the public key. Private keys are what proves you can send Bitcoin that has been sent to you, much like your bank account password. Should you lose it, or it is stolen, your funds are gone.
For the first time in recorded history wealth can be transferred instantly across borders without any jurisdiction using a medium of exchange that is unconfiscatable. It is unconfiscatable due to the unique quality of creation with an unknown discoverer. Bitcoin cannot be confiscated so long as the owner holds the private keys.
What do private keys do?
Understanding the importance of a private key will shield you from losing money and offer a better grasp of how bitcoin works. Crypto and currency merged in cryptocurrency refer to a digital currency that is encoded and decoded, a special feature of blockchain technology that prevents human interference. Transactions using bitcoin are confirmed using encrypted mathematical equations by linking both private and public keys.
The private key does the encryption part, creation of the code. The public key decodes or decrypts the code created by the private key associated with it. Both are different, yet mathematically related to one another through a mathematical signature. This signature is a set of procedures for signing messages and authenticating those signatures.
Bitcoin has a secure messaging system that processes transactions in the form of value-transfer messages. Private keys help confirm these messages and identify them, hence a private key works in a transaction as both input and output. Simply put, two pieces of information are required for a bitcoin transaction: a public and a private key. The first is public and identifies a sender or a receiver, the second is private and creates a secure message signature.
The person in possession of a private key is the only one that can provide the right digital signature to authorize a transaction. If you hold the private key, there is no reason or need to keep your crypto assets on an exchange, in a hot wallet, or with a third party. Funds are secured because the only way to produce a valid signature is to use the private key that is correctly associated with the public key.
Why must private keys be safeguarded?
In short, you lose your private keys for any reason – you lose your assets. The person holding the private keys owns the assets – be that an exchange where you have an account, your hot wallet app, the mugger who grabs your smartphone where they’re stored, or a hacker who breaches your computer. The best way to secure private keys is to use an offline storage device known as a hardware wallet. Hardware wallets combine hot and cold storage for unequaled security that offers the convenience of connecting to the Internet for conducting transactions. Additionally, should you lose the device itself, you can recover your assets.
What are recovery seed phrases?
So, the question might be, how could one lose a hardware wallet device and recover their assets? When a hardware wallet is set up, users are provided with a unique “recovery seed phrase” made up of 12 to 24 randomized words. These words should be written down or recorded and safely stored in a location that is never online or accessible online.
The best way to secure your recovery seed is by literally writing those seed words down in the correct order on a piece of paper and storing that paper somewhere safe, like a bank safety deposit box or a home safe.
Never store recovery seed words on a computer, phone, Google drive, cloud drive, Dropbox, etc. and most definitely never email it to yourself. It is also a good idea to make a couple of copies and store them in different locations.
Where you store recovery seed words is critical. Should your home become flooded or destroyed by fire, that paper record would most likely not survive either. Some users go the extra mile and commit their recovery seed phrase to memory. However, that would not be a good option for heirs should something happen to the person. There are also waterproof metal cold storage options that use engraved seed words which still need to be stored in a safe place.
Another consideration is what will happen to your digital assets if you were to pass away or become incapacitated in some manner. It is a good idea to leave detailed instructions for family members in such an event. Especially if your family is unfamiliar with handling crypto assets, otherwise those precious private keys would be lost to your heirs forever.