What is a Bitcoin Wallet

As a bitcoin user, having a personal bitcoin wallet is a starting point.

We will go through key points about bitcoin wallets and their variants, how to set one up properly and securely, and the industry-standard practices to safeguard your funds.

Before we touch on the wallets, it is important to first understand the concept of public and private keys in the context of cryptocurrencies.

Public and Private Keys

Public Key

A public key is a string of characters that looks something like this:
1C5263F79C6D87DCO8E65463CD427D89FS45O2103DA61F2OBD67FC233AF357D8

A public key is an address where bitcoin is sent to and received. A bitcoin public key or address starts with a ‘1’ or ‘3’.

You can inform someone your public key (also known as receiving or wallet address) so that he may send you bitcoin.
You can think of your public key like your email address which you can pass to another person so that he may send you an email.

Bitcoin users have to be careful that the public key has been accurately scanned or copied in its entirety. A bitcoin sent to a different or wrong address (e.g. missing a digit) is as good as a lost bitcoin.

A good habit is to check that the first and last 3 alphabets/digits tally with the original address generated by the Receiver’s wallet.
Both Receiver and Sender should always check that no alphabets or digits are missing from the front or back of the receiving address before Receiver conveys address to Sender and before Sender sends bitcoin to Receiver.

Private Key

A private key is a string of characters that looks something like this:
5K645263F9C6D8DO8E6A57842D89FS45O21DA31F2OBD67FC23AF

Yes, a private keys looks just like a public key, but with a totally different purpose. With your private key, you can check how many bitcoin on the blockchain belongs to you and it allows you the ability to spend those bitcoin.
You can think of your private key like the password to your email account. With the password, you may check your email or send an email to someone.

As such, your private key has to remain as so – private!

A popular phrase with regards to private key in cryptocurrency circle is “Not your keys, not your coins”. It would serve all cryptocurrency users well to remembers this one key rule. As we will see below, sometimes even when a wallet bears your name, you do not necessarily own the private key to that wallet.

Now that we know what public and private keys look like and what they really are, let’s see how they fit in the context of a bitcoin wallet.

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How Bitcoin Wallets Work

A bitcoin wallet contains one or more private keys which are stored in the wallet file hidden away from visibility even by the wallet owner for security reasons.

For most wallets, the private keys are normally represented by a series of 10 to 24 words in sequential order. These words are known as the seed phrase or passphrase.

If the private keys (or passphrase) are accidentally revealed by the wallet owner or recorded by a malicious party, the entire wallet is compromised.

As a bitcoin wallet owner, when requesting bitcoin from another person, you can generate a public key (or wallet address) from the wallet. You can then send this public key to that person via email or instant message so that he may key it into his wallet to send you bitcoin.

A QR code is generated with each public key so that another person may scan this code with his wallet via the smartphone camera, as a quick way to insert the public key into the transaction.

A new public key is generated for each new transaction if a previously generated public key has been used before. However, the old public key is still valid and may still be given out to receive bitcoin.
Example: You can print the public key with the QR code onto a piece of paper or place it on a website to receive donations in bitcoin. An address could be used multiple times for payments or donations from people around the world.

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It is important to understand that the bitcoin do not reside in the wallet. The bitcoin reside on the blockchain at all times. The wallet or private keys merely point to the bitcoin on the blockchain which belong to you.

When you send or transfer your bitcoin to someone, those bitcoin on the blockchain essentially change ownership from you to that person. His wallet would then show ownership of some ‘new’ bitcoin on the blockchain. Those bitcoin don’t actually move physically (in an electronic sense) from one wallet to another.

This is why it is perfectly alright if you lose your bitcoin wallet, e.g. if your smartphone is damaged or stolen, PROVIDED THAT you still have access to your private key.
Example: This would be similar if you had lost your smartphone and your emails. All you have to do is reinstall the email client app on a new phone and with your password (private key), you would be able to reaccess all your emails on the cloud (bitcoin on the blockchain). Your emails (bitcoin) are never stored in your email app (bitcoin wallet) on your smartphone.

Since the private key is the key or ticket that allows someone to spend the bitcoin that is assigned to that key, it is very important that the private key be kept safely. Standard safe practice includes storing it offline by writing it on a piece of paper and keeping that paper safe in a vault, fixed deposit box etc. Private keys should never be stored online (e.g. saved on a phone or an email in the cloud) as if this is successfully accessed by a hacker, he could easily gain control of those bitcoin and transfer them to a different (his) wallet.

The above gives an overview of how wallets, private keys, public keys, and bitcoin on the blockchain work and what happens when bitcoin is sent from one wallet to another. It is a simplified discussion without touching on the more advanced topic of unspent transaction output (UTXO), block size and how transaction fees are calculated. In reality, a bitcoin wallet works more like a giant keychain that manages a large number of keys, rather than a conventional wallet that holds funds.

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Ledger Nano X - The secure hardware wallet
Ledger Nano X - The secure hardware wallet