Bitcoin | How do private and public keys work?

The following statements do not constitute investment advice or any other advice on financial services, financial instruments, financial products, or digital assets. They are intended to provide general information. The following statements do not constitute an offer to conclude a contract for the purchase or sale of financial instruments and financial products or an invitation to submit such an offer and to buy or sell any particular digital asset. Cryptocurrencies are subject to high fluctuations in value. A decline in value or a complete loss are possible at any time. The loss of access to data and passwords can also lead to a complete loss.

If you’ve dipped your toes into the world of Bitcoin, you’ve probably come across the concept of crypto wallets, and may have even heard of private or public keys. But what exactly are they? 

In this article, we take a look at the differences between private and public Bitcoin keys, and help you understand how they help you send and receive funds safely.

A crypto wallet allows you to send, receive, view, and spend cryptocurrency. The wallet is also where your keys (both private and public) live, giving you secure access to any crypto you own.

There are different kinds of crypto wallets: simple hosted crypto wallets, where a platform looks after your private key for you, and non-custodial wallets, where you control your private keys with no third-party involvement at all. There are also hardware wallets, where your keys are stored offline, which some deem more secure. They all share one feature: they’re used for storing your crypto keys.

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A private key is a secure code that enables the holder to make cryptocurrency transactions and prove ownership of their holdings. Bitcoin keys specifically feature a 256-bit string displayed as a combination of letters and numbers. It’s stored within your crypto wallet, enabling you to access your Bitcoin whenever you need to.

Keep in mind that if someone manages to get their hands on your private key, they’re effectively gaining access to your Bitcoin holdings too, putting your crypto is at risk. The same goes for losing your private key—if you’re unable to access it for whatever reason, you’ll likely be unable to access your coins.

The risks associated with misplacing or losing your private key cannot be emphasized enough, and you’ll want to seriously consider them before wading into cryptocurrency. Regulations around the use and safekeeping of private keys are still in development; in Germany, for example, the safekeeping of private keys for customers is a regulated financial service.

Unlike a private key, a public key is designed to be disclosed to other people so they can send you cryptocurrency. It’s linked to the holder’s private key, which is needed to “unlock” the public key. Sometimes a Bitcoin address is used for transactions instead, since they are essentially compressed versions of the public key.

Imagine public and private keys like you would your house address and house keys, respectively. People will need your house address so they can stop by, yet will only be able to enter with your house keys.

A Bitcoin address is a unique string of numbers and letters of 26-35 characters in length that shows where a Bitcoin payment has been sent to and from. You can generate a Bitcoin address from your crypto wallet if you’d like to use one in a transaction. For security reasons, experts recommend generating a fresh Bitcoin address for each transaction.

Absolutely not. You should never share your Bitcoin private key, but you can share a Bitcoin address with anyone who wants to send you Bitcoin. Think of the Bitcoin address as a hashed form of your Bitcoin public key for easier use in transactions.

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If you’d like to pay someone using Bitcoin, it’s a fairly straightforward process:

1. Make sure you have enough Bitcoin in your wallet to cover the amount you want to send, and make sure you’ve selected the right currency.
2. Obtain the recipient’s Bitcoin public key or address and input it into the “Recipient” field in your wallet. (Keep in mind that different wallets and platforms might use slightly different language.)
3. Double check that you’ve entered the correct public key. If you enter the wrong public key, your Bitcoin will go to someone else and you probably won’t be able to get it back.
4. Type in the amount you’d like to send.
5.  Click “Send” and you’re all set.

If you’re expecting to receive some Bitcoin, this is what you’ll need to do:

1. Open your crypto wallet and select “Receive” to access your public key (the specific language used may change depending on your wallet). 
2. Share your public key with the sender.
3. Sit back and wait for the Bitcoins to appear in your wallet.

As we mentioned earlier, keeping your private key safe is the most important part of making sure no one else has access to your Bitcoin. Never share your private key with anyone. Remember that for transactions, other people only need your public key or Bitcoin address. If possible, it’s a good idea to keep your private key offline rather than on a device that can be accessed via the internet. If you’re especially concerned about security, consider hardware wallets as an extra secure form of offline storage. The advantage here is that they can’t be hacked when you’re not entrusting your key to a third-party.

It may be a good idea to back up your private keys in case you lose them. The types of backup available to you will depend on the crypto wallet you use. There are three main ways you can back up your private key:

• A seed phrase, which is a phrase consisting of 9-24 regular words
• A wallet file backup
• Keeping a copy of the private key itself somewhere very secure

We’ve taken a deep dive into private and public Bitcoin keys, but this article only scratched the surface of everything there is to know about cryptocurrencies. Whether you’d like to know more about crypto and security, or step back and learn the basics of cryptocurrency, N26 is here for you, every step of the way.