What Is a Bitcoin Wallet?

To send or receive Bitcoin, you need a Bitcoin "wallet".

Unlike a physical wallet that holds cash, debit, and credit cards, a Bitcoin wallet doesn't actually "store" your Bitcoin.

Instead, a Bitcoin wallet is a hardware device or software program that provides the information needed to create Bitcoin transactions by interacting with the Bitcoin blockchain.

One essential piece of information is the "wallet address", or simply "address".

A Bitcoin transaction can be described as transferring Bitcoin from one address to another address.

For example, suppose Kim wants to send Bitcoin to Kylie. They each have a Bitcoin wallet that generates an address.

Kim would provide her Bitcoin address to Kylie, and Kylie’s wallet would then request authorization for the transaction.

Voilà! The Bitcoin is "moved" from Kim’s address to Kylie’s address, and this transfer is recorded on the Bitcoin blockchain.

It sounds simple, but there’s a lot more happening behind the scenes.

In this article, we’ll explore what a cryptocurrency wallet truly is. While we focus on Bitcoin wallets, the principles apply to most cryptocurrency wallets.

Understanding Bitcoin Wallets

A Bitcoin wallet is fundamentally different from a physical wallet. Instead of storing money, it stores something called a "key".

One such key, known as a "private key", is used to send ("transfer") Bitcoin to another address.

When you start using Bitcoin and other cryptocurrencies, understanding how wallets work is crucial.

You’ll encounter terms like "private key", "public key", "address", and "seed phrase".

Wallet software often simplifies things so you don’t need to grasp these terms. However, a basic understanding of how crypto wallets function can help you avoid costly mistakes.

Let’s break down these wallet terms and how they relate to each other.

Private Key, Public Key, and Address Explained

When sending and receiving funds online, you typically need an "account number" and a "password".

In the Bitcoin world, these are called the "public key" and the "private key".

Bitcoin uses a "two-key system", where the public key is used to receive Bitcoin, and the private key is used to send Bitcoin.

Mathematically, these two keys are interrelated.

The "private key" is a unique secret number known only to you.

It’s used to "sign" transactions. Sending Bitcoin requires these "digital signatures". (More on "digital signatures" in later sections.)

The "public key" is an extremely long number, so a shortened version is used for easier handling.

This "compressed format" or abbreviated public key is called the address.

A "Bitcoin address" or simply "address" is a string of 26–35 alphanumeric characters, starting with the number 1, 3, or "bc".

Here’s an example of an address:

1AYJ2fXPABrS7RXqH2dfcAMwHAXk5Nrtoc

It can also be displayed as a QR code:

A QR code (short for Quick Response) is a graphical representation of the address that can be read using a smartphone camera.

When you want to send Bitcoin to a friend, you ask for their "Bitcoin address". This address can be shared publicly, and anyone can send Bitcoin to it.

On the other hand, as the name implies, the private key should remain confidential.

But if you’re curious, here’s what one looks like:

L5eb3xFcPHSoSytWm77UVgC6vRk4pNrhjQMQNwfootvYnzZQLXJh

(Please be kind and don’t steal my Bitcoin!)

You can think of it as a password that proves ownership and allows you to use the Bitcoin associated with your address, much like a password accesses a bank account.

Under no circumstances should you ever share your private key with anyone.

No one should ever see your private key, because anyone who knows it can control the funds in the wallet address. If someone steals your private key, there’s no way to prove the Bitcoin is yours.

That’s it! That’s the role of private keys, public keys, and addresses.

• Your public key is like your "account number".
• Your address is an abbreviation of your account number. This is what you provide to others to receive Bitcoin.
• Your private key is like your "password", used to prove ownership of Bitcoin associated with a specific address.

The sender needs the recipient’s address to send Bitcoin. Once Bitcoin arrives at the recipient’s address, the recipient can use their private key to spend or withdraw it.

How Are Keys and Addresses Created?

Private Key

Everything starts with the private key, which is simply a randomly generated number:

This long number is shortened by converting it to hexadecimal format.

Hexadecimal is a numeral system that uses 16 possible digits to represent numbers.

The first ten digits—0, 1, 2, 3, 4, 5, 6, 7, 8, and 9—represent the values you’re familiar with.

The remaining six digits are represented by A, B, C, D, E, and F, corresponding to 10, 11, 12, 13, 14, and 15, respectively.

So, a single hexadecimal digit can represent 16 different values instead of the usual 10.

That’s the private key… just a random large number in hexadecimal format.

A private key can be any number between 1 and 115792089237316195423570985008687907852837564279074904382605163141518161494337.

Public Key

Your public key is derived from your private key.

But wait—the public key is public! Others can see it.

Doesn’t that mean someone could figure out my private key?

No.

Although the public key is generated from the private key, you cannot reverse the process to discover the private key.

Why? Well, it’s complicated. Suffice it to say that an algorithm based on elliptic curve cryptography (ECC) makes it virtually impossible to derive the private key from the public key.

Essentially, your private key is protected by rigorous mathematical algorithms.

Private and public keys are mathematically linked. So, while it’s easy to generate a public key from a private key, it’s nearly impossible to generate a private key from a public key.

A private key can be converted into a public key, but a public key cannot be converted back into a private key.

Address

The public key is then "compressed" to make it shorter and easier to use.

Thus, you can think of the address as a shorter and (slightly) more readable representation of the public key.

In short, the private key generates the public key, which is compressed and shortened to form the public address.

The relationship between the private key, public key, and Bitcoin address is illustrated below:

But each step is irreversible.

Each step is considered a "one-way function", meaning it’s computationally difficult to reverse the operation and deduce the previous step’s data.

How Are Keys and Addresses Generated?

If you haven’t noticed, it all starts with the private key. Although you could try to generate a private key yourself, it’s typically generated by your Bitcoin wallet. While this happens behind the scenes, it’s helpful to understand the general process.

Here’s a step-by-step breakdown of how private/public key pairs and corresponding addresses are generated:

1. The wallet software generates a random number.
2. This random number becomes the private key.
3. The wallet software uses this private key to automatically generate the public key.
4. With this public key, an address is generated.
5. Congratulations! You now have a brand-new address to send and receive Bitcoin!

What If You Lose Your Private Key?

Losing your private key is like losing cash.

Once it’s gone, _it’s gone forever_!

You cannot retrieve your private key from your public key or address.

And you need the private key to transfer or use Bitcoin!

So, if you lose your private key, all Bitcoin stored at the address associated with that key becomes permanently inaccessible.

To use Bitcoin, you need a "digital signature" to authorize transactions, and to create that signature, you need the private key.

So, without the private key, there’s no "digital signature", and without a "digital signature", no transaction can occur.

Sophisticated mathematics ensure that the private key cannot be deduced from the public key, especially since everyone on the Bitcoin network can see the public key (in the form of an "address").

While this system is very strict, at least you know that no individual or entity (like a government) can seize your Bitcoin behind your back.

Only one private key can access your Bitcoin, and you are solely responsible for it.

If you lose or forget it, you have no one to blame but yourself.

Summary

• Public and private keys are always created as a pair.
• The public key is used to receive Bitcoin.
• Due to its length, it’s compressed into a format called an address.
• An address is similar to a bank account number.
• The private key is used to authorize control over funds in the address and initiate transactions from it.

As you can see, "storing" Bitcoin simply means safeguarding the private key.

Frequently Asked Questions

What is the main purpose of a Bitcoin wallet?
A Bitcoin wallet doesn’t store Bitcoin itself but manages the private keys required to access and transact with your Bitcoin on the blockchain. It generates addresses for receiving funds and signs transactions to authorize sends.

Can someone steal my Bitcoin if they know my public address?
No, sharing your public address is safe and necessary for receiving Bitcoin. However, never share your private key, as anyone with it can control your funds. Security relies on keeping the private key confidential.

What happens if I lose access to my Bitcoin wallet?
If you lose access and don’t have a backup of your private key or seed phrase, you permanently lose access to your Bitcoin. There’s no recovery mechanism, so it’s crucial to store backups securely.

Are all cryptocurrency wallets the same?
While the core principles are similar across cryptocurrencies, wallets are often designed for specific coins or networks. Always use a wallet compatible with the cryptocurrency you intend to store or transact with.

How can I ensure my Bitcoin wallet is secure?
Use reputable wallet software, enable two-factor authentication if available, and store private keys or seed phrases offline in multiple secure locations. Avoid sharing sensitive information online.

Is it possible to change my Bitcoin address?
Yes, most wallets generate a new address for each transaction to enhance privacy. However, old addresses remain valid, so you can still receive funds at previously used addresses.