What it is, how it works and the best ways to store

What is a private key?

A private key is an alphanumeric code generated by a cryptocurrency wallet. It is used to authorize transactions and prove ownership of a blockchain asset.

A private key is an integral part of cryptocurrency, and its encrypted properties help protect users from thieves and unauthorized access to their funds.

How private keys work

Cryptocurrency is governed by a set of digital keys and addresses, which represent ownership and control of virtual tokens. Anyone can deposit bitcoin or other tokens into any public address. However, the recipient must have the unique private key to access the deposited crypto.

Private keys can take different forms. Cryptocurrency private keys are randomly generated numbers that can be one of 2256 possibilities. Generally, they are 256 digits long, but for simplicity, private keys are usually expressed in hexadecimal form.

The public key is created from the private key through an encryption algorithm. However, it is almost impossible to reverse the process by generating a private key from a public one. A similar algorithm is then used to create a receiving address from the public key. Think of the address as a locked mailbox and the private key as the key to the box.

The postman and anyone else can put letters and small packages through the opening in the mailbox. However, the only person who can retrieve the mailbox’s contents is the one with the unique key. That’s why it’s essential to keep the key safe—if it’s stolen or lost, the mailbox can be opened by anyone with the key.

Private keys and digital wallets

While hashed private keys are essential to cryptocurrency, users do not need to manually create or remember their key pairs. Instead, cryptocurrency wallets automatically create and store key pairs. When a transaction is initiated, the wallet software creates a digital signature by processing the transaction with the private key.

The private key is used to authorize a transaction and ensures that it cannot be changed once it has been broadcast. If the transaction information is changed, even slightly, the signature will be incorrect because the algorithm generates the same signature from identical information.

If a user loses their private key, they can no longer access the wallet to spend, withdraw or transfer coins. Therefore, it is essential to store the private key in a safe place.

Store your private keys

There are several ways in which private keys can be stored. They can be written or typed on paper—these are called paper wallets. Some people use software that generates QR codes to print on paper so they can be easily scanned when a transaction needs to be signed.

You can also use devices designed for storing private keys. Many of these connect to your computer or device and transfer your keys for you, removing them from your hot wallet.

There are two types of key storage, each with two types of wallets. Custodial wallets are wallets where someone else, like a wallet, stores your keys for you. Non-custodial wallets are wallets where you store your keys. Both types have cold (have no connection to the internet) and hot (have an internet connection) wallets.

An example of a cold wallet is the storage that Coinbase uses for keys. You move your keys from cold storage to your Coinbase hot wallet when you want to use them. A non-custody cold wallet example is the Ledger Nano X, which you use to connect to a device with the software wallet of your choice, which is a non-custody hot wallet.

The Bottom Line

In cryptocurrency, private keys are codes similar to passwords that you use to authorize crypto transactions. These keys are the only way anyone can access your crypto, so it’s essential to protect them using the latest and most reliable storage techniques available. The best way to secure your keys is to use non-custodial cold storage, a method that removes your keys from accessible devices and connected wallets.

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