Equipping yourself with the adequate knowledge of a private key can shield you from losing money and any likely disaster waiting to explode. It could also offer you a clear understanding of how Bitcoin (BTC) works.
In the world of cryptocurrencies, private and public keys play a very integral role to how Bitcoin works. Suffice it to say that the major aim of cryptocurrencies is to put the power of finance into the hands of the people. But, what exactly is a private key, how is it used, and why is it so important with Bitcoin?
This guide is here to answer these questions and to show you how to keep your private key secure from hacking and attack.
1. Emergence of Cryptography
The word “cryptocurrency” came from the merging of two keywords, “crypto” and “currency.” Then, “crypto” refers to cryptography which is a way of encoding and decoding information. It is that special feature of blockchain technology that prevents human and third party (government) interference.
With so many advancements in the field of cryptography, blockchain can now confirm transaction using encrypted mathematical equations by equating both private and public keys.
2. Overview of Private and Public Keys
The private and public keys are a set of numbers that locate an address or wallet and then identify the rightful owner. So, when you create a new wallet, the public key does the encryption – creation of code. The private key serves the purpose of decoding or decrypting the code.
As their names signify, a private key should be private and kept secret, just like your credit card PIN, while the public key can go public. So, by using the public key, anyone can encrypt data and only the holder of the private key can decrypt it.
Both keys are mathematically related to one another through a mathematical signature though they are different. This mathematical signature is a set of procedures for signing messages and authenticating signatures. The public key comes from the private key, but how does the private key come about?
At the Bitcoin level, a private key is a number ranging from 1 to n-1 where n is 1.158*10^77. This means that a private key is an integer that ranges from 1 to 10^77. So, any value in this range can be a private key as long as the private key has protection and known to the person generating the key.
3. How Does the Private Key Work?
The private key plays a very important role. Bitcoin has a secure messaging system that processes transactions in the form of value-transfer messages. Private keys help to confirm these messages and identify them one after the other.
Hence, a private key works in a transaction as both input and output in the following way:
Example: Party A decides to send 2 BTC to Party B. The 2 BTC from Party A is the output. This output has a rule attached to it which Party B must meet before Party B can use the 2 BTC to spend elsewhere. This is the input for Party B’s transactions. This rule is that Party B produces a digital signature to show that they own the 2 BTC before they can spend it. This they can produce using the private key.
Based on this example, Bitcoin uses a public key cryptography to handle this transaction. It does that by using two pieces of information to validate messages. The first one is the public key which identifies a sender or a receiver and can distribute to others. Secondly, the private key creates a secure message signature.
4. How Private Keys Can Help You
Private keys play important roles in Bitcoin. This means that the person in possession of a private key is the only one entitled to provide the right digital signature that will authenticate a transaction. Here are other ways by which private key is important.
- Private Key Paves Way for a Successful Bitcoin Transaction
If you want to buy an item, send or receive coins/tokens, you send your public key to the other party. This points you to your wallet address and provides them your wallet virtual address. But, the transaction needs a digital signature with the private key in order for it to be successful.
- Private Key Helps you Take Full Control of your Finances
The rise in the fame of cryptocurrencies was actually brought about by the credence it gives the holder to take full control of their finances. With a private key, there shouldn’t be any need to keep your money or crypto assets with an exchange, a hot wallet, or even a third party.
Tip: Anyone who has access to your private key can access your money. Thus, do not reveal your private key to anyone.
- Private Keys Cut the Chances of Forging your Digital Signature
Bitcoin requires that every transaction carries a digital signature – a number selected from a very large range of numbers. So, the only way to produce a valid signature is to use the private key that is correct with the published public key. This helps to secure your funds.
In a nutshell, this is what a private key is:
- It is your digital signature.
- You can use it to confirm that you are the owner of the coins in the wallet as well as authenticate the transaction or deposit address, and to create a new public key.
- It signs the transaction and allows the receiver to receive the tokens through the public key.
- The blockchain technology validates any transaction where both private and public keys match.
5. How to Safeguard Your Private Keys
One of the ways to keep your private wallet safe is by creating a cold storage – creating and printing a paper wallet. Although the cold wallet is not prone to cyber-attacks, it creates a lot of values that are difficult to recover if it gets lost amongst other loopholes.
Your smartphone or computer is another device where you can store your private keys. This storage process provides a convenient way to access and carry funds around – this is a hot wallet. Yet, such Internet-connected devices are open to scams, hackings, phishing, and even viruses.
Having seen these prominent shortfalls in private key storage, the best way to safeguard your private keys is to use an offline storage device. It combines both cold and hot storage to provide unequaled security. The wallet is offline but you can connect to it wirelessly using a personal app. With this, you can choose when and how to use the wallet, as well as recover your assets if you lose your device.
Conclusion
Bitcoin is quite different from other electronic cash systems that use username and password logins. It is a secured messaging system protected by public key cryptography. In conclusion, Bitcoin is protected through digital message signatures generated with special private keys.
RISK DISCLOSURE
This article should not be taken as, and is not intended to provide, investment advice. Users are ultimately responsible for the investment decisions he/she/it makes based on this information. It is your responsibility to review, analyze and verify any content/information before relying on them. Trading is a highly risky activity. Do consult your financial adviser before making any decision. Please conduct your thorough research before investing in any cryptocurrency and read our full disclaimer.
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