What is a private key? This is a concept you’ll quickly become familiar with as a newcomer to cryptocurrency–like blockchains and crypto wallets, understanding the necessity for and use of a private key is one of the fundamentals of learning crypto.
To understand why private keys are needed, it’s important to understand how cryptocurrencies work. Coins like Bitcoin are mined or minted using blockchain technology. Blockchain operations are decentralized, which means the information stored in them is decentralized as well.
Anyone can view the transactions on the blockchain, and the public keys to your crypto assist in that transparency. But only the private keys offer access to the funds you have acquired. What’s more? You don’t have to provide private data to have associated with your public keys. That means you can remain anonymous for the purpose of committing to a crypto transaction.
It’s difficult to compromise such an operation where all the information is scattered throughout the network instead of one comparatively easy-to-locate repository. You might be able to destroy one book in a public library, but doing so does not affect the integrity of the rest of the information stored at the library. That’s a crude analogy, but for our purposes, it’s effective.
Cryptocurrencies are bought and sold using the blockchain which provides a more secure way to transfer funds and crypto due to the decentralized nature of its’ architecture–each transaction is recorded onto the blockchain and all transactions are stored there in order.
The design of the technology makes it difficult to compromise thanks in part to the fact that your transactions are recorded on the blockchain but also the codes that provide access to the currency created on the blockchain.
If you want to buy Dogecoin, for example, you would approach the seller, pay the fee, and be given two things–a public key that functions as the sharable address where money can be transferred and also a private key that acts as your code to access the coin or coins you have purchased.
Only the buyer has access to the private key unless they share it with someone else. This key, which some sources encourage you to think of as a password, unlocks your cryptocurrency to use or transfer.
As long as you can go online, you have the potential to use your private key.
The Private Key Is Crucial
Can you use your ATM card without knowing your PIN number? In some cases, yes. But private keys for your cryptocurrency don’t have the “press enter” option instead of entering your PIN.
Crypto, at the time of this writing, behaves more (where private keys are concerned) like the old ATM cards of decades past where, if you didn’t know your PIN, you could not use your card.
But unlike the old ATM cards, cryptocurrency private keys have NO BACKUP for retrieval. If you lose or forget your private keys, you lose access to your money. There is no tech support you can call, no IT desk, no helpline. The ATM card was more secure in this respect since you could get a replacement card, a replacement PIN, etc.
Not so with crypto. And it’s actually worse than you might think; to carry our ATM card analogy to its extreme, if you drop your ATM card somewhere and someone else picks it up, in the past it may not have been possible to use without knowing the PIN code. Today we know that is no longer true, but once upon a time it was harder to use a purloined or found card.
With your crypto private keys, the bearer of the keys gets to use the money, period. If you have your private key stolen, you lose your coins. If you lose the key and cannot retrieve it, and no one else has access? The coins simply languish, waiting to be used.
Storing Private Keys For Safekeeping
Some crypto investors warn against using a single resource to store and preserve your private keys. The most common storage is the digital crypto wallet which you can obtain online. But there are also hardware wallets, too.
These are handy for storing your coins/tokens offline. And some choose to write down or print out their private keys, too.
The more redundancy you have with the keys, the safer your investment is. Yes, using “cold storage” is nowhere near as convenient as using a digital wallet, but it is quite secure if you store the keys in the right place.
Private keys are a necessary part of doing business in the world of cryptocurrency. Your private keys are crucial to being able to use your crypto and it is a very good idea to operate with multiple backups of these keys to safeguard against them being lost or stolen.
Joe Wallace has covered real estate and financial topics, including crypto and NFTs since 1995. His work has appeared on Veteran.com, The Pentagon Channel, ABC and many print and online publications. Joe is a 13-year veteran of the United States Air Force and a former reporter for Air Force Television News.