- Private keys are the embodiment of the self-governance tenet within the crypto space
- The private key is the thing that allows you total control over your own money
- Many people underestimate its importance and power
One of the most important aspects of the cryptocurrency space is that you are your own bank. You are responsible for everything you do with your coins, right down to how you store and protect them. Most people like to store their cryptocurrency in a digital wallet of some kind, which is generally the safest way to do so, but many don’t understand a key aspect of self-storage: the importance of private keys.
This guide introduces you to the concept of private keys, what they do, how important they are and why you should take great care of them.
Fiat vs Crypto
The idea of money on the blockchain is similar to digital money in your bank account, given that both are represented as digital entries. Yet, there is a nuanced difference. Fiat money can physically leave the system when withdrawn as cash, making it challenging to track globally. The money still exists, but as far as any kind of global ledger goes, it may as well not. For example, in December 2020 it was revealed that over £50 billion in UK banknotes is unaccounted for, held off the books by everyday people (or lost down the back of sofas).
In contrast, cryptocurrencies like Bitcoin never truly leave the blockchain; they are associated with specific addresses, and transactions merely update the blockchain’s status. This unique characteristic poses security challenges, but the Bitcoin blockchain itself is highly secure due to its proof-of-work consensus (the same cannot be said for all blockchains). However, the safety of your own coins depends on the security measures taken by exchanges and wallets, which can vary in reliability.
Not Your Keys, Not Your Coins
There is a saying in the crypto community: not your keys, not your coins. What this means is that if you don’t own the private key to your crypto wallet then there is more chance of it being stolen, seized, or otherwise lost. A private key is randomly generated every time you create a new crypto wallet and acts as a kind of wallet recovery tool. What it most certainly isn’t is a wallet password, which you will set up separately (or use the fingerprint on your phone).
Note: private keys can sometimes be associated with an address within a wallet, meaning that one wallet can hold multiple keys, while others are associated with the entire wallet.
Private keys are more than keys or passwords, but they operate in a similar way. The beauty of your coins remaining on the blockchain is that if your wallet is lost or compromised in some way, you can still get to your holdings…as long as you have the private key. The wallet, be it a physical wallet that uses a USB connection or an app on your phone, is nothing more than an interface that represents your holdings on the blockchain. You can download the same wallet on multiple devices, insert your private key and you will see the same thing: your holdings registered on the blockchain.
This is great because if anything happens to your wallet, for example, if your phone dies or you lose your physical wallet, you can just get another one, import the private key and voila – you have your funds back. This is in comparison to your lovely leather wallet you got for Christmas; if you lose that, it’s gone, with the money inside it.
With Great Power…
Private keys, therefore, are very powerful, which is why you should protect them very carefully. When you download or buy a new crypto wallet and it shows you your private key, treat that private key with the same level of security as you would your wife’s diamond ring or your husband’s signed football jersey; anyone who gets hold of that private key can import it into a new wallet and take the funds associated with it. Likewise, if you lose that private key you cannot recover the funds in the associated wallet if anything were to happen to it. Many people have lost fortunes this way.
Private key ownership is a crucial tenet in the crypto space, encapsulating the idea of self-governance. But this means that the onus is on you to protect it, and there is often no recourse if something goes wrong.
In the words of Winston Churchill, Naom Chomsky and Spider-Man, with great power comes great responsibility.