The tech-entrepreneur and Bitcoin advocate Andreas Antonopoulos has a famous sentence: “Your keys, your bitcoin. Not your keys, not your bitcoin”. He’s alluding to the importance to keep the private keys of your cryptocurrency wallets under your full control.
Now, you are probably wondering what are “keys”. If that’s your case, then you must know the information below.
Public and private keys
First, we must keep in mind that cryptocurrencies aren’t physical. They represent a digital value related to an unspent transaction (the thing we know as “coin”). All transactions are permanently recorded in a distributed ledger or blockchain. It’s through the consensus of the entire nodes (the computers which form the ledger) that the transactions are approved, and for this, the system checks first the public and private keys of every wallet.
Therefore, cryptocurrency transactions are possible by using a unique pair of cryptographic keys or public-private keys. As Yan Pritzker explains in his book “Inventing Bitcoin,” it’s virtually impossible for two people to generate the same public-private key pair because it’s a very long number that’s mathematically linked.
The public-private key pair is asymmetric since you can only encrypt with one key (with the public one) and decrypt with the other (with the private one). While the public key is needed to receive funds (so it can be shared with others), the private key is essential to prove the ownership of the wallet and spend the funds.
To sum it up: the public key would be like an e-mail address you can give to receive money, while the private key would be the password to access that e-mail account and check the message (the money, in this case).
A shortened version of the public key is a common crypto-address you can give to anyone. It looks like this one from The Water Project: 3H2hQCAk9Skm8robYQHBX7YB3EqxDU74NX. Of course, this is barely an example with a BTC address. In other blockchains, they look a bit different.
On Ethereum, for example, they’re like this: 0xf99768862bc8e61ef88849cfdcc8f493aebfc5ff. On Monero, like this: 453VWT5GEkXGc2J9asRpXpRkjoCGKCJr96rndm2VMe5yECiAcUB3h8pFxZ8YGbmbGmVefwWHPXmLR69Vw1sVNWz5TsFqYbK (longer, we know. This one is to donate to WikiLeaks, by the way).
Seed phrase: the key to the treasure
Now you know how it looks like a public key, but where can you find your private key? Well, in general, personal cryptocurrency wallets automatically store and manage the public and private keys of the addresses they generate for their users. To make it easier for everyone, the wallets provide a recovery phrase or seed phrase, associated with the private keys. This phrase is usually formed by 12 to 24 random words that must be kept secret.
With the seed in your hands, you’re the one and only who can access the funds. Literally, nobody else, not even the wallet support or the crypto-exchange. Nobody can freeze, manipulate or censor any of your transactions. If there’s a problem with your current device and you lost the digital wallet, then the only thing you’ll need to do is download any wallet again, on any device, and enter your seed phrase to recover your funds.
If you don’t have this seed phrase, that means the exchange or wallet manages your money on your behalf. So, they can, indeed, freeze, manipulate, censor, or even lose your funds. That’s why the Antonopoulos sentence: not your keys, not your coins. And you must know this as well: if you lose your keys, you’ll also lose your coins. There are no “I forgot my password” options here.
Because of all of the above, it’s so important that users protect and properly store their recovery phrase, as it’s the only key to access their funds. Losing it could mean losing access to the related cryptocurrencies forever.
Protecting your private keys
It’s important to remember that anyone (you or other people) with the seed phrase can access the funds. So, the seed should be memorized and/or written on a piece of paper and stored in a safe (and private) place. It’s not recommended at all to make any kind of digital backup of this, such as a Word document, a screenshot, an email, or something digital; since it could fall into the hands of hackers.
Personal custody of cryptocurrencies gives financial sovereignty to their owners, as it translates into full control over their own money. However, it also requires greater individual responsibility. If the seed falls into the wrong hands, the user could lose all their money.
This full control can offer some valuable advantages, though. The funds will be available whenever its owner needs it, and their movements will not be recorded in a centralized database, and neither will they be associated with their identity. Besides, the user can protect their funds as they want to, send huge amounts with very low fees worldwide, and they’ll never have to face bureaucratic hurdles.
Custodial and non-custodial exchanges
One of the most popular options for buying Bitcoin and other cryptocurrencies is by using exchange platforms online. There’s currently a wide variety of services for buying and selling cryptocurrencies. These can be classified into two categories: custodial and non-custodial exchanges.
Exchanges with custody are those services that offer accounts instead of keys. For using them, the user must open a new account with them and fulfill their requirements (provide personal data and documents, for example). They can work as a wallet since the customers can check there their balance and make transactions. But they’ll never offer personal private keys. Instead, the user access only with an e-mail/nickname and password.
When using intermediaries like these, users give up full control over their funds. Likewise, they could also face freezing of funds, confiscations, and even be victims of fraud, in the case of dubious custody services.
For its part, non-custodial exchange platforms (like Alfacash) have the same benefits as those offered by custodial services, with less exposure to cyberattacks or frauds. The privacy is also higher for the users, while they keep full control over their funds. That’s because these platforms don’t offer online wallets, but ask the users for addresses under their control when trading.
If you still don’t have any personal wallet with a proper seed phrase, then it’s time to check how to choose your first crypto-wallet. Your financial independence depends on it!
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