Welcome to the second chapter of our crash course on cryptocurrency!
In the first part, we introduced the basics of cryptocurrency, blockchain, and Web3. We provided a general overview of their concepts and how they work together. Most importantly, we explained the origins of cryptocurrency and blockchain, as well as the different generations of blockchain technology. Now it’s time to dive deeper into the crypto world.
If you’re still wondering “how do I start with cryptocurrency?”, you’re in the right place. In this article, we’ll explain the fundamentals of owning and controlling cryptocurrency. Along the way, we’ll discuss what public and private keys are and why they are essential for keeping your funds secure.
Understanding Public and Private Keys
Whenever you buy your first cryptocurrency, you are automatically assigned a new address on the blockchain. Each time a blockchain address is created, two related pieces of information are generated: a private key and a public key. These two keys allow you to control the cryptocurrency at that specific blockchain address and receive cryptocurrency from others.
You can think of a blockchain address like a mailbox. Just as anyone can send a letter to your mailbox, anyone can send funds to your blockchain address. But only you, the owner of the mailbox, can open it and take out what’s inside. Similarly, only you can access and control the funds sent to your blockchain address.
The blockchain is the digital version of this mailbox system, which is where private and public keys come into play.
What Is a Public Key?
A public key is a public receiving address used to receive cryptocurrency. Any user on the blockchain can use your public key to send funds to your address.
A public key is like your bank account number, such as an IBAN or SWIFT code, or the postal address of your mailbox. Anyone can use your bank account number to send you money, but they cannot control your funds. Similarly, a public key cannot access your blockchain address—it is only used for sending funds.
What Is a Private Key?
If the public key is like your bank account number, the private key is more like an identification code or password. The private key allows you to access your cryptocurrency address and funds. As long as you have the private key, you can control and use the stored cryptocurrency.
Now you understand that the security of your cryptocurrency depends on the private key. Therefore, how you manage your private key is crucial for your assets. There are multiple factors to consider. First, do you control the private key of your cryptocurrency? Are you storing it properly to resist all possible risks?
We will discuss how to properly store private keys in the next article. For now, let’s focus on the first question: do you control your private key?
Cryptocurrency Without a Private Key
For beginners, buying cryptocurrency on a crypto exchange is the easiest way to get started. However, when you purchase cryptocurrency this way, the funds go directly into a wallet you have on the trading platform.
When you buy cryptocurrency on an exchange, no blockchain address is created, and you do not receive a public or private key through this method. You must trust the platform to safeguard your funds. The exchange manages the keys itself, and you create a password to access your wallet on the platform.
Although most crypto exchanges follow strict guidelines to ensure the safety of your funds, you do not possess the private key. Therefore, you have to rely on the platform and do not actually own or control your funds.
There’s a saying in the cryptocurrency space: “Not your keys, not your coins.” This means that if you don’t have the private key, your cryptocurrency does not strictly belong to you. Let’s explore why this saying holds true.
You Don’t Truly Own Your Cryptocurrency
Using login credentials and a password makes it easy to access funds on a cryptocurrency exchange. However, this also means that you depend on the platform to access your funds, rather than communicating directly with the blockchain. It’s like entrusting the keys to your house to a third party.
Using an exchange wallet establishes a third party between you and the blockchain address. This means that control over your funds is centralized. Does that sound familiar?
Exchanges Can Restrict Your Activities
The whole point of cryptocurrency is to give users the freedom to use their funds as they see fit.
However, crypto exchanges, like banks, may impose certain withdrawal or deposit limits and policies. They might even question your activities. In some countries, crypto exchanges may restrict your transfers. This system is not at all what cryptocurrency aims to achieve.
Not Your Keys, Not Your Coins!
If there’s one takeaway from this article, it should be this: as long as you are not in control of your private key, you do not truly own your cryptocurrency.
But if you are an absolute beginner, it’s acceptable to buy cryptocurrency on a popular crypto exchange. In fact, many crypto exchanges have very advanced security measures. However, you should choose a reliable platform that is known for being secure.
As you learn more about cryptocurrency and blockchain, you can always start using blockchain addresses, public keys, and private keys directly. Once you purchase digital assets—whether NFTs, coins, or tokens—it is wise to ensure that you store them in a wallet where you control the keys.
We will delve deeper into private keys in the next article, examining the specifics of secure self-custody to help you keep your funds safe.
Frequently Asked Questions
What is the main difference between a public key and a private key?
A public key is like your account number—it’s shared openly so others can send you cryptocurrency. A private key is like a password—it must be kept secret because it grants access to your funds.
Can I recover my funds if I lose my private key?
No, if you lose your private key, there is no way to recover your funds. This is why it’s essential to store your private key securely and confidentially.
Is it safe to leave my cryptocurrency on an exchange?
While many exchanges have strong security, leaving your funds on an exchange means you don’t control the private keys. This introduces risks such as exchange hacks or restrictions. For long-term storage, consider a secure self-custody wallet.
How can I generate a private key?
Private keys are typically generated automatically when you create a cryptocurrency wallet. It’s important to use a reputable wallet provider and follow best practices for key generation and storage.
What is a hardware wallet, and how does it protect my private key?
A hardware wallet is a physical device that stores your private keys offline. It adds an extra layer of security by keeping your keys isolated from internet-connected devices, reducing the risk of hacking.
Are there any transaction fees associated with using private keys?
Using your private key to access and transfer funds may involve blockchain network fees, but there are no fees specifically for using the key itself. Network fees vary depending on congestion and the blockchain you’re using.
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