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Introduction to crypto wallets
Crypto wallets are how we all hold cryptocurrency. Without one, you cannot enjoy the benefits of accessing digital currency and navigating the blockchain world. There are many different types of crypto wallets, each with their own advantages and disadvantages.
Private keys and public keys
Crypto wallets don’t technically store your digital currencies like you put cash and cards in a traditional wallet. Instead, a crypto wallet is a key that can unlock access to your digital holdings on a blockchain.
Every crypto wallet address has two related keys – a public and private key. The private key is a secret code corresponding to a specific public key. The private key gives you control of assets at a specific wallet address. The public key tells the blockchain and its participants which account is yours.
Quick Tip
A helpful analogy is to think of a public key as a username or email address and a private key as a password.
Wallet addresses and transactions
Your wallet address is derived from your public key. A public key is essentially a very long string of 1s and 0s. Your wallet address contains the same information in an easier-to-record format: a wallet address. These long strings of characters seem complicated but are functionally similar to an email address.
To send and receive cryptocurrency across the blockchain, you must use a public wallet address. For example, if you wish to pay for something with digital currency, you will enter the recipient’s provided wallet address – and the blockchain network – in the transaction details.
Wallet addresses can be lengthy and confusing, so it’s important to triple-check that you’re copy-pasting the correct address whenever sending/receiving crypto.
Backup and recovery phrases
Most non-custodial cryptocurrency wallets come with a “seed phrase” which is used for recovery.
This seed phrase is like the master key to all of your accounts. Each new address you control with a crypto wallet is controlled by a separate private key generated from a single seed phrase. With seed phrases, it doesn’t matter if you lose access to your crypto wallet. You can still restore every single account you have ever created by entering the same seed phrase into a new wallet.
Thanks to a decade-old Bitcoin improvement proposal, BIP-39, a wallet’s seed phrase is a list of words that can be used to regain access to a locked account. It operates as an alternative to users recording and protecting a list of private keys.
It’s vital to keep a record of each wallet’s unique seed phrase in case you lose access to the device protecting your private keys.
Evolution of crypto storage
Early stage storage
Today, using crypto wallets to manage a portfolio is fairly straightforward and several industry innovators are working on making it even easier. But back in Bitcoin’s early days, accessing your BTC could be a pain in the proverbial.
Original Bitcoin wallets were “non-deterministic”. Let’s say you wanted to manage more than one crypto wallet address. Perhaps you wanted to keep one wallet address for holding Bitcoin long-term, and another for receiving Bitcoin bonuses from your part-time job. In this era, you would be forced to record and manage the private keys and public keys of each account.
And as the tech was fledgling, these keys were typically recorded on paper or in desktop files. The problem with that method was that if you lost that piece of paper, your desktop file was corrupted or you simply forgot which keys were for which account – too bad, bye-bye crypto.
Managing two or three accounts in this way isn’t a massive deal, but what about five, ten or twenty? You can see that for those heavily involved in digital currency, recording public and private keys for each wallet address is impractical.
Development of storage methods
2012 came around, and as Bitcoin began its journey to becoming a cultural phenomenon, developers were working hard to address the storage difficulties. A developer named Peter Wuilla identified the issues and came up with a solution: Bitcoin Improvement Proposal 32 (BIP-32).
The core concept was simple: wallets could use a “hierarchical deterministic” (HD) structure to generate multiple private keys, controlling multiple blockchain accounts, using a single master key. It also gave wallets the power to derive public keys directly from private keys, removing the need to record those too.
BIP-32’s adoption now means Bitcoin holders don’t need to jot down every key for every account: managing multiple crypto accounts only requires one master key.
Following BIP-32 came BIP-39, which introduced the seed phrase, a 12-24 word translation of the master keys to your accounts. Today, HD wallets are adopted universally, allowing you to generate and manage a near-infinite number of wallet addresses backed up by an easy-to-read and record list of 12-24 words.
Did You Know
There were some serious horror stories that led to this moment. Perhaps the most notable was that of James Howells, A Welshman who accidentally tossed out a spare hard drive in 2013 when cleaning his office. Unfortunately, this storage system contained all of his private keys.
He was an early believer in Bitcoin and had been mining coins for a few years prior. At the time of losing his private keys he’d amassed approximately 8,000 BTC. Back then, it was already worth a handsome US $1.3m.
Now, his losses stand at over US $460 million.
James Howells met with representatives of Newport City Council to propose excavating the local landfill to recover his lost Bitcoin, but was ultimately unsuccessful.
Case study: Swyftx employee Kyle
Kyle’s experience with Bitcoin mining and securely storing Bitcoin highlights the importance of best practices for safely storing cryptocurrencies.
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Disclaimer: The information on Swyftx Learn is for general educational purposes only and should not be taken as investment advice, personal recommendation, or an offer of, or solicitation to, buy or sell any assets. It has been prepared without regard to any particular investment objectives or financial situation and does not purport to cover any legal or regulatory requirements. Customers are encouraged to do their own independent research and seek professional advice. Swyftx makes no representation and assumes no liability as to the accuracy or completeness of the content. Any references to past performance are not, and should not be taken as a reliable indicator of future results. Make sure you understand the risks involved in trading before committing any capital. Never risk more than you are prepared to lose. Consider our Terms of Use and Risk Disclosure Statement for more details.
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