A common misconception is that cryptocurrency is stored in a wallet, but technically speaking it actually lives on the blockchain to which it belongs. For example, BTC is native to and stored on the Bitcoin blockchain.
To better understand how cryptocurrency is stored, let’s cover these 3 core terms:
- Public key (or public address): This is simply a publicly known address from which your cryptocurrency is sent and received. Think of this like an email address in the same way your email address is used as an identifier for the sending and receiving of emails, your public key is used as an identifier for the sending and receiving of cryptocurrency. However, instead of an email address structure (e.g. [email protected]) your public key unique string of characters (e.g. ETH address: 0x89205A3A3b2A69De6Dbf7f01ED13B2108B2c43e7, BTC address: 1BvBMSEYstWetqTFn5Au4m4GFg7xJaNVN2). The format of your public key is governed by which blockchain your cryptocurrency is native to.
- Private key: A private key is used to access the funds associated with a public address and should be known only to the account owner. Think of your private key like your password to your email address. Anyone can know your email address but without your password, they cannot access your emails and send emails from your public address to others. Similarly, your private key is what permits access to control of your cryptocurrency. If someone gets your private key, they will have full access to your funds – therefore, it’s important to ensure that your private key is never jeopardised and that you don’t share it with anyone. This is where the popular saying “not your keys, not your coins” comes from.
- Wallet: A wallet is simply a program or tool that stores and/or interfaces your private key and public address. Wallets enable users to access, send and receive cryptocurrency. They can be entirely physical, entirely digital or a mix of both. Different types of wallets have different levels of security, and no wallet is completely impenetrable.
Example: Tim buys BTC on an exchange. He wants full control over his cryptocurrency, so he transfers it from the custodial exchange wallet to his own wallet.
Tim visits Blockchain.com and verifies the website’s legitimacy. He the creates a wallet before generating a public and private key.
Once he has created the wallet, hand-written his seed phrase and stored it somewhere safe offline, Tim sends the BTX from the exchange wallet to the Bitcoin address that appears on his wallet. Once the transaction has been confirmed on the Bitcoin blockchain, the wallet’s BTC balance will update.