Home Guides Beginners Guide to Bitcoin Bitcoin Address & The Private Key. How does it Work?

Bitcoin Address & The Private Key. How does it Work?

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What is a Bitcoin Address?

Bitcoin uses a public ledger that demonstrates the number of Bitcoins and their owners at any given time. But instead of linking names of people with accounts, the ledger only lists Bitcoin addresses. Each address can be considered as a pseudonym for a person, and the use of pseudonyms is why people can use Bitcoins without disclosing personal information.

Example of a Bitcoin address: 1BvBMSEYstWetqTFn5Au4m4GFg7xJaNVN2

Similar to a bank account number, a Bitcoin address consists of a string of letters and numbers, usually beginning with the number. To send Bitcoins to others, you only need to know their Bitcoin address. For someone to send you Bitcoins, you need to share your address with him. Bitcoin addresses are complicated to type as they are huge, and missing any one character is enough for the transaction to get failed.

To solve this issue, many people use (QR) code to represent their addresses. You can place your Bitcoin address, either typed or as a QR code on your business card or personal website for your convenience. Similar to most of the online payment systems like PayPal, you need an Internet connection to send Bitcoins, but you don’t have to be connected to receive them. For instance, if you work for an NGO and pass out a lot of business cards with your Bitcoin address in the form of a text or barcode by including a text requesting to make donations to your organization via Bitcoins. This way, you can receive Bitcoins even while you sleep.

QR codes are used to represent arbitrary data. They are straightforward to scan with smartphones and so are convenient for sharing the long strings of characters used for Bitcoin addresses. In traditional banking, when you transfer money from one account to another, the bank updates its privately held ledger in which every account at that bank is listed. If that ledger is lost or destroyed, any information about who owned the assets at the bank will be lost forever if there is no backup taken.

In the case of Bitcoin, this problem is eliminated. Even though Bitcoin also uses a ledger, identical copies of that ledger are distributed across millions of computers across the globe. Hence no central point of failure exists, and transactions recorded on the Bitcoin ledger are permanent and impossible to erase.

Transacting Bitcoins from one address to another is nothing but sending an instruction to all of the computers on the Bitcoin network to update each of their ledgers in the same way.

All transactions that have ever been entered on the Bitcoin ledger are public information and being transparent with all the transactions is one of the Bitcoin’s essential principles.

Even though none of our personal information is recorded on the ledger, sharing your Bitcoin address with your friends or posting it on social media platforms will associate with your identity, everyone will know your Bitcoin balance for that particular address. Hence it is recommended to use multiple Bitcoin addresses, but publicly share any one of them or some of them to enhance your privacy.

The Private Key

A private key looks just like a Bitcoin address with a long string of numbers and letters. Similar to Bitcoin addresses, QR codes are generally used to represent private keys due to their length. Every single private key is paired with a Bitcoin address which enables to unlock the Bitcoins with that address.

Example of a private key:

E9873D79C6D87DC0FB6A5778633389F4453213303DA61F20BD67FC233AA33262

In simple terms, if the Bitcoin address is a bank account number, a private key is like a PIN to that account. You need this private key to authorize the transaction you wish to do. When you make a transaction, it gets broadcasted to the entire Bitcoin network.

The network is instructed to transfer Bitcoins from your address to another address. The computers on the network will then check if the transaction is authorized before updating the ledger. The authorization is checked by knowing if the transaction is digitally signed with the appropriate private key.

This digital signature for your transaction can only be done using the specific wallet’s private key. This private key should be kept extremely confidential just like your ATM pin. If your private key gets exposed to anyone, they can scam your Bitcoins.

Every private key is associated with a Bitcoin address, but not every Bitcoin address will have a single private key. Some Bitcoin address asks for multiple private keys to unlock the Bitcoins at that address. But this advanced feature is not used for general transactions.

Since we compared the Bitcoin wallet’s private key with ATM pin, we want to point out that it is fundamentally different from that. Concerning the pin, both you and your bank will have access to that. But in the case of your private key, only you will have access to it and no one else. You can lose your Bitcoin address since it can be recovered with the help of the corresponding private key, but you can never lose your wallet’s private key.

Once the private key is lost, all the Bitcoins in your wallet gets locked forever. Hence, keeping your private key extremely safe is very important. There are many ways through which you can take the digital backup of your private key. You also can write down your private key or print it out in a piece of paper and store it in a safe place for backup. As we mentioned earlier, it is better to maintain multiple addresses with multiple private keys that to rely on one single wallet and private key to store all the Bitcoins you have.

When opening a digital wallet the application usually presents you a recovery phrase composed by 12 or 24 words. That phrase is an alias of the private key that should be handled with the same care as if it was the private key: Since this prase completely recovers any information of the original wallet it has to be kept as secret as the private key, since any stranger in possession of it has the power to wipe completely the account.

 

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