Cryptocurrency wallets and their associated keys are the cornerstone of crypto security. Unlike fiat money, crypto assets are not stored in the wallet itself, but on the blockchain; the wallet merely holds the keys that unlock them. The private key is a long, secret string that proves ownership of your coins and is used to sign every transaction. The public key is derived from the private key and in turn generates your wallet address—this is the string you share to receive funds. A common analogy is a mailbox and key: the wallet address (public key) is like your mailbox number (anyone can drop mail in), while the private key is the mailbox key that only you should have. Losing your private key (or seed phrase) means losing access to your funds forever. This is why wallets and keys are critically important: they authenticate transactions and prove ownership of blockchain assets.
Public Keys
A public key is a cryptographic code derived from your private key, serving as your wallet's "receiving address." It's like your email address or bank account number—safe to share publicly because it allows others to send you cryptocurrency. For instance, when someone transfers Bitcoin to you, they use your public key (or its hashed version, the wallet address) to direct the funds. Public keys are visible on the blockchain, promoting transparency, but they don't reveal your identity unless linked to personal information.
Private Keys
In contrast, the private key is a long alphanumeric string (typically 256 bits for Bitcoin) that proves ownership and authorizes spending. It is the secret half of the key pair. It's generated randomly when you create a wallet and must be kept secret at all costs. With the private key, you can "sign" transactions digitally, creating a unique signature that verifies the transfer without exposing the key itself. Losing your private key means losing access to your funds forever—there's no "forgot password" option in crypto. For example, if a hacker obtains your private key, they can drain your wallet instantly, as seen in numerous high-profile breaches.
Wallet Addresses
Wallet addresses (sometimes called a “receiving address”) are shortened, user-friendly versions of public keys, often hashed for added security (e.g. Bitcoin addresses start with "1" or "3"). They act as the destination for incoming transactions. Modern wallets use hierarchical deterministic (HD) structures, allowing one seed phrase to generate multiple key pairs, simplifying management without compromising security.
It’s designed so that it’s easy/safer for people to copy/paste, share, or scan (e.g. QR codes), and so that mistakes can be detected (via checksums etc.). Also, often the address is hashed, meaning it’s produced by applying certain hash functions to the public key (plus perhaps prefixes/checksums), so the address does not directly reveal the raw public key.
Here’s How They Work in a Transaction:
1. Creating a Transaction: When Lucy wants to send 0.5 Bitcoin to James, she uses her private key to create a digital signature for the transaction. This signature proves she’s the rightful owner of the funds without revealing her private key.
2. Verification: The network uses Lucy’s public key to verify her signature, confirming the transaction is legitimate. James’s wallet address (derived from his public key) is used as the destination for the funds.
3. Security: The private key never leaves Lucy’s device, and the mathematical relationship between public and private keys makes it nearly impossible to reverse-engineer the private key from the public key or wallet address.
Relationship Among Private Key / Public Key / Address
Putting it together:
- Generate private key (secret, random)
- Derive public key from private key (via cryptographic algorithm)
- Process public key (e.g. hash it, apply encoding, add checksum/format) to produce wallet address — this is what you share publicly to receive funds.
So:
Private Key → Public Key → Wallet AddressYou keep the private key secret. You can share the address (and public key, in some contexts) safely.
Importance and Security
- Because blockchain is public (every transaction is visible), what matters is controlling the private key. The fact that the private key is safe is what ensures that only you can spend the funds at that address.
- Many wallets use additional tools like seed phrases (groups of words) or hierarchical deterministic (HD) derivation so that multiple addresses keys can be derived from one seed in a reproducible, secure way. This helps with backup and recovery.
Note: We will look at seed phrases in more detail in lesson 5.4 Backing Up Your Seed Phrase Securely
To wrap up, understanding private and public keys is fundamental to managing your crypto assets securely. With a private key, you control your funds, while the public key is your unique identifier for receiving them. Now, as we move forward, it's important to understand how wallets interact with these keys. That brings us to the next topic: Custodial vs. Non-Custodial Wallets. In the next lesson, we’ll explore the key differences between these two types and how they impact your control and security over your digital assets.