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Business News/ Money / Personal Finance/  What are private and public keys in bitcoin?
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What are private and public keys in bitcoin?

Bitcoins are stored in digital wallets, which are software programmes, containing one public and one private key

It is important to select right wallet to store bitcoins,. Photo: AFPPremium
It is important to select right wallet to store bitcoins,. Photo: AFP

Extending the nearly four times rise seen in 2020, bitcoin prices have surged more than 20% to $35,249 in the first 12 days of 2021. The rally has attracted many first-time buyers to cryptocurrencies. However, there are concerns that many of these investors are buying into this asset class without fully understanding how these work and what are the risks involved.

To understand how a cryptocurrency derives its security features, you must first know the concept of public and private keys.

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Bitcoins are stored in digital wallets, which are software programmes, containing one public and one private key. Bitcoin wallets are like an online bank account where you keep your bitcoins.

Corresponding to a wallet is a private key, which is a large and random number. This key works as a password and determines the ownership of the crypto asset. Usually, cryptocurrency wallets generate a private key for users. Owning a cryptocurrency essentially means having a private key.

Remember that you won’t be able to access your bitcoins or other crypto assets if you misplace or forget the private key.

Moreover, as the name suggests, a public key is an address that everyone can see and is used by other people to send crypto assets to you. Note that a public key can be recovered using a private key.

It is important to select the right wallet to store bitcoins, as this will ensure that your crypto assets are secured. That there are two kinds of wallets; hot wallets, which are connected to the internet and cold wallets, which let you store crypto assets offline, including hardware and paper wallets.

“Banks store your information at the back-end. They don’t give you complex passwords for you to manage. These are managed passwords. Just like banks, platforms such as CoinSwitch Kuber or Coinbase have managed wallets. Here users don’t have to worry about public or private keys. These platforms manage the funds on the user’s behalf. So if something goes wrong with these companies or they get hacked, users' money will be at risk," said Ashish Singhal, chief executive officer and co-founder, CoinSwitch Kuber, cryptocurrency investment platform.

Remember that in blockchain, all transactions are irreversible.

There are a second set of wallets, which are independent wallets that give users the ability to manage or handle their own private key.

In this, while creating a wallet, a user will be assigned a private key, which the user has to note down or securely store. The ownership of the funds solely relies on the user.

“For small investors, who don’t want to get into the complexities of managing their own private key, they can manage through online wallets. But if you are tech-savvy and an informed investor or are investing a bigger sum, then you must understand the concepts of public and private keys and keep the crypto assets in self-managed wallets," said Singhal.

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Abhinav Kaul
Abhinav Kaul writes on cryptocurrencies and mutual funds at Mint. His previous stints include ETMarkets, Reuters Bangalore and Press Trust of India.
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Updated: 12 Jan 2021, 05:32 PM IST
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