Why is the private key important? How does the private key ensure the security of cryptocurrency?

Jan 05,2023
Why is the private key important? How does the private key ensure the security of cryptocurrency?

Why is the private key important? How does the private key ensure the security of cryptocurrency? The private key is essential for cryptocurrency users who want to access their assets. Next, we will discuss their working principles in detail and share some important techniques to ensure the security of Bitcoin, Ethereum and other tokens. The private key is usually combined with a public address, where users can receive and send encrypted payments from others. If we compare the encryption key system with traditional banking business, the public address is your bank account, and the private key is the PIN that enables you to withdraw money.

What is a private key?

If you have never seen a private key, imagine a long string of numbers and letters randomly mixed together. The encryption key is mathematically related to a public address, but advanced private key cryptography means that it is almost impossible to crack a password and derive a password from another password.

In fact, even if you have the most advanced supercomputer on hand, it will take billions of years to achieve.

The concept of encrypted private key is the core of Bitcoin and thousands of digital currencies that followed. However, because these coins and tokens are scattered, it is essential to protect the private key.

Can't use your funds

Losing your bank account PIN is not necessarily a disaster, because you just need to ask the bank for a new PIN. Putting your private key in the wrong place may mean that your funds will never be accessible.

There are several daunting cases where cryptocurrency investors learned this in a painful way. James Howells, an IT technician from Newport, Wales, accidentally threw away a hard disk drive with the private key he needed to access his 7500 Bitcoins. At today's exchange rate (November 2021), their value will be as high as 480 million dollars.

The disk is now languishing in a nearby landfill. Although Newport City Council would offer a 10% discount if he was allowed to look for treasure, it refused on the grounds of environment. In 2021, he raised his bet. If the search was successful, he would donate 25% to the Covid Relief Fund. There is also the strange case of Gerald Cotten, whom we will talk about later.

How to protect your private key

Fortunately, protecting your private key is not a trouble. You can also set up multiple backups for the sake of caution, but it is important to ensure the security of these backups. If anyone gets the key without your authorization or knowledge, they will be able to obtain the cryptocurrency for themselves without any review. Here are three important tips for maintaining protection.

1. Use the hardware wallet

For those who are worried about putting encrypted assets anywhere near the Internet connection, hardware wallets can be a good thing. The only goal of these physical devices is to secure your coins and tokens.

Hardware wallets are known as a form of "cold storage," and manufacturers of such devices claim they can reduce the chance of malware attacks. Some models generate their own private keys and provide a way to recover the cryptocurrency they hold when the device is lost or stolen.

Although some hardware wallets only focus on Bitcoin, others accept too many cryptocurrencies. Before deciding to invest in one of these products, it is always worthwhile to conduct a detailed study. Although they have a good record in protecting the security of cryptocurrencies, it is important to ensure that manufacturers have a good reputation. A less technical alternative is to store your encrypted private key on a USB memory stick.

2. Paper wallet

In theory, you can write your private key on a piece of paper, lock it in the safe, and access it when needed. However, the process is fraught with risks. Given how many characters make up the private key, the slightest error in the transcription process may mean that you cannot access your token. In other words, there are some great tools that allow you to print your public address and private key on a piece of paper, and attach a QR code for easy access.

3. Prudent trading

Many consumers who cannot understand how to obtain encryption keys usually rely on a centralized exchange to do this for them. This may have benefits, but for hardware wallets, due diligence is essential to ensure that the company can trust your money.

In addition to having strong security measures to defend against hacker attacks - unfortunately, such attacks still occur frequently, involving hundreds of millions of dollars - they also need refrigeration arrangements ready for every possible situation.

To illustrate our meaning, please take a look at the case of QuadrigaCX, a Canadian exchange. Its founder Gerard Cotten died suddenly in India in December 2018 due to complications related to Crohn's disease. He was only 30 years old.

The company was looking for cryptocurrencies worth about $190 million. However, Mr. Cotten is the only person in the industry who has the right to access the cold wallet, which makes users unable to access their funds. The company was declared bankrupt, and the Royal Canadian Mounted Police and the Federal Bureau of Investigation launched an investigation. It was claimed that Mr. Cotton was not actually dead.

In general, the above details why the private key is important and how the private key ensures the security of cryptocurrency. I believe you will understand it after reading it. In short, the private key is a basic aspect of the operation of cryptocurrency. Without the private key, you cannot send the cryptocurrency to another wallet address. One of the best ways to protect the private key is to use the hardware wallet.