Cryptocurrency networks, such as Bitcoin for example, use a form of ‘public key cryptography’. What his means is that when somebody creates a new ‘account’ (for want of a better word) on the network they create a two ‘keys’ – a public key and a private key.
The public key acts like an address which other people can use to send coins to that account, whilst the private key acts like a kind of secure password which the account owner can use to prove ownership of a public address and therefore spend the coins which it holds. These two keys are linked together mathematically, by a one-way algorithm. There are many different algorithms used in cryptocurrency today; Bitcoin and many others use an algorithm called SHA-256.
Bitcoin wallet software usually stores the private key for you, because it is long and difficult to both remember and type correctly. You can, however, ‘import’ a private key from one wallet into another.
Some web wallet providers and exchange wallets retain control of your private key and therefore your coins. This is equivalent to trusting your money to a bank to look after for you, but can provide a target for hackers who can gain access to the company’s servers. Keeping control of your own private key generally improves the security of your coins.« Back to Glossary Index