A private key is a secret number that allows cryptocurrency owners to access their funds and digital assets on the blockchain. It is essentially the proof of ownership for any coins associated with a public key. Without possession of the private key, those coins cannot be spent.
This article will provide an in-depth look at what private keys are, how they work, different types, best practices for security and management, and advanced techniques like multisignature wallets.
Key Takeaways
- Private keys are the secret passwords that grant full ownership and control over cryptocurrency funds.
- Hardware wallets like Ledger and Trezor are currently the most secure way to store private keys, generating them in isolated secure elements.
- Backing up private keys or seed phrases on paper provides durable offline storage, but requires careful physical security of the backup copies.
- Encrypted digital backups, multi-signature wallets, and hardware security modules offer additional layers of protection when used properly.
- Regularly testing backups, following best security practices, and staying vigilant against social engineering helps users keep control of their digital assets.
What is a Private Key?
At the basic level, a private key is a long string of randomly generated numbers and letters that functions like a password. It alone provides access and spending control over the funds associated with a public key or cryptocurrency address. Private keys are randomly created during the initialization process of a new wallet, whether that is a software, online, hardware or paper wallet.
The private key is mathematically linked to one or more derived public keys and addresses through the use of elliptic curve cryptography. When funds are received at a public address, the sender proves ownership by digitally signing the transaction with their private key. Other network participants can verify this signature against the stated public key to confirm valid ownership.
Anyone holding the private key can now spend those coins by generating another signed transaction message. This proves to the network they have authorization from the true owner without revealing the private key itself. Private keys must therefore remain secret, as exposing them allows others full access to drain associated funds from the addresses.
Private Key Formats
While serving the same basic purpose across all cryptocurrencies, private keys can take on different formats depending on factors like the wallet software, network and intended usage:
WIF Private Key
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A Wallet Import Format (WIF) private key allows you to import a Bitcoin or crypto address and its corresponding funds into certain wallet applications. It consists of a base58-encoded string that begins with 5 for Bitcoin addresses and represents the private key in a format wallets can understand.
While easy to import, WIF keys should still be handled with care as they are not encrypted. Keep them securely backed up and stored offline as much as possible. Opt for encrypted formats like keystore files if you wish to access keys regularly through online wallets or exchanges.
Related: Cryptography in Blockchain Technology: A Beginner’s Guide
Raw Private Key
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Storing a private key in its raw hexadecimal format gives you full control without restrictions but requires diligent security practices. As an unencrypted number string, raw keys offer no built-in protections against compromise. If leaked or stolen, anyone possessing the key could drain associated addresses.
For this reason, raw keys should never be input or stored on devices connected to the internet. Offline “cold storage” solutions like hardware wallets are optimal as they allow generating addresses and signing transactions without exposing the key itself. Additionally, consider partitioning funds and using multiple addresses for improved resilience against complete loss.
Keystore/JSON File
A keystore or JSON file is an encrypted file format used by many cryptocurrency wallets like MetaMask to store private keys. It contains the key encrypted with a password and other metadata needed to unlock it in the wallet application. This provides security through obscurity as the encrypted key is not exposed in raw format.
However, the password becomes a new attack vector, so it must be chosen and stored carefully. When using keystore files, only open them on trusted devices, avoid reusing passwords across accounts, and do not store the password digitally or share the file itself publicly. Be aware that decrypting the key requires access to both the keystore file and password, so backups must be made of both.
Mnemonic Seed Phrase
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A mnemonic seed phrase, also known as a recovery phrase, allows users to easily back up their crypto wallet and recover funds in the event their private keys are lost. It consists of a list of 12 or 24 random words which are derived from the original private key.
Through a hierarchical deterministic (HD) wallet setup, the seed phrase can be used to regenerate the private keys and addresses associated with a wallet. This provides a simple yet secure way to backup a wallet without needing access to the actual private keys.
However, seed phrases should still be handled carefully, as possessing this recovery data essentially gives complete control over the wallet and its funds. It is best to store seed phrases securely offline in multiple physical locations to prevent loss and minimize risks of theft or unauthorized access in case of digital compromise.
BIP38 Encrypted Key
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A BIP38 encrypted private key adds an additional layer of security by requiring a passphrase to decrypt the key and access the funds. Through the BIP38 encryption standard, the private key is scrambled and can only be unscrambled with the correct passphrase.
This protects the key if it is somehow exposed publicly, as hackers would still need the passphrase to utilize it. However, the passphrase becomes the new single point of failure, so it must also be stored securely.
BIP38 keys strike a good balance between accessibility and protection, but users must remain diligent about passphrase security practices like using strong, unique passwords and not reusing them across accounts or storing them digitally. Proper precautions are needed to prevent loss of funds in the event of passphrase theft or forgetfulness.
Related: Data Encryption: What You Need to Know
Plaintext Private Key
Storing a private key in its raw unencrypted plaintext format gives full control over the funds but provides no security against unauthorized access if the key is exposed. As a long string of numbers and letters, anyone possessing this key could instantly access and transfer all associated crypto assets.
For this reason, plaintext private keys should never be stored digitally or input online, as even momentary exposure puts everything at risk. The most secure option is to generate keys offline in secure “cold storage” hardware wallets that never connect to the internet.
Alternatively, keys can be encrypted using standards like BIP38 that require additional authentication before use. With great control comes great responsibility, so diligent security practices are necessary when handling plaintext keys to avoid catastrophic private key compromise through loss, theft or digital exposure.
Generating Private Keys
The process of generating private keys depends on the type of wallet being used:
- Software Wallets: When first initializing a software wallet like Exodus or Electrum, the program randomly creates one or more private keys that are saved to the device. Some allow exporting as WIF format for manual backups.
- Hardware Wallets: Devices like Ledger and Trezor produce private keys in a secure environment to prevent exposure. The seed phrase or PIN provides access to derive related keys.
- Paper Wallets: Websites like BitAddress can generate private keys offline for printing and storage without digital access. Requires extreme care and may be impractical for frequent transactions.
- Online/Exchange Wallets: Custodial services hold private keys on the user’s behalf and facilitate transactions through website accounts rather than independent keys.
In all cases, private keys should only be created in a secure, offline computer or dedicated hardware wallet to prevent malware, keyloggers or network snooping from observing their value. Generating keys randomly is crucial to avoid patterns that could be guessed or cracked.
Related: Distributed Ledger Technology: A Complete Overview
Private Key Storage
Once private keys are generated, secure storage is paramount to preventing theft or loss of funds. While no single option is foolproof, diligently following security best practices can help maximize protection based on individual threat models and risk tolerance levels. Let’s explore the main storage methods:
Software and Online Wallets
Storing private keys within online or software-based wallet applications provides convenience but relies on the security practices of the wallet provider. Funds are only as safe as the company or development team. Major risks include data breaches exposing keys, vulnerabilities enabling remote hacking, and legal/regulatory issues potentially freezing accounts.
Some mitigations include using reputable services with strong security auditing, avoiding storing large long-term balances, enabling all authentication options like two-factor authentication, avoiding phishing sites, and monitoring for unauthorized access. Regularly backing up wallet files and seed phrases also helps if the provider fails.
Hardware Wallets
Hardware wallets like Ledger and Trezor are considered the gold standard approach, generating and signing transactions from isolated secure elements to protect private keys even if the device itself is compromised. Built-in screens allow verification of transaction details without exposing keys to other hardware.
Keys are typically derived from a recovery seed phrase or PIN that must be properly documented and stored separately in case of device loss or failure. Physical security of the device also remains important – storing it in a fireproof safe or bank deposit box when not in use helps prevent loss or theft. Manufacturers provide firmware updates to patch vulnerabilities, so keeping devices up-to-date is also important.
Paper Wallets
Printed paper wallets provide simple, durable backups by storing private keys offline without reliance on technology or third parties that could fail. Multiple copies should be made and stored in different secure locations to mitigate risk of fire or flood destroying a single copy. However, private keys are vulnerable if the paper is lost, stolen, damaged, or falls into the wrong hands.
Regularly sweeping funds into new addresses and shredding obsolete backup papers helps improve security over time against physical risks or advances in cryptanalysis. Long-term cold storage via paper is not ideal for holdings intended to be transacted frequently. Proper secure storage of printed keys is also required, such as within safety deposit boxes, buried waterproof containers, or disguised locations in the home.
Encrypted Digital Backups
Storing private keys, wallet files or seed phrases as encrypted digital backups provides accessibility without relying on physical papers, while cryptography helps protect the keys themselves. Options include encrypted disk images, password-protected documents, cloud storage lockers, or hardware security modules.
Risks include losing encryption passwords, vulnerabilities in algorithms enabling future cracking, and data leaks exposing backup locations which could aid brute force attacks against the encryption. Storing master passwords using proven techniques like dicewords and storing password hints/clues offline helps mitigate such risks. Regularly updating to new file/cloud storage versions also ensures use of current encryption standards.
Multi-Signature Wallets
Dividing key material across separate devices, locations or parties according to multisignature schemes provides redundancy against any single point compromising the full set of keys needed to authorize transactions. Popular options include basic 2-of-3 setups requiring two of three participants to sign, up to more advanced techniques like Shamir’s Secret Sharing splitting a key into threshold shares.
Complexity is increased, but the security bar is raised significantly against threats targeting individual keys. Air-gapped cold storage solutions fall under this model, with keys held on dedicated offline computers not connected to networks vulnerable to malware or hacking attempts. Regular testing and documentation of procedures remains important to ensure ease of use in an emergency.
Physical Storage
Engraving, etching or physically storing private keys, recovery seeds or wallet backups removes reliance on technology but introduces risks of physical damage or loss. Options like stamping onto metal plates, etching onto glass, or hiding in secure physical locations all provide durable long-term protection against electrical, electromagnetic or cyber threats.
Private Key Security Risks
While private keys empower users with full control over funds, they also represent single points of failure if compromised:
- Malware/Keyloggers: Viruses and spyware pose a persistent risk of silently stealing keys during generation or storage on internet-connected devices.
- Physical Theft: Hardware wallets, paper backups or cloud drive contents containing unencrypted keys are vulnerable if lost or stolen.
- Online Attacks: Phishing, trojans or brute force cracking attempts target weak passwords/pins guarding keys or steal them from insecure exchanges/services.
- Data Breaches: Centralized storage of keys by exchanges or custodial services faces risks if databases or backups are hacked, as seen with Mt. Gox.
- Insider Threats: Employees of wallet providers, exchanges or hosted services could potentially access keys given sufficient system privileges or incentive for theft.
- Social Engineering: Deception or manipulation may trick users into revealing keys, resetting passwords or approving fraudulent transactions under false pretenses.
- Memory Loss: Forgotten passwords, lost/damaged paper backups or failure to properly secure seed phrases results in permanent lockout from funds.
Proper key management through secure storage, encryption, password managers, hardware wallets, regular backups, authentication best practices and caution around unsolicited contacts helps users stay in control of their digital wealth despite these threats.
Multi-Signature Wallets
Advanced users seeking even stronger security can employ multi-signature (multisig) setups requiring multiple private keys to authorize transactions. This acts as a deterrent against single-vector attacks by splitting key material across separate devices, locations, parties or algorithms:
- 2-of-3 Multisig: Requiring 2 of 3 pre-selected keys to sign off prevents theft if one is compromised while maintaining functionality.
- Shamir’s Secret Sharing: Splits keys into threshold shares stored in different places, with a minimum needed to reconstruct.
- Multi-Party Computation: Cryptographic protocols allow collaborative spending from geographically separated participants without exposing individual keys.
- Hardware Security Modules: Hardware devices like YubiKeys use secure elements and cryptoprocessors for key generation/signing to supplement software/online wallets.
- Air-Gapped “Cold Storage”: Keeping keys on dedicated offline computers disconnected from the internet adds a physical layer of protection.
- Segregated Witness Addresses: Separating public keys from signatures creates multisig-like functionality within a single address on Bitcoin and Litecoin.
While adding complexity, multisig can significantly raise the bar against threats if properly engineered. It remains most appropriate for high-value holdings rather than everyday spending due to increased transaction fees and coordination overhead.
Key Management Challenges
As cryptocurrency users accumulate more addresses, coins and account types over time, private key organization presents ongoing challenges:
- Address Reuse: Sending from the same address repeatedly compromises privacy and fungibility by exposing transaction graphs. Most exchanges still reuse deposit addresses.
- Address Tracking: Blockchain explorers and analytics services can cluster related addresses to profiles, undermining perceived anonymity of separate keys.
- Key Derivation Standards: Incompatible wallet software, deprecated protocols and hard forks create orphaned funds from old keys no longer supported by current nodes.
- Multiple Wallet Types: Managing private keys, seed phrases, login credentials across hardware, software, paper, exchange and other wallet solutions becomes burdensome.
- Lost Passwords: Forgotten PINs, passwords or seed phrases risk permanent lockout despite properly secured keys. Regular testing and documented backups are critical.
- Address Consolidation: Accumulating small UTXOs from past transactions results in UX friction and higher fees over time if not swept into a consolidated address under the same private key control.
Hierarchical Deterministic (HD) wallets address some challenges by deriving a branching tree of related addresses/keys from a single restored seed, but continued diligence remains vital to avoid loss of access or
Key Management Solutions
To help address these ongoing key management challenges, various solutions have emerged to simplify storage, tracking, and secure crypto wallets:
Hardware Wallets
Hardware wallets like Ledger and Trezor have become increasingly popular for their ability to generate, sign transactions, and securely store private keys in isolated secure elements with robust encryption and authentication. Regular firmware updates help patch vulnerabilities. While not invulnerable, they offer a optimal balance of usability and protection against malware/hackers compared to software-only solutions.
Hierarchical Deterministic (HD) Wallets
HD wallets allow derivation of an infinite tree of related addresses from a single restored seed phrase or recovery sentence. This follows the BIP32, BIP39, BIP44 standards to generate child keys in a deterministic order. Popular software like Electrum utilize this to consolidate funds from many old addresses into new ones under the same restored private key control, simplifying storage.
Non-Custodial Exchanges
Decentralized exchanges (DEX) like Bisq allow direct peer-to-peer trading without depositing funds into a centralized party’s control. Users retain full custody of their private keys during and after trades, avoiding risks of exchange hacks or insolvency at the cost of reduced liquidity versus large centralized exchanges.
Hardware Security Modules (HSM)
Hardware security modules like YubiKeys provide an additional layer of protection beyond software or online storage by using secure cryptoprocessors to generate and sign transactions without exposing private keys. They integrate with cryptocurrency wallet software for a hardened two-factor authentication experience.
Multisig
Multisig wallets as discussed earlier split key material across separate devices, locations or parties using threshold cryptography. This deters theft by raising the bar much higher than attacking individual keys. Options range from basic 2-of-3 setups to more advanced mult-party computation protocols.
Key Backup & Recovery
Regularly testing backups of seed phrases, private keys or wallet files on alternative media/locations helps ensure they remain restorable and accessible. Paper backups should be properly stored, while encrypted digital copies on external drives or cloud services balance accessibility with security.
Blockchain Explorers
Privacy-focused wallets and mixers help break address clustering over time, but all transactions remain publicly viewable on ledgers forever. Services like Whale Alert track large balances. Continued diligence in key management remains prudent over the long run.
Private vs Public Keys
Private and public keys are both fundamental components of asymmetric encryption systems, such as the widely used RSA and Elliptic Curve Cryptography (ECC) algorithms. These keys play essential roles in securing communication and verifying the authenticity of digital signatures. Here’s how they differ:
Private Key
- Ownership: The private key is kept secret and known only to the owner.
- Generation: It is generated by the user or a trusted key generation entity.
- Usage: The private key is used for two primary purposes:
- Encryption: It is used to decrypt data that has been encrypted using the corresponding public key.
- Digital Signatures: It is used to generate a digital signature that can be verified using the associated public key.
- Security: Since the private key must remain confidential, it is typically stored securely, often protected by encryption and access controls.
- Distribution: The private key should never be shared or disclosed to others.
Public Key
- Ownership: The public key is freely distributed and available to anyone who wishes to communicate with the owner.
- Derivation: The public key is derived from the corresponding private key using a mathematical operation.
- Usage: The public key has two primary purposes:
- Encryption: It is used to encrypt data that can only be decrypted using the corresponding private key.
- Verification: It is used to verify digital signatures generated with the associated private key.
- Security: The security of the asymmetric encryption system relies on the public key being widely accessible without compromising the corresponding private key’s secrecy.
- Distribution: The public key can be openly shared, published on websites, included in certificates, or transmitted via various secure channels.
Conclusion
In summary, private keys are the fundamental building blocks powering cryptocurrency ownership and require diligent security practices. With care, various solutions can help users safely manage growing collections of keys and addresses into the future while avoiding loss of funds through compromise or loss of access. Continuous education also helps individuals and projects advance industry best practices.
