Bitcoin Safety and Security Primer - Part Two

In my previous article I talked about the importance in treating Bitcoin and other cryptocurrencies like cash. Having a Bitcoin wallet in your computer requires a little bit more security awareness compared to having a Bitcoin wallet on your smartphone. Therefore, you may need to exercise more caution depending on the kind of wallet you are using. The reason for this is because Bitcoin makes you your own bank and there is no banking institution, organization, or government agency that will help you recover lost or stolen Bitcoins. The same principle applies to physical cash where once its gone, it's gone forever. Now that we got this established, we can move forward to some technicalities in order for users to understand how Bitcoin wallets actually work.

Blockchain, Wallets, Public Addresses, and Private Keys...Bitcoin Terminology

Now that you understand the importance of treating Bitcoin as cash, let's get more specific so that you can have a basic understanding about Bitcoin terminology and how it works before we continue any further:

Bitcoins exist on a distributed ledger called the Bitcoin blockchain. The Bitcoin blockchain is a distributed ledger that keeps track of every single Bitcoin in existence assigned to a particular Bitcoin public address. Bitcoin public addresses all have a corresponding Bitcoin private key that unlocks access to the Bitcoins assigned to that particular Bitcoin public address. A Bitcoin wallet is simply an individual or a collection of Bitcoin public addresses with their corresponding private keys.

So one thing to understand about the way Bitcoin works is that there really isn't actual digital Bitcoins being stored in your Bitcoin wallet, rather they are always on the blockchain itself. But what you do have is a set of private keys that grants you access and control, through the blockchain, to a particular Bitcoin address with however many Bitcoins are in it. The blockchain ledger's job is to keep track of all transactions that take place and at the same time will record the quantity of Bitcoins associated to every particular Bitcoin public address. It is the private keys that allow you to control that specific Bitcoin public address through the blockchain ledger. So when you send a Bitcoin to another address, what you are doing is signing that a transaction has taken place so that the Bitcoin blockchain ledger can record that a certain quantity of Bitcoins have been moved from wallet A to wallet B. (i.e. Bitcoin address A now has 1 Bitcoin less while Bitcoin address B now has 1 Bitcoin more.)

A real world analogy for how this all works is like that of having an actual bank account that only you have access to using, for example, like through a PIN number when you use a debit card to make a purchase. In this scenario, it is the bank's job to make sure that not only do you have enough funds in your account to deduct from but also to move those funds to that of the recipient's account. That's the identical function that the blockchain ledger performs. So, if someone takes your debit card (public address), and they know your PIN number (private key), they will be able to use your stolen card (wallet) to make purchases and withdraw funds from an ATM machine. This is basically the same thing that can happen to anyone when their Bitcoin wallet gets stolen because your Bitcoin wallet will normally store both your Bitcoin Public Address and it's corresponding private key.

Recommended Reading: http://en.bitcoinwiki.org/Bitcoin_wallet

So it is important to understand to always protect either your Bitcoin wallet (as a whole by making backups) or your Bitcoin private keys (for as many Bitcoin addresses you may have). This is what you want to ultimately treat as cash. Whatever it takes, guard your Bitcoin private keys. Always make backups and store them securely. We will cover some methods for doing so in the following section.

In the next article we will explore the difference between different cryptocoin wallet types and jump right in and take the first step to getting started with your own Bitcoin wallet.