How Bitcoin Wallets Work

Bitcoin wallets don’t actually contain bitcoin. Instead, they store a user’s cryptographic keys, which enable access to bitcoin on the blockchain. These wallets are akin to digital keychains, holding pairs of private and public keys used for transactions. This article breaks down how these wallets operate, focusing on key creation, wallet backups, and how wallets interact with the Bitcoin network.

Wallets use Private and Public Keys

Bitcoin wallets utilize key pairs: a private key and a public key. The private key, known only to the wallet holder, authorizes transactions, while the public key can be shared freely to receive bitcoin. Public keys are mathematically derived from private keys, making each key pair unique. Ensuring the security of the private key is critical, as it directly links to your bitcoin holdings. Anyone knowing the private key, would have access to the Bitcoin funds.

Creating a Bitcoin Wallet

When setting up a Bitcoin wallet, it generates a seed or mnemonic phrase, a series of 12-24 words. This seed phrase is the master key, generating all private and public keys for future transactions. The Hierarchical Deterministic (HD) wallet framework allows users to have many unique addresses, all derived from the same seed phrase.

A good wallet will automatically generate a new address each time you receive bitcoin, which helps to preserve privacy. Address reuse can expose your transaction history, so a new address for each transaction prevents unwanted tracking of funds.

Addresses vs. Public Keys

An address and a public key aren’t the same. Addresses are created by applying a hashing algorithm to the public key, forming a shorter identifier that’s easier to share. Addresses typically start with “bc1” while public keys begin with “02,” “03,” or “04.” Most transactions and wallets display addresses instead of public keys for simplicity and privacy.

Backing up your Bitcoin Wallet

The seed or recovery phrase generated when you create your wallet is essential for backup. As long as you retain this phrase, you can restore your wallet, even if the device or app is lost. This phrase ensures access to all future bitcoin addresses you create since they’re derived from the same seed.

One backup is sufficient for an HD wallet, but make sure your recovery phrase is kept safe. Anyone who gains access to this phrase can access your funds, so keep it secure from potential theft or loss. There are different steel backup solutions (like Plebstyle), that allow you to stamp your seed phrase in steel to make sure it even survives a house fire.

Bitcoin Wallets and the Bitcoin Network

Bitcoin wallets are typically lightweight, so they don’t store the entire blockchain. Instead, they query the blockchain to verify balances and track transactions. Some wallets rely on central servers for this data, but the most secure wallets allow users to connect to their own Bitcoin node. This setup enhances privacy by preventing third parties from accessing your transaction data. If you’re running a full node you should definitely connect it with your hardware wallet to achieve full sovereignty.

Final Thoughts

• Bitcoin wallets store and manage your keys, enabling bitcoin transactions and balance tracking.
• Private keys must be kept secret to secure your funds, while public keys can be shared to receive bitcoin.
• Backups rely on a 12-24 word recovery phrase and should be carefully protected.