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What is a private key wallet?
A private key wallet–also known as a non-custodial wallet–is like having a locked mailbox that only you can access.
But unlike a regular mailbox with a physical key, the “key” in a private key wallet is a string of random words called a “seed phrase.”
A seed phrase is a string of words created by your cryptocurrency wallet and used to get access to the crypto linked with it. Consider a wallet to be a crypto version of a password manager, with the seed phrase serving as the master password. You'll have access to all of the crypto linked with the wallet that created the phrase as long as you have your seed phrase — even if you delete or lose the wallet.
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A private key is a secret number that is used in cryptography and cryptocurrency.
A private key is a large, randomly-generated number with hundreds of digits. For simplicity, they are usually represented as strings of alphanumeric characters.
A cryptocurrency wallet consists of a set of public addresses and private keys. Anyone can deposit cryptocurrency in a public address, but funds cannot be removed from an address without the corresponding private key.
Private keys represent final control and ownership of cryptocurrency. It is vitally important to prevent one's private keys from being lost or compromised.
Why is a private key wallet important?
With a private key wallet, you have a “mailbox” (address) on a blockchain ––that isn’t publicly linked to your name or residence––where you can send and receive crypto.
Again, only you have the key to this “mailbox,” but you can give the public address to anyone you want to send you crypto.
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Who has the keys to your crypto?
While having a private key wallet gives you the most control over your funds, it comes with the responsibility of keeping your keys safe. This is the origin of the popular crypto phrase “not your keys, not your crypto.”
With a real private mailbox, if someone has the public address and the key, they can steal your mail and it’s the same with a private key wallet.
If someone knows the public address of your wallet and has your private key, they can steal your funds.
What are the benefits of a private key wallet?
The main benefit is security.
While the post office can open up mailboxes, there's one major difference between that and your private key wallet: Crypto Wallet cannot open your mailbox under any circumstances––only you can.
Simply put, with a private key wallet, no one else has access to or control of your funds unless they have your seed phrase.
Each form of crypto wallet has its own set of benefits and drawbacks, so learning how they function is essential before keeping and transferring your crypto assets.
What Is the Best Way to Store Private Keys?
Private keys can be stored on computers or mobile phones, USB drives, a specialized hardware wallet, or even a piece of paper. The ideal form of storage will depend on how often you plan to use your cryptocurrency. A password-protected mobile phone or computer is the most convenient way to store cryptocurrency for everyday use. For long-term or "cold" storage, private keys should always be kept offline, ideally on devices that have never touched the internet. Even printers can be compromised. Hardware wallets (Ledger Stax - Preorder NOW!) can facilitate cold storage by signing transactions in a way that does not compromise the private keys.
Should You Trust a Custodial Wallet?
A custodial wallet is a third-party service that allows users to store cryptocurrency, similar to a bank. This allows users to skip over the complication of private key storage, relying instead on the technological expertise of the company offering the service. However, there are tradeoffs. Custodial wallets are often targets for hackers or phishing scams, and they can also be seized or frozen by legal authorities. The best solution is to determine what type of wallet fits your individual risk tolerance and technological skill.
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