In the crypto sphere, beginner’s guides usually cover “how to buy” tips and tutorials. As a result, almost all new investors get stuck with the steps that come before the purchasing process.
For one thing, you’ll have to provide virtual storage space for your newly-acquired coins. Storage on the blockchain is different from any other model you’ve already heard of, but that doesn’t mean that it’s grisly to grasp. On the contrary, all you need is a little understanding of the blockchain terminology to get ready for your first Bitcoin purchase.
In this article, we’ll explain the notions of a private key, a public key, and a Bitcoin wallet address as essential components in Bitcoin transactions.
How Do We Store Bitcoin?
Bitcoin and other altcoins don’t have physical representatives in the outside world. What’s more, they don’t even have a real virtual representative on your computer. Technically, when you buy a crypto asset, you do get a file, but that file isn’t the coin itself. Cryptocurrencies never leave the blockchain — their natural environment — so your “virtual money” appears in the form of a file that contains data to prove your ownership.
That data is exclusively generated by digital wallets. For that reason, we say that they’re the first prerequisite you need to meet if you want to buy, sell, or transfer crypto assets, even though the name “wallets” suggests that they’re only here to store your crypto.
Crypto wallets are software programs or hardware devices containing software that creates a unique pair of keys: a public and a private key. The public key is the “destination” of the recipient, and you can hand it to anyone who wants to send you crypto. On the other hand, its pairing private key is the password or unlocking code that proves that you’re the owner of the coins received in that transaction.
Both the public and private keys are 265-bit strings of randomly generated numbers and letters. They’re impractical to remember and can’t be associated with any personal information of the user.
What Is a Bitcoin Address?
To expand the description in the previous section, the public key serves as an address to which Bitcoin users can send cryptocurrencies. Because it’s an extremely long string, the public address is hashed, and that’s how we get a real wallet address.
More specifically, when you activate a Bitcoin wallet, it’s the private key that generates the public key, which, in sequence, generates a public address. Each Bitcoin address contains an alphanumeric identifier with 26-35 case-sensitive characters that begin with “1”, “3” or “bc1”, depending on the address format.
The wallet owner can reuse the address as many times as they wish with those alphanumeric characters as a source. However, almost all crypto experts suggest creating a new Bitcoin address for each transaction because it makes it more difficult for others to trace your Bitcoin funds.
You can easily find your address on the wallet software under the Recieve option, copy and send it to sellers. As we mentioned, both keys and the address are designed to be as random as possible. Blockchain technology is public, so everyone can see when and how many bitcoins a certain address has spent or received, but there are no credentials on display to associate those transactions with a personal name.
For instance, we found that the richest Bitcoin address, “34xp4vRoCGJym3xR7yCVPFHoCNxv4Twseo”, owns 252,597 BTC, but we can’t guess who’s the “lucky ones.”
History of Bitcoin Addresses
In the early ages of Bitcoin, there was only one format of Bitcoin address, called Legacy or P2PKH. However, as the number of BTC transactions grew exponentially over time, the size of the Legacy address format became an issue. The thing is that the Bitcoin network organizes transactions into blocks, and those blocks can accept a strictly defined number of transactions. These transactions carry a certain amount of data, including information about the address.
For illustration, the original block size was 1MB, but now developers have managed to expand it to 4MB. So, to make transactions smaller in size, the bitcoin-dev community started developing new address types, thus importing new functionalities into Bitcoin.
The Rise of SegWit Wallet Addresses
The SegWit address format came along as a response to the size issue arising from the limited number of transactions allowed in a block. The name SegWit is a short form of Segregated Witness. Namely, in SegWit addresses, developers have removed signatures by counting serialized witness data as a single unit and core-block data as only four units.
This data structure has improved the capacity for storing a larger number of transactions, which ultimately leads to faster transactions and hence, lower transaction fees. Furthermore, SegWit addresses can prevent what we call — transaction malleability, which is an attack that gives a user a technical chance to modify the transaction’s unique ID just before the transaction is verified on the Bitcoin blockchain.
However, SegWit wallet addresses may not be adopted by all Bitcoin wallets and cryptocurrency exchanges. For that reason, we covered the advantages, disadvantages, and possibilities of all Bitcoin address types available in the Bitcoin system today.
Types of Bitcoin Addresses
At this point, you can find three address formats in the Bitcoin Core to opt for: P2PKH, P2SH, and bech32, with a selected range of crypto providers supporting each of them.
Legacy Address (P2PKH)
The original Legacy address is also known as P2PKH, which translates into “Pay-to-Pubkey Hash,” meaning you pay to the hash of the user’s public key. All P2PKH addresses start with 1 (for example, 1BvBMSEYstWetqTFn5Au4m4GFg7xJaNVN2). As the first address format, Legacy BTC addresses are widely used with the majority of wallets and crypto exchanges and have a large base of users, who consider it the most secure format, despite its length.
It’s important to remember that P2PKH addresses aren’t SegWit compatible, even though you can send BTC from a Legacy to a SegWit address without any limitations.
SegWit Address (P2SH)
This is the non-native SegWit version, where the P2SH code-name refers to “pay to script hash.” All P2SH addresses start with 3 (for example, 3J98t1WpEZ73CNmQviecrnyiWrnqRhWNLy). Apart from being more compact to use compared to Legacy addresses, this type of SegWit has a broader scope of functionalities.
As a casual investor, you should know that they’re the best option for multisig addresses where you can assign multiple digital signatures (from different people or different computers) to authorize a transaction and that P2SH addresses are supported by some of the largest wallet brands like Ledger Nano S, Exodus, and Trezor.
Native SegWit Addresses (Bech32)
Bech32 addresses are longer than the two other address types as each starts with the distinct “bc1” prefix. It’s also called native segwit address format, supported by almost all sophisticated desktop and hardware wallets but a very small number of crypto exchanges.
This means that exchanges do allow users to send digital assets to bech32 addresses, but they don’t allow them to receive their funds in this format. That’s because the bech32 format isn’t fully compatible with the old software, so users might not be able to receive network confirmations from all Bitcoin software packages.
As a result, this format has the smallest number of users, not only because of the lack of support but also because of the considerably lower transaction fees, which don’t suit the nodes (miners) who receive fess as a reward for verifying transactions originating from a bech32 wallet address.
Different Types of Bitcoin Wallets
Even though they have the same purpose, Bitcoin wallets form a large market that offers wallet packages from various access points. They can be discussed in terms of many specifications and subtle traits but for starters, you should be able to differentiate between hot vs cold storage and custodian vs independent wallets.
Hot wallets are all storage solutions requiring internet access to execute transactions and balance monitoring. This diverse group includes web wallets and software apps (desktop wallets and mobile wallets), offering users incredible ease of use and comfort for managing their crypto funds. On that account, the internet factor makes hot storage a weak system in terms of security.
Hardware wallets or cold storage, on the other hand, come in the form of a physical device with its own piece of software that keeps your private keys far from malware, scams, and hacker attacks. For a better user experience, you can pair a hardware wallet with a compatible software app.
In terms of private keys, the distinction between custodians vs independent wallets raises more concerns. Most centralized crypto exchanges like Coinbase offer you storage space for your bitcoins as part of your account — usually in the form of online wallets. As convenient as this may seem, in this scenario, your private keys aren’t yours. Therefore, crypto experts assert that you should activate an independent wallet before purchasing any bitcoins.
A Few Words Before You Go…
Your Bitcoin address is a modified form of the created public key, and thus, it can be freely shared, distributed, or advertised on any virtual place without the risk of losing your Bitcoin. On the other hand, access to your private key will give anybody full power over your coins kept at that address. That’s the crucial thing to know before making your first move in the enchanting crypto sphere.
As your portfolio grows and your knowledge in crypto expands, you can focus on the Bitcoin address format that matches the best with your trading style.