Private Keys: What Are They and Why Do You Need Them?

A private key is the only tool for accessing your coins. In 2024, attackers siphoned approximately $2.2 billion from crypto services. Most of these losses are attributed to key compromises. It is believed that millions of Bitcoins are lost forever due to lost keys: estimates range from 1.5–2 million BTC to approximately 3.7 million.

In this article:

1. What is a private key
   1.1. How a private key works: technical aspects
2. Why a private key is needed
3. How you can lose a private key and what the consequences are
4. Where is the best place to store private keys
   4.1 Tips for secure storage

What is a private key

A private key is a unique code that allows you to manage Bitcoins at a specific address. Imagine: a public address is like an account number, while a private key is like a PIN code, without which you cannot send funds.

Important! Technically, a private key is a unique secret from which a public key and subsequently an address are calculated. When a user creates a transaction, it is signed with the private key. When spending funds, the public key is revealed, and the network uses it to verify the signature: if everything matches, the transfer goes through. Therefore, the key is a means of proving ownership, not a means of authentication in the traditional sense.

A wallet can be simple, with one key and one address. Or it can be an extended one, where all keys are generated from a single seed phrase. A seed phrase is a set of 12 or 24 words, acting as a master key. If you lose it, access to the wallet is lost forever.

In the context of storage, keys are categorized as "hot" and "cold":

• a hot key is connected to the internet and is convenient for frequent operations;
• a cold key is offline, slower, but more secure.

And one more important point: on a centralized exchange, the private key is held by the exchange itself, not the account owner. This is not a formality, but a very practical difference in the level of control and risk (more on this in the following sections).

How a private key works: technical aspects

You don't need to be a cryptographer to understand the mechanics of a private key. It all works based on asymmetric cryptography; you just need to remember a simple chain:

Private Key → Public Key → Address

• The private key is kept only by the owner. It is a 256-bit number—there are so many variations that it is impossible to guess. It is needed to sign transactions.
• The public key is calculated from the private key. When a transaction enters the network, miners or validators use the public key to verify the signature. If everything matches, the operation is recognized as authentic and added to the blockchain. If the signature is forged, the network will simply reject it.
• The address is a shortened version of the public key. This is what you send to other people to receive a transfer.

When sending funds:

1. The private key creates a digital signature. It is unique for every transaction. Signing is a process that the wallet performs automatically.
2. The network verifies it using the public key.
3. If everything matches, the transaction is recognized as authentic and enters the blockchain.

The public key and address that other network participants see are always derived from the private key, but this process is irreversible. That is, having the public key or address, it is impossible to calculate the private key. This is the key idea: the system is transparent for verification but secure for ownership.

Why a private key is needed

• Asset ownership. The blockchain does not know passports or contracts. To the network, the owner of the coins is the one who holds the private key. No key means no access, even if you have all the screenshots of transfers and receipts.
• Transaction confirmation. Without a signature, the network will not recognize the transaction. This is protection against forgery and fraud.
• Access to services. In DeFi protocols and dApps, the private key acts as a way to log into the system. It confirms your identity without a username or password.

Why investors and traders need to know all this:

For investors and traders, this is important for a simple reason: it is the private key that determines who actually has control over the assets. With self-custody, there is no intermediary who can restrict access to funds or block an operation, but all responsibility for security also falls on the key owner. If the key is lost or compromised, you will not be able to restore access through support.

How you can lose a private key and what the consequences are

The most common cause of losses in cryptocurrency is not hackers, but simple human error. Seed phrases are lost, forgotten, or accidentally erased along with a phone or an old laptop.

Main scenarios:

• Loss of storage media. The key or seed phrase was stored on a hard drive/flash drive that was thrown away or lost. The most famous case is programmer James Howells from Britain, who accidentally threw away a disk with 8,000 BTC. Today, that is worth billions of dollars, and access to them is closed forever.
• Forgotten seed phrase. A person wrote the words on paper but lost the sheet or mixed up the order. Even one wrong word makes wallet recovery impossible.
• Phishing and theft. Scammers posing as technical support ask you to enter the phrase on a fake website. After that, the funds are gone instantly.
• Device hacking. If private data is stored in a text file on a computer or in a screenshot on a phone, a virus or Trojan can easily steal it.

The consequences are obvious:

• Irretrievable loss. No company or court will restore your coins.
• Instant theft. A leak = an immediate transfer of funds to someone else's address.
• Psychological blow. Losing access to coins is like locking a safe and forgetting the code forever: you are sure the money is there, but you can no longer open it.

Where is the best place to store private keys

There are three main options for storing private keys, and each is suitable for different tasks.

1. Hot wallets. These are mobile apps or browser extensions that are always connected to the internet. They are convenient for quick transfers, working with DeFi, and trading. But they are the ones most often targeted by hackers: one infected smartphone or fake website is enough to lose everything.
2. Warm wallets. Solutions from exchanges or services where keys are stored online, but with additional protection—multi-signature, two-factor authentication, and access restrictions. For the user, this is a comfortable option: fewer worries about backups and settings. The downside is that the user must trust the company, which means they depend on its reliability and reputation. For example, in 2025, Tether blocked the wallets of the Russian exchange Garantex due to sanctions, and users lost access to their assets.
3. Cold wallets. The safest method: the key is stored offline. These can be hardware devices (Ledger, Trezor), paper versions with a printed seed phrase, or an old laptop without internet. Using them is slightly more difficult and slower, but the risk of remote hacking is reduced to zero.

The optimal strategy is to combine methods. A hot wallet is needed for operational transactions, a cold one for long-term savings, and a warm one can be used as an intermediate option for convenience.

Tips for secure storage

Mistakes are too costly to treat lightly. But most problems can be prevented with simple habits.

• Never store keys in "plain text." A text file on a computer or a screenshot on a phone is an invitation for viruses and hackers.
• The seed phrase must be offline. It is better to write it down on paper and keep it in a secure place.
• Do not use cloud storage. Google Drive or iCloud are convenient, but a compromised account = access to your savings.
• Check application sources. Install wallets only from official websites. Fakes are encountered regularly.
• A hardware wallet for large sums. If a person holds more than they are willing to lose, buying a Ledger or Trezor should be mandatory.
• Do not share keys under any circumstances. Real services will never ask for a seed phrase or private key.

Ultimately, the right strategy comes down to balance: a hot wallet for daily operations, a cold one for savings, and key data should exist only in offline format. The easier the access, the easier it will be to lose your assets.