Private keys and wallets

While Bitcoin addresses appear to be a string of random numbers, they are actually computed from a private key. Private keys are long strings of random characters generated by your Bitcoin wallet software. There can only be one address generated from your private key, thus your private key is both the seed and password to your Bitcoin address.

Bitcoin private keys generally contain 51 characters and start with a 5, such as in the following example:

5Jd54v5mVLvyRsjDGTFbTZFGvwLosYKayRosbLYMxZFBLfEpCS7

Similar to your pocket wallet with credit cards, your Bitcoin wallet is a collection of addresses and private keys. Each address is used to receive and hold bitcoin.

In the preceding table, we can see how the balance in a typical wallet is composed of multiple Bitcoin addresses (in bold) with their corresponding private keys. Each address holds a balance that can be combined for a payout.

While most Bitcoin software holding your bitcoin are called wallets, they are technically keychains. Keychains are designed to manage and protect your Bitcoin keys. The term wallet is a convention carried over from Bitcoin legacy software.

Reputable online wallets take the necessary precautions to protect your private keys. Most online wallets use a technique called Cold storage. Holding private keys in cold storage means that your keys are physically stored offline in a vault. Access to the vault is required to interact with the keys.

Additionally, multi-signature addresses are used to protect the coins in cold storage. Typically, an address will require one key to transfer its bitcoins. Multi-signature addresses usually require two or more keys to sign a transfer. With cold-storage, there will often be a two of three requirement so that no one employee has full access to the funds.

Private keys are generated from large amounts of random data, called entropy in computer science, and are very difficult to crack. With all the computing power available today, it is not possible to find the private key of a Bitcoin address using brute force methods. Even if computing power were to exponentially increase to the point where that's possible, the Bitcoin software can be upgraded to include new cryptographic methods to match.