What is a Bitcoin wallet?
Or how a Bitcoin wallet is just a password
If you have ever created a Bitcoin wallet on your phone with an app like Exodus or Copay, or if you went all the way for a hardware wallet like Trezor or Ledger, you probably heard about the famous “Backup Secret Phrase” also known as the “12 secret words” which every app tells you to take care of it with your life for your Bitcoins to stay safe.
It can seem ridiculous how 12 words can be so important, but when you start thinking of them as a password, or as your bank card’s PIN, then we start understanding the seriousness of letting someone else know your secret phrase.
If you are reading this, there’s a high chance you have an email address on a popular platform like Gmail, where to access your information you’ll need an email and a password. Everything inside that account is stored on Google’s computers somewhere in the world. If someone else gets to know your password they could start sending emails to all your contacts, export all your data and even steal your identity. Giving away your email password can be considered as something very serious, even financially or life threatening.
Losing the secret “12 words” of your Bitcoin wallet is equally bad since those 12 words ARE your Bitcoin wallet, which after being passed through a bunch of mathematical functions turns into an ultra secure vault. Crazy, right? On my previous post about What is a Bitcoin transaction I gave the analogy of a transaction being like coins in your pocket, moving from one place to the other, although in reality those coins are not really being physically transferred from, let’s say, fro your phone to your friend’s hardware wallet.
To understand this a bit better, let’s have a crash course of:
Where’s the money on the blockchain
As I previously explained, the blockchain is only a series of blocks being solved by miners, one after the other, with all the transactions being stored as if they were boxes, heavily protected by the magic of mathematics. The content of this transactions is the record of who sends money to whom, so you can think of it as a huge spreadsheet keeping the record of money movements around the world.
On this huge spreadsheet is where your money is, and the 12 secret words, is the password which allows you to edit this spreadsheet. So in reality the coins are not in your phone, but only the password is. Which is why giving it away would be the equivalent of opening your online bank portal on a library’s computer, and then going for a vacation to Hawaii, letting anyone there take your money.
But where’s the blockchain?
That’s a good question! In the example above I mentioned how your emails were sitting on Google’s servers. The big difference with Bitcoin, is that the blockchain is on every miner’s computer. For a miner to participate in the “solving blocks” process, they have to store an exact copy of the blockchain on their computer. If you’ve heard the phrase “Bitcoin is decentralized”, this is what they are talking about. Google could one day deny the access to your email if you used the word “bomb” and “United States” in the same sentence with the excuse of you being a potential terrorist when in reality you were only describing last Lorde’s concert in the US as a bomb. They could do this because they control the servers where they are stored, on the other hand with Bitcoin, everyone has an exact copy of the blockchain and you could access your money on any miner’s computer. Let’s imagine Google is a Bitcoin miner too, and suddenly they don’t want you to access your hard earned money on the blockchain. They can’t do that! Because you could just go to another miner and say “hey where’s my money”, and that miner would just give you access because he doesn’t care, he is there for the money of your transaction fees (as all of us, let’s be honest). That’s why Bitcoin is taking the financial system by surprise.
The fact that everyone has an exact copy of the blockchain, and that anyone can see how much money each Bitcoin wallet holds, doesn’t compromise its security. By the time of writing, Bitcoin has a market capitalisation of 1 trillion dollars (trillion with a T). If it would be possible to steal it someone would have done it already, andbetter believe more than 1 person has tried before. Bitcoin is extremely secure because of the magic of mathematics, relaying on very basic concepts. If you would like to see behind the curtain, make sure to subscribe to the newsletter so you don’t miss my next post on decrypting Bitcoin’s cryptography (title in progress, naming is hard).
After learning this I hope you consider backing up your 12 secret words. You can write it on a very nice piece of paper and put it on a safe, or under your mattress. Make several copies and dig them on the dirt, you can always import it to a hardware wallet like a Ledger Nano. But make sure to never post it online, don’t save it on your social media, and never ever give it to a stranger asking for it on the internet. NEVER. If you want to share something about your Bitcoin wallet, it should be your address.
Now I’m afraid of sharing my Bitcoin address
You shouldn’t be. The difference between your Bitcoin address and your wallet, is that with your wallet you can move money, and with your address people can only send you money. Going back to the email’s example, the Bitcoin address is the equivalent of your email address, and your wallet is the equivalent of your email password. You share with everyone your email address, but you don’t share with anyone the password. I’ll put my money where my mouth is, so I’ll leave my Bitcoin address below, exposed to the internet so you believe me a little bit more.
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Recap
A Bitcoin wallet is made out of 12 words and you have to keep them secret
In practice a wallet is like an email password
Your email is at a company’s computer. The blockchain is in thousands of computers
It is nearly impossible to prohibit you from accessing your Bitcoins
Your money is not physically on your phone like cash on your leather wallet
Your amount money (Bitcoins) is a number on the blockchain
Your wallet is to move money, an address is only to receive money
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