One of the most important aspects of Bitcoin, and indeed the entire cryptocurrency space, is that you are your own bank. You are responsible for everything you do with your coins, right down to how you store and protect them. Most people like to store their cryptocurrency in a digital wallet of some kind, which is generally the safest way to do so, but many don’t understand a key aspect of self storage - the importance of private keys.
Fiat vs Bitcoin
The concept of money on the blockchain isn’t so different from the money in your bank account, now that almost everything is digital. Money in your bank is just numbers on a spreadsheet until you actually withdraw it into notes and coins. The same is true with cryptocurrencies - the money is just figures on a digital ledger until you take it out (via an exchange).
However, the difference is a little more nuanced than that. Fiat money can ‘leave’ the supply when it is taken out of a bank as cash. From that point on, no one knows what’s happening to it except for the holder, which presents insurmountable problems for those wanting to keep global records of money movement. Of course the money still exists, but as far as any kind of global ledger goes, it may as well not. For example, in December 2020 it was revealed that over 50 GBP billion in UK banknotes is unaccounted for, held off the books by everyday people (or lost down the back of sofas).
Bitcoin, on the other hand, can never get lost because it never leaves the blockchain. You can swap your bitcoin for cash at an exchange and send the cash to your bank, but your bitcoin is now owned by the exchange. This explains how cryptocurrencies never actually ‘belong’ to their owners in the physical sense, despite being associated with an address under their control.
For example, if your digital wallet says you own three bitcoin, the bitcoin is not actually in your wallet - it’s still on the blockchain, because it can never leave it. What your wallet is doing is pointing to a record on the Bitcoin blockchain that says ‘this wallet address owns those three bitcoin’. When you want to send it on to someone, your wallet tells the Bitcoin blockchain (through Bitcoin miners) to change the status of the blockchain to say that the three bitcoin in question are now associated with a new address. Strictly speaking you never really ‘had’ it.
This presents an interesting security conundrum - if you don’t actually own your bitcoin, how can you protect it? The good news is that the Bitcoin blockchain is the safest in the world, thanks to its proof-of-work consensus algorithm. The bad news is that not all Bitcoin exchanges and wallets are made equal, with some methods of Bitcoin storage being less secure than others.
Not Your Keys, Not Your Bitcoin
There is a saying in the Bitcoin community - not your keys, not your bitcoin. What this means is that if you don’t own the private key to your Bitcoin wallet then there is more chance of it being stolen, seized, or otherwise lost. A private key is randomly generated every time you create a new Bitcoin wallet and acts as a kind of wallet recovery tool. What it most certainly isn't is a wallet password, which you will set up separately (or use the fingerprint on your phone).
Private keys are more than keys or passwords, but they operate in a similar way. The beauty of your bitcoin remaining on the blockchain is that if your wallet is lost or compromised in some way, you can still get to your holdings - as long as you have the private key. The wallet, be it a physical wallet that uses a USB connection or an app on your phone, is nothing more than an interface that represents your bitcoin holdings on the blockchain. You can download multiple wallets, insert your private key and you will see the same thing - your bitcoin holdings as they are on the Bitcoin blockchain.
What this means is that if anything happens to your wallet of choice, for example if your phone dies or you lose your physical bitcoin wallet, you can just get another one, import your old wallet from the private key and voila - you have your funds back. This is in comparison to your lovely leather wallet you got for Christmas - if you lose that, it’s gone, with the money inside it.
Private keys, therefore, are very powerful, which is why you should protect them very carefully. When you download or buy a new Bitcoin wallet and it shows you your private key, treat that private key with the same level of security as you would your wife’s diamond ring or your husband’s signed football jersey - anyone who gets hold of that private key can import it into a new wallet and take the funds associated with it. Likewise, if you lose that private key and then you lose access to your wallet, you will not be able to recover your funds. Many people have lost fortunes this way.
The Rise of Institutional Custodians
One important thing to note is that your funds aren’t always at risk if you don’t own the private key. All it means is that you are completely in the hands of the wallet maker - you are placing your trust in them and relying on their security systems being robust enough to repel hackers. In essence, they have more ownership of your bitcoin than you do - if the company folds or the app shuts down then you could lose access to your funds.
While instances of wallet makers going off grid and taking user funds with them are extremely few and far between, it is still a threat, and one that the ‘not your keys, not your bitcoin’ movement has been trying to educate people about.
However, in recent years there has been a movement by regulated cryptocurrency brokers to offer bank-grade custodial options for those who don’t want the responsibility (or hassle) of doing it solo. This has given rise to companies working with regulators to make sure that their security is as tight as a bank is with fiat money, while cryptocurrency custody insurance is also becoming a popular option with the most secure platforms.
Gomoon is one such example, with anyone who buys bitcoin from us being confident in the fact that their holdings are stored by the fully regulated bank with which we are partnered. This means that you can trust us to protect your funds in ways that other exchanges and wallets can’t, with fiat deposits also being insured in line with Federal Financial Supervisory Authority regulations, known as BaFin.
Gomoon offers a custodial option that is the next best thing to sticking your Bitcoin wallet under your mattress, and is an ideal option for those who want to leave the security of their funds to those who know exactly what they’re doing.
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