What Does It Mean To Actually Own Cryptocurrencies?
By Cryptolete on ALTCOIN MAGAZINE
As much as the pictures plastered all over the internet depicting bitcoin as a gold coin with a “B” on it would like you to believe, bitcoin, in fact, is not something that you can hold in your hand.
Bitcoin is entirely digital.
It has no weight, no smell, no texture.
It is nothing but digits on a screen mixed into a beautiful complexity of the mathematical code.
Because of this, many people don’t actually understand what it means to literally “own” your bitcoin.
This article will help to clear up what it means to actually have bitcoin in your possession and how it’s moved around the blockchain.
Where Are Cryptocurrencies Located?
Cryptocurrencies are located on the blockchain, which is the decentralized network that bitcoin runs on. I like to picture the blockchain as a giant web that has bitcoins constantly moving through it at lightning speed.
Whenever you buy, sell, exchange, trade, or transfer your bitcoin to a different address, you use what’s known as a public and private key pairing. This pairing enables your crypto to be safely moved from account to account. I like to picture this as a message that you send up to the blockchain that securely tells your bitcoin to go to a specific location.
The Mailbox Analogy
The easiest way to think about a public and private key is a mailbox.
Everyone can see your mailbox and look up your address. If you want someone to send you mail, you give them your address and they mail you something. It then goes into your mailbox. Your address is your public key. It’s fine to share your public key because that is your address and that is how people will know where to send cryptocurrency to.
If you want “Bob” to send you 0.25 bitcoin, you just send Bob your public key and he will be able to send you the bitcoin.
Your public key is a random set of letters, usually both upper and lower case, typically 30 to 34 characters in length. You can create as many public keys as you want. This is good because your public is, well, public. Anyone who sees your public key can look it up and see how much you have inside of that public key address. Of course, they would need to know that the string of random letters that makes up your public key is actually yours first, but still. This means that anyone who you send bitcoin to can see how much you have by looking up the address you sent them. Creating a new address for each transaction is one option to help counter this, but more than likely there will be new privacy features that will be built into bitcoin in the future that will enable you to be able to choose whether you want to show or hide your balance.
Back to our example, if you get postage mail and it gets delivered to your mailbox, you’ll need to either physically walk to your mailbox and open it, or you’ll need a key to unlock it. For this example, let’s pretend you need a key to get your mail when someone sends you something. Just like how you need a “private key” to get your mail from your mailbox (aka your “public address”), you also need a “private key” to get your cryptocurrency. This is where your private key comes into play. Usually, you won’t even know what your private key is. This is because private keys are kept hidden on exchanges to minimize risk. Coinbase, Gemini, Binance and other centralized exchanges hold your private key for you because it minimizes the chances of new people messing things up or losing their bitcoin.
Now, if you decide that you want your bitcoin to be yours and have complete control over them, you will need to own a wallet that contains a private key. Hardware wallets, software wallets, paper wallets, and other wallets can all be ways that you can generate your own private keys so that the crypto that you own is truly yours. Whoever has access to the private key owns the cryptocurrency. You never want to give out your private key to anyone. Just like how anyone with the private key to your home can get into your home, anyone with your private key for crypto can get into your crypto account.
The Credit Analogy
An easy way to think about it is like this; in today’s world, everything is based on credit. Whether you’re trading stocks or have credit in your bank account, it’s all based on a credit-based ledger system that is controlled by a third party which is the banks. If you know what has happened with Greece, Venezuela, or other countries, you would know that these banks can go bust. In these countries, the central authorities (aka the banks and governments) were not able to honor the debts on the credits. Even in America, the banks needed the bailouts.
With cryptocurrencies, only the person with the private keys actually has access to and owns the cryptocurrency. Everything is on the blockchain, which has trust built into it. This eliminates the need to trust a central authority, a third party, a bank, or a government because the trust lies within the mathematical formula that bitcoin and blockchain technology was spawned from.
The blockchain holds the bitcoin and the public and private key combinations tell the blockchain who the real owner is.
For example, if you want to send 1 bitcoin over to Lauren, she’ll send you her public key. You’ll paste it into your account, either on an exchange or from your personal wallet, and then the exchange or your wallet will take your public key and private key, put them together and verify that you are indeed the owner of your bitcoin. That message will then be sent to the blockchain and the 1 bitcoin will be sent to the address that Lauren gave you. Once the bitcoin gets sent to Lauren’s address, her public key and private key will come together, verify the transaction and accept the bitcoin you sent her.
Conclusion + Video Example Of What The Blockchain Looks Like
Now, of course, this was an incredibly simplified concept of what exactly happens when you send cryptocurrency, but it should give you a good idea about how it all actually works. There are a lot of videos out there that go into the major details regarding blockchain technology and cryptocurrency. I highly suggest you watch them, as they are astonishingly interesting. With saying that, it’s sort of like regular money and the banking system; you don’t have to know what exactly happens when you swipe your credit card for it to work; it just works. Similarly, you don’t have to know all the ins and outs of what happens when you send your crypto. But I still do recommend watching more videos and learning more about it.
Thanks for reading and watching!
Louis, Cryptolete
