What does it actually mean to “store crypto”?
A popular misconception about crypto wallets is that they contain or actually store actual crypto.
In Bitcoin’s case, this means that some people believe that Bitcoin wallets actually contain bitcoins.
But this is false.
Confused about crypto wallets
Unlike a physical wallet in the real world which holds cash, a Bitcoin wallet does NOT actually hold your bitcoins.
It can’t.
Why not?
Bitcoin is digital
Because, unlike cash, bitcoins don’t exist in physical form. They’re digital. You can’t physically store something that doesn’t physically exist!
Bitcoins are just numbers.
Bitcoins are simply represented by numbers on a ledger…Bitcoin’s blockchain.
When I say, “I own 3 bitcoins.”, what this really means is that we can look at Bitcoin’s blockchain (which is public), look up my address (which was generated by my Bitcoin wallet)., and see that I have 3 bitcoins associated with this address.
A helpful way to think about how a Bitcoin wallet works is to imagine that you have a real-world wallet that doesn’t hold any cash but holds just a debit card.
Wallet holding debit card
If you’re not familiar with a debit card, it’s a rectangular piece of plastic that looks like a credit card except that it’s linked to the user’s checking account at a bank.
A debit card (also known as a “check card” or “bank card”) is a payment card used to buy goods or services. that deducts money directly from your checking account when it’s used.
The amount of money that can be spent with it is tied to the account balance (the amount of funds in your checking account).
Cashier
So when you’re at the checkout counter at the grocery store, and it’s time to pay, you grab your wallet from your pocket or purse, whip out your debit card, and swipe or insert it at the terminal.
Pay with debit card
The cashier will either ask you to enter a personal identification number (PIN) or give you a slip to sign.
Your PIN number or signing your name (signature) is how you “prove” you are you and are authorizing the spending of your funds from your checking account.
Card terminal
As you can see, your money is not stored on your debit card. What the debit card provides is “access” to the funds in your checking account.
And with your PIN or signature, which “proves” you are the owner of the checking account, you can “unlock” the funds sitting in your checking account….and “spend” the funds.
Your checking account is just part of a digital ledger of the bank, so “spending” your funds just means that money is moved from your checking account to another account.
In this case, the grocery store’s bank account.
So if you think about it, if the only thing your wallet holds is a debit card, your wallet is NOT storing any actual money.
What it’s actually storing is something (the debit card) that gives you “access” to your money.
For example, U.S. dollars do not physically exist on debit cards. The debit card does not “store” your dollars. But the debit card gives you “access” to the U.S. dollars you own in your checking account.
Your money isn’t stored “in” your debit card.
Your money since it’s digital (or electronic) is represented by your checking account balance, which are just numbers recorded on a digital ledger (or database) that’s stored on your bank’s server.
If you lose your debit card or accidentally burn it or flush it down the toilet, you don’t lose your money.
A Bitcoin wallet works in a similar fashion with a couple of differences.
Instead of a checking account, Bitcoin uses “addresses” to represent account numbers. A Bitcoin address is where bitcoins (BTC) can be RECEIVED and from which they can be SENT to other addresses.
And rather than holding a debit card, a Bitcoin wallet holds something called a “private key”.
So a Bitcoin wallet does NOT store bitcoins, it stores a private key(s).
A private key is just a string of digits. This private key is like a debit card in the sense that if you are in possession of it, you have access to a specific address and can “spend” any bitcoins that are tied to that address.
Just like a debit card and knowledge of your PIN “proves” you are the owner of a specific checking account, a private key “proves” you are the owner of a specific Bitcoin address.
And just like a checking account is part of a big digital ledger that keeps track of transactions from all the bank’s customer accounts, a Bitcoin address is part of a big digital ledger that keeps track of all Bitcoin transactions that occur from all Bitcoin addresses. This digital ledger is Bitcoin’s blockchain.
As mentioned earlier, with a PIN or signature, is how a debit cardholder authorizes a transaction, which simply allows money to be “moved” from their checking account to another person’s or entity’s checking account, which is all recorded on the bank’s digital ledger.
In Bitcoin’s case, instead of a PIN or a handwritten signature, Bitcoin relies on a “digital signature”.
Creating a “digital signature”, is how a private key holder authorizes a Bitcoin transaction, which simply means bitcoin(s) is “moved” from the sender’s Bitcoin address to the recipient’s Bitcoin address, and this “movement” of bitcoins from one addressed to another address is permanently recorded on Bitcoin’s blockchain.
It’s not a perfect analogy since there are technical differences in the way money is actually “moved” between the two but the point is…
Bitcoins are NOT stored in the wallet. Bitcoins are assigned to addresses that are listed on Bitcoin’s blockchain.
A Bitcoin wallet doesn’t store bitcoins but grants access to your bitcoins.
A wallet manages the private key that grants access to the address where your bitcoins are stored.
What you have is a private key that allows you to prove you are the owner of an address and can “spend” any bitcoins tied to an address.
Think of bitcoins assigned to an address and that information is recorded on the blockchain (ledger). To be able to unlock and move the bitcoins to another address, you need the private key associated with the current address.
Your money is “stored” in your checking account number. Your bitcoins are “stored” in your Bitcoin address.
Your wallet holds the debit card that grants access to your checking account. Your Bitcoin wallet holds the private key that grants access to the Bitcoin address.
Your checking account balance is denominated in your local fiat currency and transactions are what is recorded in your bank’s database. Your address balance denominated in bitcoin (BTC) and transactions are what is recorded on Bitcoin’s blockchain.
A debit card is issued by your bank (along with a PIN). A private key is generated by the wallet itself.
