In late 1990s, the Public key infrastructure (PKI) emerged to help govern encryption keys through the issuance and management of digital certificates and in today’s world its examples are SSL certificates, digital signatures, and authentication for Internet of Things devices. This infrastructure manages the digital certificates issuance to offer protection to sensitive data, produce unique digital identities for users, devices and applications and secure end-to-end communications.
PKI provides a public key and it signifies the identity of the user. By definition, a public key is an alphanumeric string which serves as a public receiving address in cryptocurrencies. Someone needs to have a public key to get the Bitcoins.
Private Key is an alphanumeric string that allows transactions from the cryptocurrency address. We need a private key that each user can hold to prove their identity. A person requires a private key to send or transfer Bitcoins. Tokens which have been sent to addresses whose private key are not known, effectively becoming unusable and they are called burned Tokens. Whoever holds the private key controls the money and owns the bitcoin so you should never share your private key unless you fully trust the other party.
The private key is stored in a wallet and it is a collection of the user credentials. A wallet effectively encapsulates private keys. In other words, in blockchain, the user’s wallet stores credentials and tracks digital assets associated with the user’s address.
In a web wallet, the private key is on a server. In a hardware wallet, a private key is stores on a specialized hardware device. In desktop or mobile wallets a private key is on the device that may or may not be connected with the internet.
A private key that is stored in a device connected to internet is called hot storage; while cold wallets are on a device not connected to the internet. It is highly advised to keep private keys in cold storage and divide money in multiple wallets to make it more protected and save your hard earned money.
Taking a real world example, the Grayscale Bitcoin Investment Trust (ticker: GBTC) employed robust security and storage as the crypto assets of the trust are stored in offline or “cold” storage with Coinbase Custody Trust Company, LLC, as Custodian.
Paper wallets are highly recommended to back up your bitcoin wallet and store private keys in the physical world.