Bitcoin is a cryptocurrency, also known as a digital currency. Computers create bitcoin in a process referred to as mining. The actual process is finding the solution to extremely complex mathematical questions and recording them in a ledger. While such calculations and recordings can be done with pen and paper, that isn’t a feasible method. Once mined, bitcoin is then usually sold to an exchange, where it can be bought and sold similar to a stock on the stock market. Individuals or businesses can buy and sell on the exchange, or send bitcoin back and forth among themselves.
There is no physical manifestation of cryptocurrency, so the ownership and transfer of bitcoin can only occur by recording transaction on the ledger and having it confirmed by others who hold a copy of the ledger. To make this all work in a reasonable amount of time, it is most often done with the assistance of a digital device.
The owner’s device stores a public key, which is similar to an IP address, and allows transactions between two owners. For a transaction to occur though, each owner must authorize the transfer using their private key – basically a very complicated password.
Here’s the most important thing to know: if you lose your keys, you’ve lost your money.
Imagine waking up one morning with amnesia. The only thing you can remember is that you have a million dollars in a bank somewhere. You don’t know your name, the bank account number, the name of the bank, or even the country that the bank is in. You’re never going to find your money, even though it’s out there somewhere. This is the situation if you lose your public and private keys. Your bitcoin is still out there somewhere, but you’re never going to be able to access it. Keeping those keys safe is paramount. So, how do you do that? You put your keys in a “wallet” and your “seed” in a vault.