What is a BTC address and why do you need it? If you are a first-time cryptocurrency user, you need to have these questions answered before you start sending or receiving bitcoin.
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BTC Address Explained
It is a unique identifier you need to send or receive your digital funds. They sometimes compare it with an email address you give people if you want to hear from them.
A correct BTC address looks like a string of 26 – 34 letters and numbers. It always starts with 1, 3 or bc1 prefix. There are different address formats, we will be dealing with them later in this article.
Below are some basics you need to know about a Bitcoin address.
- It’s a piece of code that represents the destination (or the source) for a BTC payment.
- It is not where the bitcoins are stored.
- For every transaction, a receiver generates a unique brand-new address using any Bitcoin wallet. If you follow this rule, it makes your transactions extremely hard to trace.
- You cannot return the crypto you have received to the sender. In a way, a BTC transaction is like a letter with no return address.
- A Bitcoin address can look like a QR code. It helps things easier for users.
Now, let’s see how it all works in theory and practice.
How Does a Bitcoin Address Work
Imagine, you owe your friend Bob 1 BTC and want to send this amount to him. Bob has a wallet app installed on his mobile device. What you guys do next?
- Bob lets you know he wants his 1 BTC back and generates a new address in his wallet app. He sends this address to you in his request.
- You enter your wallet, copy-paste Bob’s address into the Recipient field and click Send.
- The transaction goes to a special pool where it awaits confirmation by miners. When this process is complete, the money goes to Bob.
Ok, and what happens if you accidentally send more BTC than you owe? Remember, Bob cannot return the extra coins to you, as there’s no such option. No, he should not use the address you gave him when you were borrowing 1 BTC from him. The reason is simple — Bob cannot be sure you still use it. If you don’t, the money may get lost somewhere in cyberspace.
So, the best option for you would be to go to your wallet and create a brand-new address for Bob. Then you provide it to him for one-time use.
Why You Have To Generate a New Address Every Time
For security reasons. You know that in a blockchain network all the confirmed transactions enter the distributed public ledger. ‘Public’ means that anyone can view the records with your public address. If you use it repeatedly, it would be rather easy to follow your financial activities. In some cases, it’s possible to link them to your real identity.
To prevent this from happening, you’d better use a new address for every occasion.
What Is a BTC Address: Address vs Public Key
Sometimes people think these two things are the same, and it causes confusion. Let’s make it clear.
Your BTC address, as the name suggests, is like an email address.
People send you stuff using it. On the technical level, it’s a hash of your Public key.
Hash is a product of a cryptographical function that always returns you a piece of code of a certain length, no matter what you input. To get a BTC address, we hash a Public key first with SHA256 function and then apply RIPEMD160 function to the result. Then we encode the result as Base58 format to make it more readable and human-friendly.
If it seems too difficult, you can see the Bitcoin address as a shortened version of your Public key. Any such version is different — the probability of generating two identical addresses is almost zero.
Thus, the Public key is the thing a wallet app uses to create an indefinite number of new addresses.
Continuing the analogy, a wallet app is your ‘email client’. The private key (the one you should keep secret) is your password.
What Is a BTC Address: Validation
Before sending your bitcoins, you can check if the address you use is valid. First, you check the length of the string — as we mentioned, it must be between 26 and 34 characters and begin with 1, 3 or bc1. Also, we recommend you to use a special online tool.
Note that most wallet apps should check the address for you automatically. If you insert an incorrect (not long enough, containing some invalid characters, etc.) address into the Recipient field, the app will not allow you to send.
IMPORTANT: If the address you use is valid, it means you can send money to it. It does not mean that the wallet is active (actually used by someone).
Multi-Signature Bitcoin Addresses
If you manage your funds collectively, you may want to create a multi-signature Bitcoin address using a combination of multiple private keys.
A multi-signature address has a prefix 3, as it’s a newer technology. You may think of such an address as of a check issued for two persons. You cannot cash this check unless both parties (you and your partner, friend, spouse, colleague) authorize this operation.
The person responsible for a multi-signature address generation must decide in advance on the exact number of private/public keys needed for the purpose. Once you have created such an address, you cannot change these details. If you need to do it, you start the process anew.
How To Create a Multisig Address
You can generate a multi-signature address without using a third-party service, by executing a special command in the Bitcoin Core client. An easier way would be to use a multi-signature wallet provider service like Electrum.
A multi-signature BTC wallet is a good option for startups with several co-founders who don’t want to put one person in charge of their common funds.
What Is In a BTC Address
A correct BTC address has the following features:
- It consists of no more than 34 random characters, including numbers, UPPERCASE, and lowercase letters. Some addresses can contain fewer characters, but no fewer than 26.
- It does not contain such characters as uppercase “O”, lowercase “I” and the number of 0. They can be mistaken for other symbols.
- It starts with 1, 3 or bc1.
- There are several characters inside a BTC address that serve as a checksum. It means they present a sequence of symbols used to check the data for possible errors.
BTC Address Formats
There are three BTC address formats: P2PKH, P2SH, and bech32. Normally, they don’t come into conflict, though few wallet providers and exchanges support all of them. Let’s see how these formats are different from each other and what the pros and cons they feature.
P2PKH Format (Legacy)
If you are dealing with P2PKH format, your BTC address starts with 1. It was the format BTC used originally, so they also call it ‘Legacy’.
The abbreviation P2PKH stands for ‘Pay-to-Pubkey Hash’. It means ‘Pay to a Hash of the Public Key’.
If you send bitcoins from a legacy address, you are likely to pay a higher fee as such a transaction is larger in size. Also note that P2PKH and SegWit formats are not compatible, but you can send your bitcoins from a Segwit address to a P2PKH address.
Any address of this format begins with a 3. The name P2SH means ‘Pay to Script Hash’. You lock your bitcoins to the hash of the script. To unlock them, you need a special unlocking script (the original script + some additional data).
Such an address feature wider functionality than a legacy address. It’s often used for multi-signature BTC wallets we talked about earlier.
Without diving deeper into technical details too complicated for a beginner, it’s the most popular type of Bitcoin address. You can use P2SH to send you digital funds to an address of any format. It ensures cheaper transactions and a slightly higher level of privacy.
Bech32 Format (SegWit)
A bech32 address is longer than any other, as it begins with the ‘bc1’ prefix. Most wallets (both soft- and hardware ones) support this native SegWit format.
On the downside, few exchanges do it. Most often, your exchange will allow you to send funds to a bech32 address. The problem is that you are unlikely to receive anything using it.
What Is a BTC Address: FAQ
It’s a unique identifier you use to send and receive digital funds.
It looks like a long string of characters (uppercase and lowercase letters and digits) and starts with 1, 3 or bc1 prefix. Also, a BTC address can be represented as a QR code.
A correct BTC address contains 26 – 34 characters. The number of characters depends on the format used.
There are three formats of Bitcoin addresses. They are P2PKH, P2SH, and Bech32. They start at 1, 3 and bc1, respectively.
No, it’s not. A Bitcoin address is a hash of your Public Key.
It’s better not to reuse it at all. You should create a brand-new address for every BTC transaction. It helps to protect your privacy and prevent other users from tracking your financial activity in the blockchain network.