How Do Physical Bitcoins Work

The cryptocurrency market is a multi-trillion dollar market, which clearly illustrates the financial significance of cryptocurrencies today. In the early 2010s, cryptocurrencies were a new financial instrument that attracted mostly tech-savvy, crypto enthusiasts who believed that one day, digital currencies would become a real alternative to physical, fiat money. 

Over the years, the popularity of Bitcoin (BTC) as the first cryptocurrency with innovative, decentralized blockchain technology has grown exponentially, making the asset widely accepted today as a payment method worldwide. After the emergence of BTC, thousands of other cryptocurrencies have also been launched with more or less success. Some of the most popular altcoins with a high trading volume and market cap today are Ethereum (ETH), Ripple (XRP), and Litecoin (LTC). 

Since cryptos don’t exist physically, just like with fiat money, you need to keep your funds somewhere. Digital crypto wallets were invented for this specific purpose – storing digital assets. Hot wallets and cold wallets of various kinds are made for storing cryptos, but with Bitcoin, there are also physical bitcoins which are an important episode in the history of the currency.

Let’s take a look at what kind of crypto wallets exist and how the BTC blockchain works in order to understand why physical bitcoins were invented at one point.

How Does the Bitcoin Blockchain Work

In order to understand the need to store bitcoins and other cryptos in crypto wallets, we need to clear up how blockchain technology actually works. The Bitcoin blockchain is the first, most widely accepted, and most popular crypto blockchain. 

Basically, the BTC blockchain is composed of blocks that constitute the blockchain and network nodes (miners) that validate BTC transactions and mine new bitcoins in the process. New blocks are added to the blockchain thanks to the work of miners, who validate transactions. 

Once 1MB of transaction data is validated, a new block is added to the blockchain. Each block can contain a different number of transactions, so sometimes it can take longer for a block to get processed through the network. After a transaction is validated by miners, the funds that are being sent from one destination to another will be available at the receiving destination.

The funds don’t exist in any form besides the bytes on the Bitcoin blockchain, and when the funds arrive in a receiving destination, such as a crypto wallet, they are accessible with the private key of the wallet owner.

The wallets are actually used to facilitate transfers of crypto assets using the private keys and public keys of the funds, but without the blockchain, those assets don’t really exist. In the event that the Bitcoin blockchain gets compromised and shut down, transfers of the currency wouldn’t be possible anymore, and users wouldn’t be able to facilitate the use of BTC in any way. 

Because of this, the validation system on the BTC network guarantees that no false transactions or network breaches can happen since every transaction requires several independent confirmations by miners in order to get processed.

Methods for Storing Cryptocurrency

Given the fact that cryptocurrencies don’t exist beyond the blockchains they are built on, they need to be stored somewhere securely. That’s why crypto wallets exist.

Sure, you can store your cryptos directly on an exchange platform account such as Coinbase or Binance, but it is more secure to store coins in a wallet. Let’s see what’s the difference between the two types of crypto storage used for keeping digital assets safe.

Hot Wallets

Hot wallets are all wallets that are connected to the internet and based on software. They are usually divided into desktop wallets and web wallets, which are all digital wallets and can also be used as smartphone wallet apps. 

Desktop wallets are programs that need to be installed on a PC or laptop and are accessible via desktop, while web wallets are directly accessed through their web platforms. The most popular wallets also have their phone apps for easy and quick access to your funds while on the move. 

Hot wallets aren’t insecure; on the contrary, they are a secure method for storing your assets if you are using moderate amounts of crypto for everyday needs, such as payment for services or ordering products, and conducting moderate money transfers.

With a hot wallet, you can buy or sell Bitcoin fast, which is usually what people need their wallets for – to store their funds and have easy access to them. It’s a great idea to use a hot wallet for these needs, but if you want to store large amounts of crypto, then you should go for a hardware solution combined with a hot wallet.

Cold Wallets

Cold wallets, on the other hand, have no connection to the internet and store BTC addresses offline. It is ideal to use a cold wallet as a Bitcoin wallet, combined with a trustworthy web wallet.

Cold wallets are divided into paper wallets and hardware wallets. 

Paper wallets are basically pieces of paper with printed private keys and public keys to your funds, along with QR codes of the keys for easy access. These wallets are regarded as very safe, but the thing is that you need to be very careful not to lose or accidentally damage your paper wallet. If you can keep the paper wallet physically safe, then it really is a great way to store your funds because no one but you can have access to them, and no one can steal your codes by hacking an online wallet platform.

Hardware wallets also store your private keys safely offline, but they are more practical and easier to use than paper wallets.

Hardware wallets are specialized USB devices with top-notch encryption that store your private keys securely, having several layers of security such as PIN codes and passphrases, which ensure your funds are safe even if you lose the device. 

The most popular hardware wallets, like Trezor and Ledger Nano X, are also compatible with lots of popular web wallets, making a perfectly safe crypto storage combination. This allows you to use a web wallet to transfer funds while storing your private keys safely on a hardware wallet.

Everything You Need to Know About Physical BTC

Back in 2011, when Bitcoin was just two years old and the cryptocurrency community was making its first steps, a man named Mike Caldwell invented physical bitcoins. He called them Casascius coins, which were real-life, physical coins invented for safely storing crypto coins in an innovative and secure way. 

Casascius Coins: How They Work

These coins didn’t have any intrinsic value in the monetary system, since they were just pieces of metal. The thing is that each physical BTC carried a private key for accessing a certain amount of BTC that the physical coin was purchased for in fiat money. The coins by themselves didn’t have any value.

The whole point was in the private keys that were printed on the stickers on the back side of the coins. To access the funds a physical BTC carries, you just had to take off the sticker in order to find the Bitcoin address underneath.

The methodology was similar to share certificates or bank cards. Credit cards, debit cards, or papers that confirm someone’s ownership of shares aren’t worth anything by themselves. There is no money physically on the card or on the piece of paper, but they do contain valuable data that gives you access to funds, for example, by linking the card’s data to your bank account. 

Physical bitcoins work in a similar manner. The coins are just a physical form that resembles fiat money, but, in fact, it’s the private keys on the coins that carry the true value.

Every physical BTC has a unique private key, which means no one can access your funds unless they physically find or steal your coin and take the private key from the back of the coin under the hologram sticker. 

Also, in the event that someone does get a hold of your physical coin, they can only access the funds under that specific coin and not all of your crypto assets, which would be the case if someone has the private key of your entire crypto wallet.

People tend to be more cautious with physical assets than with digital ones, so these coins were an innovative form of storage for BTC when they appeared. Additionally, they were also a sort of collector’s item because of their unique form.

What Types of Casascius Physical Bitcoins Were There?

There were several types of physical bitcoins with their own specific BTC values. There were two series of 1 BTC coins that weren’t worth much at the time they were manufactured (in 2011), but in regard to the contemporary value of BTC which is much higher, these physical coins are worth serious cash.

There were also 10, 25, 100, and 1000 BTC coins. Now imagine the worth a 1000 Bitcoin coin would have nowadays, carried around in a physical wallet, among paper money.

What Happened With Physical Bitcoins

When Casascius coins were introduced on the market, the idea was revolutionary in the sense that physical coins could carry access to digital assets. Unfortunately, physical bitcoins were produced for only two years, until 2013.

Mike Caldwell’s project came under the scrutiny of the US Government which didn’t see physical bitcoins as legal and legitimate. The Financial Crimes Enforcement Network (FinCEN) expressed a position that the production of Casascius coins is a sort of money transmitter business and that Caldwell is actually illegally minting coins, giving them financial market value. Of course, this is something only the state institutions like central banks and treasuries are allowed to do. 

The US Treasury Department disapproved of Caldwell’s activities, and that was basically the end of Casascius coins, back in 2013.

As you can see, the main obstacle to physical bitcoins becoming an everyday storage option for keeping your BTC in your real-life wallet was government policy and regulations. This is understandable, since in 2013, the cryptocurrency market was still very young. Bitcoin was launched only four years earlier, in 2009, and the appearance of physical bitcoins may have been regarded as a premature step the world wasn’t ready for. 

Nowadays, however, with the crypto market value exploding and constantly reaching new heights, another form of physical storage for cryptos might be well received, under the condition that it complies with legal regulations.

A Few Words Before You Go…

Physical BTC is an important part of the history of Bitcoin. The fact that these coins were sold for just two years doesn’t mean that at one point in the future, some new types of physical BTC won’t appear and get widely accepted by the community and regulatory bodies alike.

More and more banks and financial service platforms like PayPal are accepting cryptocurrency-related transfers, so it isn’t impossible to imagine physical coins for different cryptos in the future.

About The Author