Crypto Basics Crypto Knowledge

What is a XPUB and How Does It Work

Every crypto user needs a cryptocurrency wallet with an XPUB to conduct any crypto transactions. A crypto wallet is a digital purse for ‘keeping’ digital currency and through which users can send or receive cryptocurrencies like bitcoin.

Cryptocurrency isn’t stored in your wallet but is kept in the blockchain of a crypto coin. A wallet is software built to interact with the blockchain. It holds your private key and public address but not the coins (crypto tokens).

Crypto wallets at a glance

A cryptocurrency wallet must have a private key and a public address, which are nothing other than a random string of numbers. A public address may be shared with other users to send crypto funds.

On the other hand, a private key is specific to the owner of a crypto wallet and must never be shared with anyone. The user with access to a private key can use it to send funds to other crypto wallets.

For enhanced security and privacy, wallets usually generate bitcoin cash addresses and a new bitcoin each time a crypto fund is received.

What are XPUBs

An Extended Public Key (XPUB) is a special type of public key. Think of an XPUB as the basis of your receiving address, but unlike email address or postal address. Bitcoin is built to create another receiving address for carrying out every new transaction.

The basis for using a new address for every transaction is majorly to protect your privacy. But this poses another problem. How do other users know your address to transact with you? The issue was resolved through Hierarchical Deterministic wallets.

Crypto wallet employs the Hierarchical Deterministic (HD) framework, a method for generating and managing addresses. Every public address generated by a crypto wallet comes from XPUB.  Whenever you receive crypto funds, XPUB will create a new receiving address. 

XPUB holds information about public keys only, but not private keys. As such, it can’t grant you access to your wallet’s funds. However, it allows you to view the transaction activities of your wallet.

Simply put, an XPUB is like a Read Only form of all the balances and transactions of your wallet from the very first day it became active but void of the ability to do balance transfers.

Each of your wallet assets has its own XPUB, for example, one XPUB for Bitcoin, one for Litecoin, etcetera.

Safeguarding your XPUBs

We highly discourage crypto users from sharing or showing their XPUBs to other users. When a third party knows your XPUB, it enables them to track your wallet’s payment history and possibly cause disruptions that can block access to your crypto funds.

There are occasions when you may be required to reveal your XPUB. For example, if you use tax software such as Accointing, it may request your wallet’s transactions to do tax calculations. You can safely grant the software access to your transaction information while withholding full access to your wallet’s digital assets.

Even though a bitcoin cash address after generation doesn’t become invalid and can be used for receiving other multiple payments, we strongly recommend that you use a new address for every transaction.  Using a single address for all your transactions makes it easier for malicious users to track your payment history.

Struggling with your crypto trade tax reporting? Accointing offers a straightforward platform with lots of insights on how to quickly file your crypto taxes at a go!

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