|For those who don't know what a Biticoin is click on the image|
A Brain Wallet refers to the concept of storing Bitcoins in one's own mind by memorization of a passphrase. As long as the passphrase is not recorded anywhere, the Bitcoins can be thought of as existing nowhere except in the mind of the holder. If a brainwallet is forgotten or the person dies or is permanently incapacitated, the Bitcoins are lost forever.
A Brain Wallet is created simply by starting with a unique phrase. The phrase must be sufficiently long to prevent brute-force guessing - a short password, a simple phrase, or a phrase taken from published literature is likely to be stolen by hackers who use computers to quickly try combinations. A suggestion is to take a memorable phrase and change it in a silly way that is difficult to predict.
The phrase is turned into a 256-bit private key with a hashing or key derivation algorithm (example: SHA256). That private key is then used to compute a Bitcoin address, or a deterministic sequence of addresses. This conversion can be done with a utility such as Casascius Bitcoin Utility or Electrum.
Bitcoins are sent to the address. In order to recover the Bitcoins, one must recompute the private key with the same phrase. The private key is imported into a wallet.
Example Brain Wallet:
First, a phrase is chosen. "Man made it to the moon,, and decided it stinked like yellow cheeeese."
Note that the extraneous characters and broken grammar are intentional, this makes the passphrase harder to attack.
The SHA256 hash of this string is calculated. (Note, this is also the private key in hex, and must be kept secret). SHA256 = 74 E8 60 03 A7 4C BA 14 ED 92 74 30 1E F4 75 FE C0 DA 8B 0F 76 48 69 FC 14 43 5A E0 36 8F DD B9
This number is turned into a Bitcoin address using the standard published algorithm.
Bitcoin address = 1CeU9ugjwfsnzrhqjKy1HUBzXCCXVC76m1
End result: Bitcoins sent to this address are accessible to someone who knows the original phrase. The extraneous characters, of course, must be remembered intact.