An estimated 20% of the Bitcoin supply is considered inaccessible or “lost,” often due to individuals losing access to their wallets. There have been too many horror stories of people losing generational wealth because of human error. The solution is the seed phrase. A seed phrase is a sequence of 12 to 24 words allowing users to recover their bitcoin.
But what exactly is a seed phrase, and why is it so vital? How can you protect your bitcoin from potential threats? In this article, we’ll dive into the importance of seed phrases, explore how to create and secure them, and share best practices for keeping your bitcoin safe.
What is a Bitcoin Seed Phrase?
A seed phrase, also known as a recovery phrase, is a series of words that stores all the information needed to recover a Bitcoin wallet. This sequence of words is important because it allows you to regain access to your bitcoin if your wallet is lost, stolen, or otherwise compromised.
Your seed phrase will be the target of hackers and thieves, so, you should never store your seed phrase online. Instead, keep physical copies of your seed phrase in a secure location to safeguard your bitcoin.
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No Bitcoin wallet provider or company will ever ask you for your seed phrase.
Hot and cold wallets utilize seed phrases to secure and recover your bitcoin. In both wallet types, the seed phrase acts as a backup and recovery tool. Also, seed phrases are compatible across different wallets, providing the flexibility to easily switch between different wallet providers. For example, in the event your hardware wallet gets destroyed, you can use your seed phrase to recover your assets on a new hardware wallet, even if it is from a different company.
Is a Seed Phrase the Same as a Private Key?
Seed phrases and private keys are different. A private key is derived from a seed phrase. In other words, a seed phrase can be seen as a backup that recreates the private key. A private key is a string of numbers and letters used to send transactions. Private keys are securely stored in wallets, eliminating the need for users to re-enter their private keys for each transaction they wish to make.
If a hacker gets access to your private key, they can still steal your bitcoin without using your seed phrase.
Why Are Seed Phrases Important for Self-Custody?
Seed phrases are a critical part of self-custody and function as a safety measure for your wallets. When setting up a new wallet, a seed phrase will be created as a key to regain access if needed. If you want true ownership of your bitcoin without trusting a third party, you must take security seriously. When you hold custody over your own bitcoin, the responsibility of looking after your seed phrase is on you.
For many beginners, the concept of self-custody or “being their own bank” can be intimidating. It’s common for users to initially place their trust in an exchange or a custodial service. Self-custody does not have to be an all-or-nothing approach. You do not need to transfer all your funds into self-custodial wallets right away. Instead, you can start small and gradually increase your holdings in self-custody as your confidence and understanding grow.
More advanced users might opt for multi-signature (multisig) wallets. Wallet setups like this involve multiple keys and thus multiple seed phrases, with some keys managed by trusted third parties. This significantly reduces the risk associated with losing a single key or seed phrase.
Different Types of Seed Phrases:
There are different types of seed phrases based on the format and the number of words they contain. BIP 39 seed phrases are the most common type. They are made up of a list of 2,048 English words and come in three lengths:
- 12 words: Common for many wallets.
- 18 words: Rarely used.
- 24 words: Offers the highest level of security.
Electrum seed phrases are another type of seed phrase. Electrum, a popular Bitcoin wallet, uses a different word list that is not part of the BIP 39 list. For additional security, more complex wallets may utilize a method known as Shamir’s Secret Sharing, which splits the seed phrase into multiple parts.
The Shamir Backup is more complex and so more user error is likely. Managing multiple shares increases your risk of losing them along with other logistical challenges. There is a risk of losing access to your bitcoin wallet if enough shares are lost or destroyed.
This allows users to enjoy the best features of different standards while ensuring compatibility and security.
➤ Learn more about BIPs
How To Recover a Bitcoin Wallet Using a Seed Phrase:
While recovering your wallet with your seed phrase may seem stressful at first, it is actually a simple process. We will walk you through it.
Hot wallets are connected to the internet and are more susceptible to hacking. For those holding substantial amounts of Bitcoin, we strongly recommend using cold storage, which is not connected to the internet, for more security.
Step 1: Set Up Your New Wallet
- Hot Wallet: Download your hot wallet application from a trusted source, such as the official website or app store. Make sure the software is up to date.
- Cold Wallet: Activate your cold wallet device, such as your hardware wallet, by connecting it to your computer using the USB cable.
Step 2: Press “Recover” or “Import”
- Hot Wallet: Open the application and look for options like “recover” or “import” wallet. This is typically found in the settings or during the initial setup process.
- Cold Wallet: Use the accompanying software of your hardware wallet and select the “recovery” option. This may also be labeled as “restore” or “import.”
Step 3: Entering Your Seed Phrase
- Hot Wallet: The application will prompt you to enter your seed phrase. Carefully input each word in the exact order provided.
- Cold Wallet: Using the hardware device interface, input your seed phrase. This might involve using physical buttons to select letters or words. Ensure each word is entered correctly and in the right order.
Step 4: Creating a New Password
- Hot Wallet: After successfully entering the seed phrase, the application may ask you to create a new password. This password secures access to the wallet on your device and is essential for day-to-day transactions.
- Cold Wallet: Similarly, after entering the seed phrase, you’ll be prompted to set a new PIN or password. This step is crucial for securing access to your hardware wallet.
Step 5: Syncing With the Blockchain
- Hot Wallet: Once the seed phrase is verified and the new password is set, the wallet will start retrieving data from the blockchain. This process may take a few minutes, during which your transaction history and balances will update.
- Cold Wallet: Your hardware wallet will also need to sync with the blockchain. Connect it to your computer, open the corresponding software, and allow it to update. This ensures your wallet reflects the latest state of the blockchain.
Where Should You Store Your Seed Phrase?
While keeping your seed phrase secure may seem scary, you can significantly lower the risks of your bitcoin being hacked or stolen by following some best practices.
First, you must always keep a record of your seed phrase. Some people keep multiple copies of their seed phrase and store them in places only they can access.
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Keeping an electronic copy of your seed phrase, either on your laptop or in the cloud is risky.
We recommend that you keep an offline copy of your seed phrase as they will be safe from hacking, however, they are susceptible to physical damage or wear and physical theft. For example, the ink of a pen can fade over the years. As an alternative, some engrave their seed phrase on a metal plate, which offers protection against fire and water damage.
➤ Learn more about metal Bitcoin seed storage stress testing
It is most important to never share your seed phrase with anyone, no matter how close they are to you. You should never share your seed phrase with the company that created the wallet. If your wallet company requests your seed phrase to troubleshoot miscellaneous errors, someone malicious is likely impersonating the company and this is a scam.
➤ Learn more about avoiding common Bitcoin scams
The Risks of Seed Phrases
Self-custody can be risky if managed poorly. A significant amount of bitcoin has been lost over the years, with little to no chance of recovery. The reason for this is simple: people have lost access to their seed phrase. If you lose both your seed phrase and access to your wallet, you lose access to your bitcoin entirely, and no one can help you regain it. Additionally, misspelling or swapping words in your seed phrase can lead to recovery challenges, which are sometimes amendable, but users should be very careful when recording their seed phrases.
This absolute nature of seed phrase dependency means that any mistake, such as misplacing or forgetting, results in irreversible loss. However, if you still have access to your wallet but have lost your seed phrase, you should immediately transfer your bitcoin to a new wallet and generate a new seed phrase.
If you do decide to share your seed phrase with others, you must be cautious about who you share it with. Sharing your seed phrase is very risky, as it grants those who know it full access to your Bitcoin wallet. Anyone with your seed phrase can control your assets, which is why it is important to keep your seed phrase confidential. If someone turns out to be untrustworthy, they could steal your bitcoin, and you would be unable to recover it. Therefore, always handle your seed phrase with security in mind to keep your bitcoin safe.
Many users who find self-custody intimidating trust an exchange or brokerage such as River to hold their bitcoin. This usually comes at no cost, but it does mean you are trusting a third party to secure your bitcoin.
Nevertheless, understanding seed phrases is crucial for all bitcoin owners, as they are key to upholding the principles that Bitcoin embodies: sound money, decentralization, and self-sovereignty.
Key Takeaways
- Seed phrases are critical for regaining access to your Bitcoin wallet if it is lost or compromised.
- Properly managing and securing seed phrases is paramount. Storing them offline in secure, fire and water-resistant containers, or using advanced methods like the Shamir Backup, helps protect against both digital and physical threats.
- Mismanagement of seed phrases can lead to irreversible loss of Bitcoin. It is vital to handle your seed phrases with care, keep them confidential, and understand that losing or sharing them can result in losing access to your Bitcoin entirely.
