Storing cryptocurrency can be a little complicated at first because the blockchain wallets used to store it work much differently than traditional financial accounts. When you set up a blockchain wallet, it will provide you with a string of words called a seed phrase. These randomly generated words are extremely important, and everyone who owns cryptocurrency should understand how seed phrases work.
What is a seed phrase?
A seed phrase is a list of 12 to 24 words that can be used to access funds in a crypto wallet. It's also called a recovery phrase or seed recovery phrase because its purpose is recovering cryptocurrency funds if the wallet itself is lost.
Your seed phrase is the backup in case anything happens to your blockchain wallet. If you accidentally drop your hardware wallet in the ocean, or if you break your phone that has your wallet app on it, you're not out of luck. You can set up the same wallet software on a new device, plug in your seed phrase, and your cryptocurrency will be available with your new wallet.
The thing to remember is that anyone who knows your seed phrase can access and take your cryptocurrency. It's crucial that you store your seed phrase securely so that only you can access it.
Seed phrases explained
Unlike a bank account, cryptocurrency isn't tied to your identity. It's stored on a blockchain, which is a ledger that records all the transactions that occur. To access cryptocurrency, you need to demonstrate that it's yours by providing a password.
The seed phrase is the master password to all the cryptocurrency managed by a wallet. It's worth noting here that wallets don't technically store cryptocurrency. They provide access to it by storing the keys to the funds, which are used to access that crypto on the blockchain.
Seed phrases are needed because there's nothing connecting people to the cryptocurrency they own. If you lose your debit card, you can ask the bank to send you a new one because the account is under your name. Blockchains don't have your identity, so if you lose your blockchain wallet, the only way to prove that cryptocurrency is yours is with the seed phrase.
How a seed phrase works
Every blockchain wallet generates a seed phrase of 12 to 24 words during the setup process and instructs the user to record all the words in order. The words are chosen at random from a word list. Many wallets use the BIP39 standard, which has a list of 2,048 words.
To use a seed phrase with a wallet, select the option to restore using a recovery phrase. The wallet will prompt you to enter your seed phrase in order. After you've correctly entered the seed phrase, you'll have your crypto in your wallet.
Seed phrases can work with other blockchain wallets but only if the wallets follow the same standard. For example, MetaMask and Trust Wallet both use the BIP39 standard. So you could take your seed phrase from MetaMask and use it with Trust Wallet to import your cryptocurrency there or vice versa.
Seed phrase vs. private key
Seed phrases and private keys both provide access to cryptocurrency, so it's easy to get them confused, but they're not the same thing.
Blockchain wallets generate public keys and private keys. A public key can be shared with other parties and is used for receiving transactions, similar to an account number. A wallet address is a hashed version of this public key. A private key is the wallet owner's key and is used for authorizing transactions, like a PIN.
Each time the wallet generates a wallet address that the owner can use to receive crypto, it also generates new public and private keys associated with that address. Private keys are derived from the wallet's seed phrase.
Although a blockchain wallet can have an unlimited number of private keys, it will only ever have one seed phrase. That seed phrase is used to generate every private key and provides access to all the wallet's cryptocurrency.
What happens if you lose your seed phrase?
Your seed phrase is one of two ways to access your cryptocurrency; the other is the blockchain wallet. If you lose your seed phrase, you can still use your blockchain wallet to recover your crypto.
In this situation, you should transfer all your funds out of that blockchain wallet immediately. Send them either to a crypto exchange where you have an account or another wallet that you use. After you've done that and confirmed that the transfers went through, you can reset the original wallet and generate a new seed phrase.
There are a couple of reasons why it's important to move your crypto out of a wallet if you lose the seed phrase. If anyone finds your seed phrase and you're still using the same wallet, they could steal your crypto. If you lose your seed phrase and your wallet, there's no way to get your cryptocurrency back. You need at least one of the two.
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How to store a seed phrase
The recommended way to store a seed phrase is to make a physical copy and keep it somewhere safe. A simple option is to write it down. If you want something more durable, you can use a metal storage device. There are quite a few products that allow you to engrave or stamp your seed phrase into metal for a more durable record.
The hard part is deciding where to store the physical copy, and this will depend on what you feel provides the best combination of security and convenience. A safe deposit box is one option, as is a safe in your home. Some people choose to split their seed phrases into multiple parts and store each part at a different location.
What you want to avoid is storing your seed phrase either on your computer or online. The risk of a hardware failure or a hack makes these risky places for a seed phrase.
If you invest in cryptocurrency, storing it in your own blockchain wallet is a good idea for added security. An essential part of using a wallet is recording the seed phrase and storing it in a location where only you can get to it. That seed phrase provides access to all your crypto, so it's a helpful recovery tool, but you don't want it to fall into the wrong hands.
