One of the basic principles of cryptocurrency is the idea of “self-sovereignty”: you should be able to access your crypto without having to prove your identity, and you shouldn’t have to rely on a bank or other institution to store it safely. The technology cryptocurrencies like Bitcoin and Ethereum use to accomplish this is the blockchain — which both stores and secures your crypto using a peer-to-peer network of computers spread around the world.
How does the blockchain know which crypto is yours? It uses algorithmically generated password-like codes that only the holder has access to. When you first set up a crypto wallet — whether it’s a software wallet like Coinbase Wallet — it generates a string of simple words, which is your seed phrase (a.k.a. a Recovery Phrase). The wallet also uses the seed to create private keys — which allow you to send or spend your crypto. Think of the wallet as being like a password manager for crypto, and the seed phrase as being the master password.
The reason that the seed phrase is a series of 12 to 24 simple words (like “army,” “energy,” “fabric,” “lucky,” “opera,” “stereo,” “trash,” or “void”) rather than a numeric password is that long strings of numbers are difficult for humans to remember or even transcribe correctly — think of how hard it can be to input a too-long wifi password. Your seed phrase unlocks your wallet, along with the private keys associated with all the crypto in the wallet.
- Since only you know the seed phrase, keeping track of it is of the utmost importance
- Anyone with your seed phrase can gain access to your crypto.
- If you delete or lose your wallet without carefully saving your seed phrase, you lose access to your crypto. (Just talk to Stefan Thomas, who lost access to hundreds of millions of dollars worth of bitcoin.)
- Learn more about setting up a crypto wallet.
How does a seed phrase work?
When you create a crypto wallet, a seed phrase is automatically generated. The seed phrase is a representation of a long string of random numbers — and your wallet uses it to generate the private keys that let you send and spend your crypto.
The reason the seed phrase is given to you in word form (rather than a long string of random numbers) is that humans are better at remembering and interacting with a series of words. But you shouldn’t rely on your memory for storing your seed phrases. What are some better ways? See the section on securing your seed phrases below.
- Each seed phrase is pulled from a list of 2,048 simple words. The seed phrase idea was widely adopted after 2013’s Bitcoin Improvement Proposal 39, which established a standard for a “deterministic wallet” — which most wallets are now — in which one seed phrase would control all of the private keys held in the wallet.
- The standard also makes major wallets incompatible: if you want to switch wallets, you just need to enter your seed phrase into the new wallet and your crypto will be available there.
- If you lose or delete a wallet, you can even recreate it using your seed phrase alone.
- Keeping your seed phrase safe from hackers, phishing attacks, or just simple loss is absolutely crucial.
How can you store a seed phrase safely?
There’s a wide range of strategies about how to best secure seed phrases, which tend to vary based on how much crypto you have and how much you value security vs. convenience.
One very powerful way to secure a seed phrase would be to split it between safe deposit boxes in multiple locations (making sure there’s redundancy in case something were to happen to any of the locations). Obviously, this is not very convenient.
Some people use specialized services to engrave seed phrases into durable materials like stainless steel.
For many people, simply writing your seed phrase down and keeping copies in more than one safe location is a solid approach.
Using Coinbase Wallet (which is separate from the main Coinbase app you use to buy or sell crypto) you can opt in to the encrypted Google Drive or iCloud recover-phrase backup feature, which stores an encrypted version of your seed phrase in the cloud. You should also have your seed phrase somewhere safely offline.
As long as you have your seed phrase, you have your crypto. If you lose a hardware wallet on a bus or break a phone containing a software wallet, you haven’t lost your crypto — you can simply enter your seed phrase into another wallet.
What happens if you lose your seed phrase?
If you accidentally throw out a scrap of paper your seed phrase is written on, forget which book you hid it in, or you die without passing it on to an heir, you lose access to your crypto. Unless someone steals your seed phrase, your cryptocurrency will remain safely stored on the blockchain, but you (or your heirs) won’t have any way to access it. So keep your seed phrase safe! If you lose your seed phrase you lose access to your crypto.
If I’d prefer not to manage my seed phrase, are there other options?
Sure. If you buy crypto via Coinbase, you don’t actually have to immediately move it to a separate wallet (or ever, it’s up to you). Instead, you might choose to leave it in your Coinbase account, in which case Coinbase automatically holds on to it via a “hosted wallet.”
As your holdings grow, you’ll want to at least explore the main security options available — including moving some of your crypto from your main Coinbase account into a Coinbase Vault, which adds a layer of protection without requiring you to manage a seed phrase or private keys. (You can also move crypto from a Coinbase Wallet to Coinbase Vault and vice versa if you want to take a hybrid approach.)
What’s the difference between a seed phrase and a private key?
Private keys allow you to send or spend some of your Bitcoin, Ethereum, or other cryptos — they’re algorithmically derived from the long string of numbers represented by your seed phrase.
Your seed phrase gives you access to your wallet and all the private keys in the wallet. You can think of a crypto wallet as being like a password manager for your crypto — as long as you have your master password (the seed phrase) you have access to all the associated crypto.