Just like using a local bank, using a cryptocurrency wallet involves saving your funds in the form of non-perishable assets on the blockchain. As mentioned earlier, using a crypto wallet is similar to using a local bank- you can trade coins, buy and sell assets, earn a profit (in the form of interest), and do many other things.
However, unlike your local fiat currency, cryptocurrencies as a store of value offer so much more to the user. By using cryptocurrencies, a trader or user can access large profit margins and more secure investment and storage sources. You can think of cryptocurrencies as a virtual piggy bank created with Titanium-steel.
Now, remember that this “piggy bank” is only secure because of its titanium covering; such can be said about cryptocurrencies too. Your Seed Phrases are the titanium words that you require for keeping your assets intact and open. Sometimes, you might be presented with terms like Mnemonic phrases, Seed Backup phrases, or Seed Recovery Phrases. They are the same.
What is A Seed Phrase?
Seed phrases or seed recovery phrases are best described as a list of random words that a user receives when they are creating a crypto wallet. The seed phrases store all the user’s information to access or recover their bitcoin funds on-chain. A seed phrase usually ranges from twelve (12) to twenty-four (24) words.
While some individuals believe that mnemonic phrases are poor descriptors or security tools because they need to be memorized. Others have adapted and found a way out of memorizing twelve random words that might get mixed up in the future. The seed phrases were initially introduced in Bitcoin with the BIP39 seed phrases.
The software used in designing your crypto wallet automatically generates these phrases whenever you create a new wallet. Storing these phrases securely will ensure that if your hardware wallet malfunctions, you can always download the software again and have access to your assets once again.
Most users tend to write these phrases safely in something that is possibly their trading journal.
There are two major types of wallets, and they’ll be mentioned below.
How a Seed Phrase works
When new users download and install or create a crypto wallet, they need to open a new account. Immediately this account is created, the seed phrases are generated, and the user is required to provide those words to access the new crypto wallet. Without these seed phrases, the wallet won’t allow the user to make any transactions.
The reason for having such a long list of words as a key phrase is to avoid the act of memorization and interaction. However, relying on human memory to store your key phrases can have an adverse effect on your wallet. Why? Well, first, the human mind is prone to forgetting certain events at a point in time. Second, accidents can occur, affecting your memory.
Whenever your wallet is downloaded, it generates a list of 2048 simple words. The idea of the seed phrase was initially adopted during the Bitcoin Improvement Proposal 39 in 2013. The rule established a “deterministic wallet,” which allowed a single seed phrase to control an entire log of private keys within a wallet.
The BIP39 standard also makes it easy for you to transfer the contents of one wallet to another wallet’s platform; hence they are inter-compatible. Switching wallets is made easy and fast. Also, whenever you delete your wallet, you can easily recreate it by using just your seed phrases – an efficient strategy.
How to Keep Seed Phrases Safe?
As mentioned earlier, keeping your seed phrases safe is a vital part of securing your assets and funds. There are various methods of securing your seed phrases, and they will be discussed below.
- First, a simple and effective method of securing your seed phrase is to split it and store it between safe deposit boxes in several locations. Ensure that there’s redundancy to avoid any complications and events at the specified locations. Although it isn’t convenient, it sure is effective!
- Writing your seed phrases in a mnemonic notebook and keeping copies of them in more than one safe location is another practical approach. It is a solid approach, straightforward, and can be performed at your convenience.
- If you consider yourself a wealthy crypto trader, or you can afford it, engraving your seed phrases on a durable material like stainless steel or a gold bar is advisable.
- Also, for optimum security, you can use Coinbase Wallet. Your Coinbase wallet is separate from the main Coinbase app that enables you to buy and sell crypto, and you can also decide to use an encrypted Google Drive or iCloud recovery-phrase backup feature. The iCloud feature allows you to store an encrypted version of your seed phrase in the cloud.
- While you have your seed phrase, your crypto wallet is safe. So! Losing your hard wallet doesn’t mean you’ve lost your crypto; since you have successfully stored your crypto elsewhere. With that, you can store your seed phrases in another wallet since you have them offline.
Difference between a Mnemonic Phrase and a Private Key
With private keys, you can spend or send your cryptocurrency since they’re derived algorithmically by a string of numbers represented by your seed phrase.
Whereas with your seed phrase, you have access to all your private keys in the wallet – it acts as a password manager for your crypto portfolio, as long as you have your seed phrase.