Before taking self-custody of your crypto assets, it’s vital to fully understand seed phrases. Seed phrases are also referred to as ‘seed recovery phrases’, or ‘seed backup phrases’.
But what does this series of words do, and why is it so important to keep them safe?
Taking self-custody of your crypto means moving them off a cryptocurrency exchange and taking ownership of the private key. If you have the private key, you have complete control of the assets inside the wallet.
If you keep your crypto on a centralised exchange like Binance or Coinbase, the exchange has custody of your coins by holding the private key. When you take self-custody of your coins, you’re responsible for safeguarding them. Read about the importance of decentralisation here.
The main difference with having custody of your coins is that if you forget your wallet’s password, the wallet provider won’t be able to simply reset your password and restore your access. The only way to recover a wallet if you lose or forget your password is through the Seed Phrase.
What is a seed phrase?
When you create any new wallet, the wallet provider will create a Seed Phrase for you, which is a random series of 12-24 words that acts as the key to your crypto funds. If you’ve ever created a crypto wallet, you were probably prompted to note down a series of words similar to the following:
all tourist alarm travel crew logic random sight bulb ritual frozen help
Seed phrases leave less room for human error (as it’s easier to remember and enter a series of words than numbers).
Keeping your seed phrase safe
Your seed phrase gives access to your crypto wallet and all of the private keys contained inside. Keeping your seed phrase safe and hidden is crucial. If you lose access to your seed phrase, you lose access to your funds.
As long as you have your seed phrase, you have access to your crypto. Even if you lose your hardware wallet or the device containing a software wallet, you can retrieve your crypto by entering your seed phrase in another wallet.
Many people write their seed phrase down and store copies in multiple locations. Others engrave seed phrases in durable materials or store them in a safe.
Seed phrases were introduced after the 2013 Bitcoin Improvement Proposal 39 (BIP39). There are 2048 words on the BIP39 wordlist. This means that a series of 12 words has 128 bits of security which has 2128 possible combinations. In other words, a hacker would have to complete 2128 operations to complete a 12-word seed phrase. So, it’s almost impossible for even the most experienced hacker to guess your phrase. The longer the phrase, the more secure it is.
Disclaimer: NOT FINANCIAL NOR INVESTMENT ADVICE. Only you are responsible for any capital-related decisions you make and only you are accountable for the results.