What is a seed phrase? The key to crypto security

One of cryptocurrency’s defining traits is the absence of centralized intermediaries. Investors who store their crypto in self-custodial wallets don’t have to worry about counterparty manipulation or mismanagement. However, this also means full responsibility falls on the user. There are no customer support agents to help if someone loses access to their crypto wallet – the only way to restore it is with a seed phrase.

As long as crypto investors keep their seed phrase secure, they have a "reset button" if they lose a device or forget their wallet’s PIN. In this guide, we’ll explain what a seed phrase is, why it matters, and how to protect it.

What is a seed phrase?

Seed phrases are the backups of blockchain-based wallets. Also called "mnemonic" or "recovery phrases," these lists of English words serve as a human-readable version of the private key, making it easier to store and use securely.

While crypto investors could technically use their private key to recover funds, seed phrases offer a more user-friendly and less error-prone solution. If someone loses access to their crypto wallet due to a broken device or forgotten password, they can restore their cryptocurrency balance using the correct seed phrase.

To recover a wallet, users simply need to open a new wallet account, select "Restore Old Wallet," and enter the seed phrase in the correct order.

Private key vs. seed phrases

A seed phrase is a human-readable backup of a wallet’s private key. In other words, while a private key is the actual cryptographic code that controls a specific crypto address, a seed phrase provides a more user-friendly way to restore wallet access.

Since private keys are long, complex strings of letters and numbers, they are difficult to remember and prone to recording errors. To address this, crypto developers introduced seed phrases – a more recognizable format that serves as a valid and secure recovery method. While a seed phrase is not identical to the private key, it is mathematically linked to it and allows users to restore their crypto funds if needed.

To help illustrate the difference, here's what a sample private key might look like:

5KJvsngHeMpm884w4D7X3SJSv5dN2jMf7tqGkD2n9pT7sZ8oWuX

By contrast, seed phrases usually contain a list of 12, 18, or 24 English words and may look something like this:

Absurd, Brain, Bracket, Reward, Load, Pizza, Summer, Sun, Zone, Woman, Scare, Mail 

Unlike private keys, seed phrases are easier to write down, store securely, and enter correctly when recovering a wallet.

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How does a seed phrase work?

When users set up a new cryptocurrency wallet that relies on seed phrases, the wallet automatically generates a unique list of 12 to 24 words linked to the private key. Typically, users must reenter the seed phrase during setup to confirm they have recorded the correct words in the proper order.

Since seed phrases are directly tied to the private keys of a specific wallet address, they can be used to restore an old balance in another wallet. As long as the new crypto wallet is compatible with the seed phrase’s word list standard (usually BIP39), users should have no issues recovering their cryptocurrencies.

How is a wallet seed phrase generated?

Crypto wallets use a randomization function called entropy to generate a cryptographically secure number between 128 to 256 bits. This number is then assigned a unique identifier through a one-way hashing function. The wallet then divides the random number into 11-bit segments and maps each segment to a corresponding word in the seed phrase.

Since 2013, the Bitcoin Improvement Proposal 39 (BIP39) has been the most widely used wordlist for seed phrases in crypto wallets. The BIP39 list contains 2,048 English words, each assigned a specific position based on the wallet's unique address. When users set up a crypto wallet, the system selects 12, 18, or 24 words from this list to generate the wallet's seed phrase.

The importance of crypto wallet seed phrases

Seed phrases play a critical role in crypto wallet recovery. If users lose access to their wallet for any reason, their crypto funds remain safe – as long as they have securely stored their seed phrase. While some methods exist to attempt wallet recovery without a seed phrase, they are significantly more complex and less reliable.

The BIP39 standard simplifies crypto recovery by providing a structured and user-friendly format. Since seed phrases consist of recognizable English words, they are easier to record and recall than a long string of random letters and numbers. This standardization makes wallet restoration more accessible and reduces the chance of errors, allowing users to securely manage their crypto assets while benefiting from peer-to-peer (P2P) technology.

Best practices for managing a seed phrase

While seed phrases offer a reliable way to recover crypto wallets, they also introduce security risks. Since anyone with access to a seed phrase can take control of a wallet, investors must keep this information private and secure. If a thief sees a seed phrase, they can drain digital assets, and if a user loses their seed phrase, they won’t be able to recover their wallet.

Before downloading a self-custodial wallet, crypto users should understand these added security responsibilities and feel comfortable without relying on third parties for account recovery. Here are some best practices to safeguard a seed phrase:

Write the seed phrase on paper or metal

Writing the seed phrase on paper or metal is the safest way to store it. Paper is the most accessible option, but it’s fragile and susceptible to water damage, fire, or accidental tears. Metal backup sheets offer long-term protection as they are resistant to fire, water, and corrosion. Avoid storing seed phrases digitally, including in cloud storage, emails, or screenshots, since these are vulnerable to hacks and data leaks. Keeping all copies in a secure place, such as a safety deposit box, is strongly recommended.

Never share seed phrases

Seed phrases should always be a secret. No company, wallet provider, or exchange will ever ask for it. Scammers often pose as customer support agents to trick users into revealing their seed phrase. Once exposed, a seed phrase gives full access to a wallet’s funds, making recovery impossible.

Make multiple seed phrase copies

To minimize the risk of loss, creating multiple copies of a seed phrase and storing them in separate secure locations is a smart precaution. Some users take it a step further by splitting the seed phrase into sections – for example, storing six words in one location and the remaining six elsewhere. This approach makes it harder for a thief to obtain the full phrase, as they would need to break into multiple locations.

Consider adding an optional passphrase

For added security, some wallets allow users to set an optional passphrase, sometimes called the "25th word." This user-generated word or sentence adds another layer of protection, preventing unauthorized access even if someone discovers the full seed phrase. However, if the passphrase is lost, even users with the complete seed phrase won’t be able to recover their wallet.

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Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.