Cryptocurrencies have swept the world of finance by storm. Non-custodial wallets grant you total command over your funds. The pivotal point of this authority resides in the seed phrase, also known as the recovery phrase, which is paramount to the security of your cryptocurrency holdings.
What is a seed phrase?
A seed phrase comprises 12, 18, or 24 words that are indispensable for private key generation of each cryptocurrency you possess. It is akin to a master key that unlocks all the doors of a hotel. Should you misplace your hardware wallet or forget your PIN, the seed phrase stands as the sole backup that allows access to your crypto assets.
It is imperative to secure your seed phrase with utmost care. Storing it on paper or in an unsecured location poses a significant risk. Instead, keeping it offline in a secure safe or bank deposit box is the best course of action. You can also store it digitally on a flash drive that is not connected to the internet.
Hot Wallets
A hot wallet is a type of cryptocurrency wallet that is internet-connected. This enables easy and convenient access and transaction of your cryptocurrencies at any given time. Several exchanges and online platforms offer hot wallets for users to store their crypto assets.
However, hot wallets are accompanied by a higher risk of security breaches. As they are connected to the internet, they are susceptible to hacking and malware attacks. Therefore, it is crucial to exercise caution, use robust passwords, enable two-factor authentication, and ensure that your software is updated.
If you only hold a small amount of cryptocurrency or frequently use it for transactions, a hot wallet may be a suitable option. However, if you plan on retaining a significant amount of cryptocurrency for an extended period, it is better to consider cold storage options for added security.
Cold Storage
Cold storage pertains to the practice of storing your cryptocurrency in a wallet that is disconnected from the internet. This greatly reduces the risk of hacking and other security breaches that can arise with hot wallets.
Hardware wallets (such as those offered by GridPlus) paper wallets, and offline computers are the most popular forms of cold storage. Hardware wallets are physical devices that can be connected to a computer to manage your cryptocurrency. Paper wallets are another option where you print out your seed phrase and private keys and store them in a secure location. Offline computers are another secure option where you can use a computer that is never connected to the internet to manage your cryptocurrency.
While cold storage may be less convenient than hot wallets, it is a much safer option for storing larger amounts of cryptocurrency for longer periods of time. With cold storage, you can be confident that your crypto assets are secure and protected from potential security breaches.
Seed Phrase Storage Methods
Standard
Storing your seed phrase in a safety deposit box or bank that can only be accessed by the owner is the bare minimum level of security recommended for storing cryptocurrency assets. This level of security ensures that only the owner has access to the seed phrase, and no one else can gain unauthorized access to the cryptocurrency holdings.
While this method is simple and easy to implement, it is not foolproof, and there is always a risk of losing access to your cryptocurrency if the safety deposit box or bank becomes inaccessible. This is why it is essential to have backup plans in place, such as storing your seed phrase in multiple locations or using additional security measures such as a passphrase.
Splitting The Seedphrase
When it comes to safeguarding your seed phrase for cryptocurrencies, it is vital to have a backup plan. One popular approach is to have four separate locations for your seed phrase, with two locations for words 1-12 and two for words 13-24. This way, if you misplace one or even two locations, you can still retrieve your funds.
Location A: Words 1-12
Location B: Words 1-12
Location C: Words 13-24
Location D: Words 13-24
Added Security via Passphrase
Adding a passphrase as a 25th word can provide an extra layer of security. However, it is important to note that this passphrase does not encrypt your seed phrase but alters it instead. This implies that you will need the passphrase in addition to the 24-word seed phrase to access your funds.
To make the passphrase strong enough, it should be full alpha-numeric with upper and lower case letters, a few special symbols, and 24 characters long. This level of complexity provides around 128-bits of entropy, making it extremely difficult for anyone to crack.
With a robust passphrase in place, you can store your seed phrase and passphrase in three separate locations:
Location A: Words 1-12, Words 13-24
Location B: Words 1-12, Passphrase
Location C: Words 13-24, Passphrase
This way, even if you lose one of the three locations, you can still recover your funds. Additionally, compromise of any one location does not give up access to your funds.
Cryptocurrencies have revolutionized the financial landscape, and their widespread adoption has led to an increased need for secure storage solutions. Non-custodial wallets provide complete control over your funds, but it is crucial to understand the significance of the seed phrase in safeguarding your cryptocurrency holdings. By following recommended storage methods and utilizing cold storage options, you can ensure that your crypto assets are secure and protected from potential security breaches.