Ever since Bitcoin and other cryptocurrencies hit the mainstream and became a subject of a wider general public interest, they have been scrutinised for their complexity in terms of UI (user interface) and not-so user-friendly applications for access.
The key thing about owning crypto is that it gives you full control over your capital, without the need for a third party guardian or trustee.
This can be a double-edge sword : on one hand it is censorship-resistant, meaning that no entity or company would stop you from accessing or handling your capital; on the other hand, it can be a tricky thing if you forget or lose your access to the wallet where you keep your crypto and since you are the sole guardian of that information, you are at risk of losing it irreversibly if you are not very careful.
This is why I will lay down the basics here in an attempt to help you avoid the latter.
Throughout the past decade there have been a number of reports about people losing their access to their crypto holdings for a number of reasons. Lost passwords, lost private keys, lost USB sticks with seed phrases, even complete hard drives have been lost or thrown out without a chance of recovery, so let me point out here that the most important thing for securing your crypto is your private key or seed phrase.
What does that mean?
To truly own your bitcoin (and other crypto) you must be the owner of your private key.
A private key is a string of alphanumeric code that acts as the link between you and the data about your coins that is stored on the relevant blockchain. In simple terms, if you have 5 bitcoins, you keep them in a wallet, that wallet is in fact an application that connects you to the Bitcoin blockchain and unlocks the information that points out to your ownership of that 5 bitcoins. Bitcoin is simply computer code, so you don’t have actual 5 coins stored anywhere, what really happens is that on the blockchain there’s data about every transaction, so your private key reads the inputs and outputs that have occurred previously and that way it calculates that you have these 5 bitcoins. It does that every time, so there’s no mistake and there’s no way to cheat it or pretend that you have 5 bitcoins if you’ve already spent some or all of it. This is why your private key is in fact your most precious asset in this case. It gets less complicated from here, so bear with me.
There are a few types of wallets but most importantly, there 2 types you need to know of. One is the web-based, hot-wallet, where the information can be accessed at all times and via a third party (a company) and these are usually applications for your mobile or websites that have login entry. This is with a username and password, just like most other websites and in most cases with these wallets you are not in sole possession of your private keys, they are being controlled and secured by the company that runs that service. Examples: Coinbase, Bitpay, Coinpayments, exchanges (pretty much all of them) such as Binance, Bittrex, Bitfinex, Gemini and so on..
The other type of wallets you need to care about is the cold-storage, the type of wallet that gives you full ownership of your private keys and these can be web-based too, like Blockchain.com, Exodus and Coinomi or hardware devices such as Ledger, Trezor and others.
What these wallets do is give you full control and even though they are also operated by companies, they do not store information about your accounts in their database, hence you must keep your logins and more importantly, seed phrases secure.
What is a seed phrase?
To keep it simple, a seed phrase is the identifier of your account with any of these wallet providers. Technically, it’s not quite correct to explain it like this, but in more generic terms, it works this way, so let’s not over-complicate things. What the seed phrase does is to create the link between you and the private keys that you operate with the wallet application so that if you loose your password to unlock the application (or the device) or even if you loose or damage the device itself, you will be able to access your account on another device or through another application with the help of that seed phrase. It’s also called a mnemonic phrase and it can be a set of 12, 24 or more words that are selected by random when you are setting up that wallet (or device) for the first time.
For example : “word dog cloud stable taken cute focus”… and so on. These are never coordinated into a proper sentence.
Most of the hardware devices or software applications also have password protection or pin codes that you use to access your coins, so they have a few layers of security and are deemed the most efficient and secure way to keep your crypto holding safe in the long run.
The best part is that you don’t need to have a record of every private key you have associated with these wallets (and in most cases one account would have quite a few private keys, not just one or two) but what you really need to have is that seed phrase.
If you forget your password, pin code or other login details for that wallet, you can use the reset function at any time and use the seed phrase to set up a new password or pin code for the same account with the same 5 bitcoins you own.
NB: it is very important to keep your seed (mnemonic) phrase out of sight, well-hidden and stored securely away from your computer. Computers get hacked, files get copied and accessed, so if your seed phrase is stored in a file on your computer, you are not going to avoid becoming a victim of theft, so HD wallets like Ledger, Trezor and Keepkey always have a few pieces of paper where you can write your seed phrase and store these in a safe place, out of reach, just like you’d store diamonds, a gold bullion or other valuables – in a safe vault, bank, under the bed (lol, not really) hope you get the point.
Some people even use metal plates for their seed and keep them in a highly secured vaults in banks or in a few places for peace of mind.
This was not the case with Peter Schiff – a well-known businessman and gold advocate, who’s been using every opportunity to discredit Bitcoin and recently made a lot of noise, trying to scare people away from Bitcoin by revealing that he lost all his bitcoin by simply forgetting his password to his wallet in a tweet last week. He later revealed that he didn’t keep a record of his seed phrase, nor his private key which was his mistake really.
Having a huge following on social media and being in the public eye, Peter is one of many bitcoin opponents that use every trick in the book to turn people away from crypto in favour of gold or other assets that they have a vested interest in, so while I wouldn’t take his claim seriously, it did one thing: bring awareness about the importance of knowing how to secure your crypto holdings properly. Instead of being put off by the complexity of it, let’s just learn these basic steps we need to take to secure our capital because it really is rewarding to be truly independent and in full control of our money.
I hope this post has helped you avoid becoming another Peter Schiff and you will go through your accounts now and take notes of every seed phrase (and maybe your private keys too) that you have. Please do so now and make sure you don’t just keep these in your computer, the best practice is to have them written physically and store them in a place where they won’t catch fire.
Be creative, it pays to be wise and as the cliche goes: better safe than sorry.
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