The most fundamental step before a person can starts to buy/sell any cryptos is to understand wallets.
The definitions and relationships among these terms are often very confusing to everyone.
- Crypto wallet
- Hot wallet
- Cold wallet
- Hardware wallet
- Non-custodial wallet
- custodial wallet
- Public Key
- Private Key
- Recovery seed phrase
Let’s demystify these terms!
Firstly, how do you keep, send and receive your Cryptocurrencies? In Crypto Wallets! To put it simply, Hot Wallet is a crypto wallet that is connected to the internet whereas a Cold Wallet doesn’t connect to the internet. Cold wallet are usually considered to be safer as it is not connected to the internet.
Cold wallet example include Hardware wallet such as Ledger, Trezor etc. Hot wallet example include browser extension wallet such as Metamask, XDefi etc (if one didn’t connect ledger to it as the interactive interface).
Non-Custodial Wallets means you are holding on to the Recovery Seed Phrase (you owned the crypto) whereas Custodial Wallets means you are not holding on the Recovery Seed Phrase (example when your Cryptocurrency are in an exchange). If an exchange hacked or closed down suddenly, please say goodbye to your coins.
What are Recovery Seed Phrase/Password/Pin?
Whenever you create a crypto wallet, a Recovery Seed Phrase of either 12 or 24 words are automatically generated out of 2048 word from the BIP-39 Word List. There are so many combinations of Seed phrases that can be generated such that it is basically non-hackable and this makes them very secure. This is like the master password of your Crypto. Ledger hardware wallet, Metamask hot wallet interface is like the password manager software.
During wallet generation, you will also need to create a Password or Pin for faster access to the wallet when doing any transaction. If you lose this Password or Pin, you can still recover your wallet using the Recovery Seed Phrase. However, if you lose both the Password or Pin together with your Ledger at the same time to the same person, you have to say goodbye to your cryptos.
What are Private/Public Keys?
Public key are the public address that one use to receive the cryptocurrencies and is in the blockchain. It is paired to a Private key where it is needed to authorized any transaction for the public address. In short, if you owned the Private Key, you are the owner of the Cryptocurrency. Hence, for every address created, there will be Public and Private key.
Hence, do not share your Private Key. Anyone with this key can access your cryptocurrency. However, do note that the private key are stored in a crypto wallet (such as Ledger, browser extension wallet like Metamask etc). Always remember that storing your coins in a hardware wallet is the most secure method because unlike browser extension wallet, the private keys never leave the device and thus stay offline.
What are the differences between Private Key and Seed Phrase?
For every Recovery Seed Phrase generated from your wallets, it will always create the same set of public addresses and private keys. Seed Phrases are the mnemonic version of all your private keys. Thus even if you forgot your password/pin, lose your hardware wallet, you still can get back your coin as long as you know your Recovery Seed Phrase.
One key point to note is that Private key is usually an access key to just one address (account), while Recovery Seed Phrase is an access key to the whole wallet, which can hold multiple addresses. Thus, Recovery Seed phrases can recover all private keys but not vice versa.
A picture is worth a thousand words. Refer to the diagram below for a better understanding.
In summary, after explaining the terms above but if one still have difficulties understanding the terms, just remember these points:
- If you keep your coins in an exchange, generally it should be safe for those reputable and big exchanges but do bear in mind the potential risks.
- Always get a Hardware Wallet such as Ledger and generate your own Recovery Seed Phrase.
- Secure your Recovery Seed Phrase and Private Keys, don’t let anyone know or lose it.
- Don’t lose both password/pin together with your hardware wallet (e.g Ledger) at the same time.
How to find out the Private Seed Phrase of my Ledger? (For advance users only)
For those interested to find out what Private and Public keys will be generated from a particular Seed phrase, advance users can manually generate all private keys using software such as Ian Coleman’s BIP39 tool. Let me show you an example using randomly generated 24 words seed phrase.
Go to https://iancoleman.io/bip39/ and select “24” to generate random mnemonic.
You can see the random 24 seed phrases that are generated. Choose the Coin as “ETH – Ethereum” (I choose a common coin that everyone know. Of course, you can choose other coin).
Scroll to the bottom. You can see the full list of Private keys and their corresponding Public Keys.