October 2, 2020

The seed is your treasure as an investor in crypt coins part 2

As an investor in cryptocurrencies it is essential to know how to use the seed correctly. This gives us access to our funds in case, for example, your hardware wallet is lost or stolen, the company offering the service stops working (Ledger device, exodus, coinomi etc.) or we simply want to restore our funds to another device or wallet.

In the previous article we explained what a seed is and how it works (The seed is your treasure as an investor in cryptocurrencies part 1). In this one we will focus on security and learning how to use it in case you need to rescue your funds.

Protecting your seed is synonymous with protecting your heritage in cryptocurrencies

For better or worse, when we have control of the private keys, we are the only ones responsible for the security.

If we have lost the seed and no longer have access to our wallet, no one can give us back access to the funds.

Here are some recommendations that you should take into consideration to make the backing of the seed safe:

  • The seed must be as protected as possible against possible theft, so it is not advisable to store it in a computer or cell phone with an internet connection.
  • You can write it down on paper, there are even fireproof metal plates to back up the seed and it is protected in case of fire or water contact.
  • Store half of the seed in one location, and half in another location (for more security even have several copies in different locations)
  • Use a passphrase (you can visit this article to see how it works hyperlink: The seed is your treasure as an investor in cryptocurrencies part 3).

How to recover funds from the seed

Using the same application or the same device where we previously configured it, the wallet can be restored by entering the words that make up the seed. But, we will show another way to rescue the funds without the need of a third party. That is, if we generate the seed with a Ledger device, we do not necessarily need another Ledger device to restore the wallet as we will see in the following example.

  • We have for example a Ledger device with the following seed:

camp myself eye rubber spy picnic business knife element hurdle snow virtual horror attract dragon protect spread pen squeeze copy enact giraffe occur fuel

  • We added 3 accounts (Bitcoin, Ethereum, Litecoin)
  • The addresses that appear to us are:

Bitcoin: 1Gt7rYMsJsSQgnfkH8EVQM53FQWc7dffQu

Ethereum: 0x0152a1c74483ebFD68A496372edC8D622843061C

Litecoin: LSxTQiYnAqEsLYVPWdzu2X4Ln876GckWv2

Now let’s imagine that the device has been stolen or lost. We can use a mnemonic calculator to calculate our private keys like iancoleman.

This tool, despite being a web page, incorporates the algorithmic calculation within the source code, therefore, the information is not sent to any server. However, it is recommended that during its use you are not connected to the Internet, and you could even download the entire website and use it on an offline computer.

  • We introduce the seed in the text field BIP39 Mnemonic: example

  • Having selected in the field “coin” the cryptocurrency that we want to extract the information, the list of private keys and their associated public addresses will appear below example2

  • We will take the private keys of the addresses we need to recover, in our case the first address of Bitcoin, Ethereum and Litecoin

Bitcoin: L5Y9LjHJ2GT4XEgytsZGjUp4sWcmbsPjTWRriHEaq1kPCvPYCjtp example3

Ethereum: 0x1ccea8ea18aff14727aa4a209efcf1578446edbe7d27ea86ec6271782c46b0bb example4

Litecoin: TB3jYmB46ePZJ3wLubpFbtoaMTPHFAKqcBsPXZqCHW8UGZo4YZFu example5

Once we have the private keys of the wallets we want to recover the funds we have the option to import or sweep:

Import: we can use a software portfolio client to import the private key, this way we can continue to use the public.

example6 Cliente Electrum BTC

example7 Myetherwallet.com

example8 Cliente Electrum LTC

Sweep: When a one way sweep is performed, all funds are passed to the new wallet, leaving the old address empty and should no longer be used. Please note that the network fee will be paid in this case as it is actually a transaction.

We can use multi wallets like Exodus

If we enter each of the cryptocurrencies, in the options menu we will give it to “move funds”, and we will introduce the private key. In this way, the new wallet will be scanned with a new private key.

example9 example10

As you can see, having the seed you can calculate all the private keys and use the wallets as if they were paper wallets, so we have the security that if the services of the wallet we use stop working we can always recover the funds. Not in the same way it would happen if we have it in an exchange as we explained in the article “It is up to you to properly protect your cryptocurrencies part 1”.

As a curiosity, in the case of Ledger devices, we are not allowed to create more than one address if the previous one has not received funds. But as you have seen with the mnemonic calculator, we can extract all the following addresses that Ledger devices would import and use them.

This security standard has other interesting additional functions such as protection against extortion, resolving inheritances or simply adding another layer of security. Discover it in the next article. Hyperlink: The seed is one of the most important things you need to know as an investor in cryptocurrencies part 3.