In the unfortunate event that you lose your debit card, Visa will instantaneously block it — no harm done unless someone else has found it in the meantime and treated themselves with a handsome eBay order using your card details.

Unfortunately, things don’t go that way in the crypto ecosystem. The Bitcoin blockchain doesn’t have a phone-line support team to rely on simply because it’s a decentralized setup without any form of human governance.

The technology the blockchain uses provides robust on-chain security as long as your private keys — your Bitcoin passcode — are kept safe. All those soul-crushing amounts of lost Bitcoin due to hacker attacks, malicious software, and forbidden access stem from improper use of private keys.

For this very reason, we’ll comb through all crypto wallet recovery possibilities and, hopefully, help you provide the best protection for your Bitcoin wallet.  

How Do Cryptocurrency Wallets Work?

Cryptocurrencies don’t have a printed representation in the outside world, and what’s more, neither do they have a digital one. In fact, cryptos can’t be replicated anywhere outside the blockchain because they never leave their native environment. So, the question is: What does your Bitcoin wallet store then?

Vector illustration crypto wallet

As a software program, a Bitcoin wallet stores data that proves ownership over your digital assets. This includes your Bitcoin address, a digital signature, and a set of digital keys.

Interestingly, those keys are fully independent of the Bitcoin network since they’re generated and managed exclusively by your Bitcoin wallet software. The best way to understand their roles is to think of the public key as your bank account number and the private key as being similar to the PIN code you use to get access to your funds. 

You need to correctly submit your public key together with the matching private key in order to initiate a Bitcoin transaction, which is what we call your digital signature.

The Bitcoin address is frequently mistaken for the public key, which is wrong. The Bitcoin address is actually derived from the public key with an irreversible math function. Thus, the wallet address is a simplified and compressed form of the 256-bit public key into 26-35 alphanumeric random characters. That’s the destination address through which other bitcoiners can recognize you and send you a certain amount of cryptocurrencies.

Private keys, on the other hand, are the only way to access the received funds — not your keys, not your bitcoins.

Private Keys Across Different Types of Bitcoin Wallets

So, your responsibility as a Bitcoin holder is to provide a safe environment for your private keys. This isn’t an easy task because, first, there is an overwhelming choice of Bitcoin wallet brands available today, and second, the most convenient storage packages are usually the least reliable.

Despite the diversity in design and functionalities, digital wallets can be divided into two main groups: hot wallets and cold wallets. To learn the mastery of key protection, you must know the exact location of your digital keys. 

Hot Wallets

All types of wallets that require an internet connection to perform their basic functions (balance checkup and sending and receiving crypto) are considered hot storage. This is a diverse group consisting of web wallets, mobile, and desktop wallet apps. 

Mobile crypto wallet

Web or Online Wallets

Web wallets are almost always a custodian type of software wallet linked to your crypto exchange account. Centralized cryptocurrency exchanges (CEXs) offer online space for keeping your newly-purchased bitcoins as part of their trade package.

It’s quite a handy setup — you buy the coins and leave them on the exchange without the need for external transfers. However, this raises two critical concerns: (1) your provider keeps your private keys, which means they’re not technically yours, and (2) your private keys reside on the exchange’s servers, which is not recommended for security reasons.

Wallet Apps

This category of Bitcoin wallets includes desktop and mobile apps (for Android and iOS) that keep your private keys in the device on which the app is downloaded. From a security perspective, this scenario is much better than in-exchange wallets.

However, wallet apps are also prone to malware and physical damage; hence, they’re not the best long-term solution, especially if you hold a large number of bitcoins. Still, desktop and mobile wallets have developed a state-of-the-art design and a vast of additional functionalities, thus contributing to a positive and hassle-free crypto experience. 

Cold Wallets

Cold storage in the crypto world is represented by hardware or offline wallets. They’re physical devices containing their own software, which makes them fully independent and immune to external factors that can compromise your private keys.

However, you need to connect your hardware wallet with compatible computer software for easy navigation and access to more advanced opportunities. This direct connection — either through a cable or via Bluetooth — won’t affect the safety of your private keys as they’ll be securely stored offline in the device. 

Storing bitcoin hardware wallet

The only downside is that the activation of a hardware Bitcoin wallet requires a specific setup and a few in-device adjustments, which is considered time-consuming in today’s fast-paced lifestyle of casual investors. What’s more, wallet devices aren’t free, unlike all other forms of crypto storage, so it’s much easier for new users to rely on a web platform or app that doesn’t differ from other mainstream payment providers like PayPal. 

How to Backup Your Bitcoin Wallet?

Now that you know what to expect from a crypto wallet, let’s move on to the best backup practices. As you can see, some types of crypto wallets are safer than others, but it doesn’t mean that they’re virtually immune to damage.

For example, there is a realistic chance for devices (mobile phones or laptops) containing crypto wallet apps or hardware wallet devices to get lost or physically damaged. Computer failures don’t necessarily mean that your crypto data will vanish for good. Certainly, you have to ensure a proper backup of your wallet during the registration process.  

Use a Seed Phrase 

The most common approach to a painless wallet backup is using a seed phrase. Unlike the digital keys and wallet address, the seed or recovery is a  combination of 12-24 meaningful words. They’re chosen by the software algorithms of your wallet, which “pick” the words randomly out of a pool of 2,048 words and give them to you in a strictly defined order. 

As mentioned above, the seed phrase creation is part of your setup process, even though you can activate the wallet by skipping this step. However, this “live-saving” mnemonic code is capable of restoring your wallet on another device, so it’s of utmost importance not to neglect it. 

You don’t have to meet any specific requirements to get your seed phrase. For instance, the process on Electrum  — one of the top Bitcoin wallet picks — goes in the following order. (You should know that all other BTC wallets follow a similar route in delivering a seed phrase to new users.)

Sewed phrase stamp crypto wallet
  1. Once you download the Ethereum app on your desktop, navigate to Create a New Wallet and follow the step-by-step instructions.
  2. When you get to the Keystore page, select Create a New Seed.
  3. The 12-word phrase will pop up on the screen, so it’s your turn to save it someplace safe.
  4. For confirmation, the wallet will require you to enter the phrase back in an empty field. Don’t worry if you go wrong while re-writing or copying it. You can go back and repeat the process with a new set of words.
  5. To make sure that everything went well, go to the Wallet tab and find Seed.

Where Should I Store My Recovery Seed?

The greatest challenge in seed-phrase protection is to ensure storage space that is secure enough. Unlike other wallet data, you must make a copy of your seed phrase and keep it outside the wallet software. The latest storage trends suggest that the ideal solution for your seed phrase is to encrypt the string with the help of special software and store the encrypted phrase in a well-established cloud service.

From a broader perspective, this backup plan is too complicated for a great part of Bitcoin users. Yet, there are plenty of other options to make sure your recovery phrase stays intact. When it comes to secret codes, even the savviest bitcoiners claim that paper can sometimes be the best safeguard.

Other Forms of Wallet Backup 

While the seed phrase is the most conventional backup model, you can also “hide” your private keys in backup files for added security.

Copy the Wallet.dat File

The Wallet.dat is actually your Bitcoin file or, more precisely, the file that stores all your “ownership certificates,” including the private key. When using a Bitcoin core wallet, this file is stored in a certain location on your Windows (or other supported operating systems), depending on the model itself. In some cases, the Wallet.dat may not be visible in the selected location because it’s been automatically stored as a hidden document.

Whoever gets access to your wallet.dat file will technically have access to your bitcoins. The best practice is to encrypt your BTC wallet with a secure password and save the password in external locations, preferably outside of your desktop or laptop. Once encrypted, you can store the file in private cloud storage or a USB drive. 

Text File

You may have noticed that Bitcoin wallets allow you to export private keys through an in-wallet feature that can be found at different locations depending on the model you use. On some wallet dashboards, you can see it as Export Keys, or simply as Backup Wallet on others. 

Downloading text file crypto wallet

When you activate this option, the system will generate a JSON or CSV file with your entire wallet data in it. Just like Wallet.dat, once you get this file, put your back into a reliable storage model either on a cloud, a flash drive, or another external hard drive.

Finally, don’t forget to turn off your internet connection during the export process. 

Paper Copy

Paper wallets used to be the prime example of cold storage before the first hardware device Trezor appeared on the crypto scene in 2013. They allow Bitcoin holders to print out a paper version of their key set, with a caution to keep that piece of paper in a safety deposit box or another safe location. 

The process of issuing a “key document” is rather straightforward. You can find a few websites like bitcoinpaperwallet.com and walletgenerator.net that work exclusively as wallet generators. Once you get landed on the chosen website, it will automatically generate a random pair of keys based on the 256-bit string mechanism together with a QR code for further use. 

The general impression is that this storage approach is obsolete in today’s digital era but it can be of great use for ultimate safety, especially to large-scale Bitcoin HODLers. 

A Few Words Before You Go… 

One of the most fascinating blockchain behaviours is the way it treats ownership through digital keys. The matching nature of private and public keys enables many of Bitcoin’s properties, including a cryptographic proof-security model, decentralized trust, and independent financial governance. 

As different as this model might be from traditional cash systems, it requires the same level of awareness and responsibility when it comes to proper backup. The available backup methods for crypto are designed for all types of Bitcoin holders and don’t require any specific tech skills. It takes maybe a bit of your precious time, which is worth spending, given the rate of cybercriminals and irresponsible Bitcoin holders, who lost their keys, failed to back up the digital wallet, and never took blockchain’s immutable nature for granted.