What Is a Wallet Passphrase in Bitcoin?

Adding a passphrase to a Bitcoin Wallet
Bitcoin Wallet Passphrase For Hidden Wallets

In Bitcoin, a passphrase adds an extra security measure to your hardware wallet beyond the standard seed phrase. It acts as a unique password appended to your seed phrase that provides an additional layer of protection to access your physical device, creating a "hidden wallet" and helping shield your funds from external threats. This passphrase must be provided whenever you want to access this hidden wallet.

Passphrases also allow access to multiple wallets on the same network or platform. Each passphrase, combined with the seed phrase, unlocks a specific wallet. For example, if you create a wallet with the passphrase "xyz," changing it to "abc" creates a new wallet entirely.

Remember, your hardware device only stores one seed phrase, but you can use different passphrases to access different wallets. Even a slight change to your passphrase creates a new wallet, so it's crucial to back up and safeguard your intended passphrase carefully (ideally as a metal backup).

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Bitcoin Passphrase vs. Seed Phrase

While passphrases and seed phrases are connected concepts, they are fundamentally different and serve differing purposes. 

A seed phrase, also known as a recovery phrase, or mnemonic phrase, consists of a set of 12-24 words that are used to recover a Bitcoin wallet's private keys. It acts as a master key to accessing and recovering a wallet and all its associated funds. This is considered a singlesig (single-signature) standard wallet.

On the other hand, a passphrase is an additional phrase or word added to the seed phrase to create an extra layer of security for a Bitcoin wallet. It functions as a unique, memorable password that must be provided to unlock the hidden wallet. While the seed phrase is crucial for wallet recovery, the passphrase further secures the wallet by making it more difficult for unauthorized users to gain access. 

Both are essential components of a Bitcoin wallet, but each serves a distinct purpose. If you want to learn more about seed phrases, their purpose, and importance, you can read our article here.

Advantages and Risks of Using a Passphrase

This additional level of security is certainly not restricted to advanced users, but beginners should know that using a passphrase introduces advantages and risks to securing your Bitcoin.

The main risk of using a passphrase is potentially forgetting the passphrase and thereby losing access to your Bitcoin. Additionally, it can complicate inheritance planning or passing down your Bitcoin, especially for those unfamiliar with self-custody.

Despite these drawbacks, passphrases also introduce several advantages. Firstly, they enable the creation of multiple wallets on the same network or platform, each associated with a different passphrase. This allows for creating a decoy wallet, useful in scenarios such as a $5 wrench attack where an attacker uses coercion or force to try to steal your funds. For instance, you could create a dummy wallet with a small balance and a unique passphrase. If threatened, you can offer this dummy wallet to attackers, ensuring the security of your main wallet with a different passphrase.

Secondly, a passphrase adds an extra layer of security. While an attacker may obtain your seed phrase, they cannot access your funds without the passphrase. However, it's essential to note that storing the passphrase securely is crucial; if it is written down rather than memorized, it may be vulnerable to physical attacks or theft, similar to a backup seed phrase, thus diminishing its effectiveness.

For these reasons, a multisig wallet may be preferable for heightened wallet security and minimized risks, as we will explore in more detail below.

Multisig vs Passphrase

Given the risk of forgetting your passphrase, a collaborative custody multisig wallet, such as what we offer here at Theya, presents a compelling alternative. While multisig has been said to be too complicated, Theya makes it accessible even for non-technical users.

In a multisig setup, multiple private keys are required to authorize Bitcoin transactions, enhancing security by distributing trust among multiple parties. A common multisig setup is a 2-of-3 arrangement, where at least two of the three private keys are required to access the funds in the wallet. This mitigates the risk associated with a single point of failure, such as forgetting a passphrase or seed phrase or having these stolen from your possession.

In a collaborative multisig model, such as with Theya, the responsibility for managing the private keys associated with a wallet is shared among trusted parties, reducing the likelihood of theft or loss. For example, in a 2-of-3 multisig, you may hold one key, a trusted family member may hold another, and Theya will hold the third and final key. Only you can access the funds since 2 of the 3 keys are needed to access the Bitcoin. You can learn more about multisig wallets here.

By combining the benefits of multisig security with a user-friendly design, Theya offers a solution that addresses the limitations of relying solely on a passphrase while ensuring users maintain full control over their Bitcoin holdings in the most secure way possible.