Guides / Glossary / Recovery phrase
Glossary

Recovery phrase: the words that recreate a key

A list of words, usually 12 or 24, that encodes a wallet seed. Anyone who has it can recreate the key.

Education only

Definition. A list of words (often 12 or 24) that encodes a wallet seed. Anyone who has it can recreate the key, so it is kept offline and never photographed or typed into a computer.

How it works

BIP 39 sets out how a random number, the seed, is turned into a list of common English words drawn from a fixed list of 2,048. Twelve words carry 128 bits of randomness and twenty four words carry 256 bits, each with a short checksum. The same words always regenerate the same keys, on any compatible device. Some set ups add an optional passphrase, which acts like an extra word that is not written on the backup.

The phrase is created inside the signing device when a key is generated. Good devices display it once for the holder to write down, and then ask for some of the words back to check the copy.

Why it matters for a company

A recovery phrase is the key. Whoever reads it can recreate the signing key on their own device, with no record that they have done so. For a company, that means the phrase must be treated like the most sensitive document it holds: kept offline, never photographed, never typed into a computer or phone, and stored where only the named keyholder or a sealed process can reach it.

In a multisig wallet, one exposed phrase is not enough to steal funds, which is the point of multisig. But an exposed phrase should still be treated as a compromised key and the funds moved to a new wallet. The randomness also matters: the 2026 COLDCARD advisory described a firmware bug that weakened seed generation in affected versions, a reminder to follow vendor security notices.

Example only, fictional. At a company key ceremony, each director writes their 24 words onto a steel plate, the plates are sealed in tamper evident bags with serial numbers, and the bag numbers, not the words, go into the key register.

Common mistakes

Sources

Primary sources only. Each link was checked on 9 November 2026. Rules change, so confirm the current version with your adviser.

  1. Bitcoin BIPsBIP 39: Mnemonic code for generating deterministic keys
  2. CoinkiteCOLDCARD security advisory: weakened seed generation in affected firmware (July 2026)
  3. NISTSP 800-57 Part 1 Rev. 5: Recommendation for key management
Education, not advice.

This is general information and education only. It is not financial, investment, tax, accounting, legal or regulatory advice, and it is not a recommendation to buy, sell or hold bitcoin or any other asset. It does not take account of your circumstances or those of your company. You must obtain your own official professional advice to confirm this information is correct before acting on it.

Rules change. This information is correct to our understanding at the last-reviewed date, but it may be incomplete or out of date, and official sources take precedence. Bitcoin is volatile. A company that buys it could lose some or all of the money it puts in.

Using this site does not create an adviser or client relationship. IoT Financial is not authorised or regulated by the Financial Conduct Authority (FCA) and is not registered with the US Securities and Exchange Commission (SEC) as an investment adviser. Read the full disclaimer.