MSTR Cat

Blockchain/Level IV · Protocol depth/4.3 Custody and privacy/Lesson 4

Backups and passphrases

The fragile paper, the forgotten word, and the drive in the landfill

MaterialsA metal stamping kit or engraver for durable backupsA fireproof safe with a combination lockA notebook to record restoration test results

Wonder

  1. Why does a sheet of paper holding twelve words represent more value than the paper it is written on?
  2. How can adding a single extra phrase to a backup make the funds unrecoverable if that phrase is lost?
  3. What happens when the physical medium holding the keys outlives the person who remembers how to open it?

Explore

  1. A BIP39 seed phrase, typically twelve or twenty-four words, encodes, in words, the secret from which every key in the wallet is derived. Paper is the most common backup medium because it is cheap and durable in dry conditions, but paper burns, rots, fades, and can be stolen. Many owners now use stamped or engraved metal plates to resist fire and water damage. The location of these backups matters as much as their material; a safe that no one else knows about protects the secret from thieves but also locks it away during emergencies.
  2. BIP39 includes an optional passphrase, often called the ‘twenty-fifth word.’ When this phrase is combined with the mnemonic via PBKDF2 stretching, it produces a completely different seed. The bare twelve words open one wallet; the same words plus the passphrase open another. Some users keep a small decoy balance under the bare words, for coercion scenarios, and the main funds behind the passphrase. However, if the passphrase is forgotten or lost, the funds are permanently inaccessible because there is no ‘wrong’ passphrase—every combination generates a unique, likely empty, wallet.
  3. Storing the backup passphrase in the same location as the seed phrase defeats its purpose as a second factor. If an attacker finds both, they gain full access to the keys. Conversely, if the owner dies and the heir knows only the seed words but not the passphrase, the assets are lost. This creates a tension between security against theft and resilience against loss. A common practice is to keep them physically separated, such as one in a home safe and another with a trusted family member or legal custodian, ensuring that neither alone grants access while both together do.
  4. SLIP-39, or Shamir’s Secret Sharing, offers an alternative to single-seed backups. It splits the secret into multiple shares, where any threshold of them can reconstruct the original. For example, a 2-of-3 setup means two out of three shares are needed for recovery. Any number of shares below the threshold leaks no information about the secret. This eliminates the single point of failure inherent in a single mnemonic phrase but adds complexity: every share must be stored safely, and losing more shares than the margin allows makes recovery impossible.
  5. History provides cautionary tales of backup failures. In 2013 a hard drive belonging to James Howells, holding the keys to about 8,000 BTC, was thrown out (accounts differ on who discarded it); it is now buried in a landfill in Newport, Wales; Newport City Council has refused to let him excavate; the High Court struck out his claim in January 2025, and the Court of Appeal refused permission to appeal in March 2025. In January 2021, Stefan Thomas told The New York Times he had used eight of ten password guesses on an encrypted drive holding the keys to 7,002 BTC; two more wrong guesses and the drive would erase itself. These cases illustrate that cryptographic security is only as strong as the human processes surrounding key management.
  6. Testing restores before relying on a backup is a standard practice in operational security. Common practice is to test periodically that a backup actually regenerates the wallet and that the owner knows all necessary components, including passphrases or share thresholds. This prevents the discovery of corrupted backups or forgotten secrets only when access is critically needed. Whether using metal plates, paper, or digital shares, a backup plan has to weigh the risk of theft against the risk of loss.

Key facts

  • A BIP39 passphrase combined with a mnemonic produces a unique seed different from the bare mnemonic.
  • Storing a backup passphrase in the same location as the seed phrase defeats its function as a second factor.
  • SLIP-39 splits a secret into shares where any threshold reconstructs it, and fewer than the threshold leak no information.
  • James Howells’ hard drive with ~8,000 BTC was discarded in 2013 and is buried in a Newport, Wales landfill.
  • In 2021 Stefan Thomas had two password guesses left on an encrypted drive holding the keys to 7,002 BTC.
  • Paper backups can burn or rot; metal plates are used by many owners for greater physical durability.

Exercise nine, six, three, one

9CollectList 9 distinct backup methods or media used for storing cryptographic secrets, ranging from paper to digital encryption.
6ClusterGroup the 9 into 6 categories based on their primary vulnerability: fire/water damage, theft, human error/forgetting, technical obsolescence, legal seizure, or complexity-induced loss.
3DistillReduce the 6 groups to 3 core reasons why backup strategies fail in practice.
1CrystallizeWrite 1 sentence on the trade-off between making a backup secure from thieves and keeping it accessible during an emergency.

Fact check

Dates, figures and claims checked against the published sources listed below.

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