Cryptocurrency Wallets and Security 2 — Questions and Answers
Question 1: What is a hardware wallet's primary advantage over a software wallet?
- Faster transaction speed
- Private keys never touch an internet-connected device (Correct answer)
- Free to use with no purchase cost
- Supports more cryptocurrencies
Correct answer: Private keys never touch an internet-connected device
Hardware wallets store private keys in an isolated chip that is never exposed to the internet, protecting against malware and remote attacks.
Question 2: Which attack involves tricking a user into revealing their seed phrase through a fake customer support interaction?
- Replay attack
- Sybil attack
- Social engineering (Correct answer)
- Eclipse attack
Correct answer: Social engineering
Social engineering exploits human trust rather than technical vulnerabilities, often through impersonation of support staff to extract seed phrases.
Question 3: A BIP39 seed phrase typically consists of how many words?
- 8 or 10
- 12 or 24 (Correct answer)
- 16 or 32
- 6 or 18
Correct answer: 12 or 24
BIP39 defines seed phrase lengths of 12 or 24 words, which encode 128 or 256 bits of entropy respectively.
Question 4: What does 'change address' mean in a Bitcoin transaction?
- The recipient's updated wallet address
- The address that receives unspent funds returned to the sender (Correct answer)
- A new address generated after a private key rotation
- A temporary address used during multisig signing
Correct answer: The address that receives unspent funds returned to the sender
Bitcoin transactions consume entire UTXOs, and any excess amount beyond the payment is sent back to the sender via a change address.
Question 5: What risk does address reuse introduce in a cryptocurrency wallet?
- Higher network fees per transaction
- Reduced privacy by linking transactions to one identity (Correct answer)
- Slower confirmation times on the blockchain
- Inability to receive future payments
Correct answer: Reduced privacy by linking transactions to one identity
Reusing addresses allows anyone to trace the full transaction history of that address, degrading financial privacy.
Question 6: Which type of wallet is considered 'non-custodial'?
- An exchange account where the platform holds keys
- A wallet where only the user controls the private keys (Correct answer)
- A shared multisig wallet managed by a company
- A paper wallet stored in a bank safe deposit box
Correct answer: A wallet where only the user controls the private keys
Non-custodial wallets give sole control of private keys to the user, meaning no third party can freeze or access funds.
Question 7: What is the purpose of a passphrase (sometimes called the '25th word') added to a BIP39 seed?
- It replaces the seed phrase entirely
- It creates an additional layer of encryption for an extra hidden wallet (Correct answer)
- It speeds up wallet synchronization
- It is required to broadcast transactions on-chain
Correct answer: It creates an additional layer of encryption for an extra hidden wallet
A BIP39 passphrase generates a completely different wallet derivation path, acting as a second factor so a stolen seed phrase alone is insufficient.
Cryptocurrency Wallets and Security 2
What is a hardware wallet's primary advantage over a software wallet?