Overview
A watch-only wallet is a Bitcoin wallet configured with only public keys (or an extended public key) and no private keys. It can track balances, monitor incoming and outgoing transactions, and generate new receive addresses, but it cannot sign or broadcast transactions. This separation of monitoring and spending capabilities is a fundamental component of secure cold storage setups.
How It Works
Cold Storage Setup with Watch-Only Wallet:
┌──────────────────┐ ┌──────────────────┐
│ OFFLINE DEVICE │ │ ONLINE DEVICE │
│ (cold storage) │ │ (watch-only) │
│ │ │ │
│ Private Keys │ │ xpub only │
│ Seed Phrase │ xpub │ (no private │
│ Signs txs │────────> │ keys) │
│ │ │ │
│ Air-gapped │ │ Monitors balance│
│ │ │ Generates addrs │
│ │ PSBT │ Creates unsigned│
│ Signs PSBT <───│──────────│ transactions │
│ │ │ │
│ Returns signed │ │ Broadcasts │
│ PSBT ──────────>│────────> │ signed tx │
└──────────────────┘ └──────────────────┘
The xpub (extended public key) allows the watch-only wallet to derive all child public keys and addresses in the wallet's derivation path, enabling it to track the full balance without ever having access to spending authority.
Use Cases
- Secure cold storage monitoring: Check balances and receive payments without exposing private keys to an internet-connected device.
- Business accounting: Track incoming payments and generate invoices without giving the accounting system spending capability.
- Hardware wallet companion: Desktop wallet software often operates in watch-only mode, preparing transactions for signing on the hardware device.
- Multi-party monitoring: Share an xpub with an auditor or business partner who needs visibility into funds but should not be able to spend them.
- PSBT workflow: Create Partially Signed Bitcoin Transactions (PSBTs) on the watch-only wallet, transfer them to an offline signer, and broadcast the signed result.
Privacy Considerations
Sharing an xpub reveals all current and future addresses derived from that key. Anyone with the xpub can see the entire transaction history and balance associated with that derivation path. Therefore, xpubs should be treated as sensitive information and shared only with trusted parties or services.
Common Misconceptions
A watch-only wallet is not less secure — it is actually a security feature. By separating the monitoring function (online) from the signing function (offline), watch-only wallets reduce the attack surface for cold storage by ensuring private keys never touch an internet-connected device.