What is a Watch‑Only Wallet?

A watch‑only wallet is a software wallet that can discover addresses, display balances, track transactions, and build unsigned transactions, but it cannot sign because it holds no private keys. It typically uses public information such as an extended public key (often called xpub, or more generally xpub/ypub/zpub depending on address type) or a descriptor that describes how addresses are derived. With the right information, a watch‑only wallet can follow your coins in real time without any ability to spend them.

This separation is ideal for cold storage. Your hardware wallet or air‑gapped device holds the private keys in a secured environment. Your desktop or phone can then host a watch‑only wallet to monitor activity, estimate fees, label transactions, and prepare a Partially Signed Bitcoin Transaction (PSBT) for offline signing.

Key idea: view and plan online, sign offline.

Why Watch‑Only Makes Sense for Canadians

Canadian Bitcoin users have a few country‑specific needs that make watch‑only wallets especially useful. Banking in Canada often relies on digital controls and notifications, and crypto users commonly reconcile e‑transfer or wire deposits with exchange withdrawals to self‑custody. With a watch‑only wallet, you can verify incoming funds to your cold addresses without ever plugging in a signing device. For small businesses or side hustles accepting Bitcoin, a watch‑only setup lets a bookkeeper track invoices and issue receipts while the signing keys stay in the hands of the owner.

• Record keeping for CRA: You can label deposits and withdrawals, export transaction histories, and keep clean cost‑basis records over multiple tax years.
• Operational separation: Staff can monitor donations or sales without access to spending keys, which supports robust internal controls.
• Mobile visibility: Keep an eye on balances while traveling, but leave your private keys in a secure location in Canada.
• Multi‑sig oversight: Co‑signers in different provinces can view activity independently, minimizing coordination overhead.

How Watch‑Only Wallets Work

Extended Public Keys and Derivation Paths

Bitcoin wallets use hierarchical deterministic standards (often referred to as BIP32 and BIP44 family) to derive many addresses from a single seed. An extended public key represents a branch of that tree. Given an xpub and a defined derivation path, software can derive all future public addresses for a specific account without needing private keys. That enables transparent monitoring.

Descriptors and Address Types

Descriptors are human‑readable strings that describe the exact script template your wallet uses. For example, a descriptor can encode whether addresses are legacy, nested SegWit, or native SegWit, or Taproot, and it can include multiple extended public keys for multi‑sig. Descriptors reduce ambiguity, which is essential when restoring watch‑only views across different apps or when coordinating with co‑signers.

Gap Limits and Address Discovery

Watch‑only wallets typically scan ahead a window of unused addresses, called a gap limit. If you generate many new addresses without activity, you might exceed that window and the wallet may not automatically discover fresh addresses. Keep an eye on gap limits or increase them when you expect a burst of new receive addresses, for example during a fundraiser.

PSBT for Offline Signing

A watch‑only wallet can build an unsigned transaction with selected inputs and outputs, then export a PSBT. Your offline signer reviews and signs the PSBT, returning a finalized transaction to the online machine for broadcast. This preserves the cold‑hot separation while giving you precise control over fees and outputs.

Security Model and Threats to Consider

• No private keys on the online device: This is the central security benefit. Even if your laptop is compromised, the attacker cannot sign a transaction.
• Privacy risk through public keys: An xpub or descriptor leak can reveal your entire address set and balances. Treat public keys as sensitive data.
• Network privacy: Querying a public block explorer from your home IP can leak which addresses you control. Prefer connecting your watch‑only wallet to your own node or use privacy‑preserving network settings.
• Label leakage: If you synchronize labels through cloud services, ensure they are encrypted. Labels often contain personal information about payees or invoices.
• PSBT integrity: Always verify outputs, change addresses, and fees on the signing device screen before signing. Do not trust the online computer.

Step‑by‑Step: Set Up a Single‑Sig Watch‑Only Wallet

1. Create or identify your cold wallet on a hardware device. Confirm a fresh seed phrase, optional passphrase, and a secure PIN. Record the seed phrase on durable media and store it safely.
2. On the hardware wallet, open the account you intend to monitor. Confirm the address type you want to use, for example native SegWit or Taproot. Consistency helps future recovery.
3. Export your account’s extended public key or descriptor. Many devices can display a QR code or save a file that contains the descriptor with derivation path and fingerprint.
4. On your online machine, install your preferred wallet app and create a new watch‑only wallet. Import the exported xpub or descriptor. Double‑check that the fingerprint, derivation path, and address type match what the hardware device shows.
5. Force a rescan or initial synchronization. Label your first few known addresses, such as cold storage vault and emergency fund. Consider increasing the gap limit if you expect frequent new receive addresses.
6. Test the setup. Send a small transaction from an exchange to a newly generated address. Verify on the watch‑only wallet that the deposit is detected. Compare the receive address on your hardware device screen with the address displayed in your watch‑only wallet to ensure they match.

Once configured, you can safely request new receive addresses from the watch‑only app, track confirmations, and export transaction histories. Signing remains strictly offline.

Step‑by‑Step: Set Up a Multi‑Sig Watch‑Only Wallet

Multi‑sig adds redundancy and reduces single‑device failure risk. A common template is 2‑of‑3: any two keys out of three can sign. A watch‑only wallet can coordinate these keys without possessing any private material.

1. Generate each co‑signer on separate devices. Record seed phrases and any passphrases individually. Store them in different secure locations, ideally different cities or provinces.
2. On each device, export the public information for the chosen account: the extended public key or descriptor, plus derivation path and fingerprint.
3. On your coordination machine, create a new multi‑sig watch‑only wallet. Import each co‑signer’s public information. Carefully name each co‑signer to avoid confusion later.
4. Confirm the policy, for example 2‑of‑3, and the address type. Generate a receive address, then verify on two hardware devices that the address displayed on screen matches the watch‑only wallet.
5. Distribute the finalized descriptor to all co‑signers. Each signer should save it with their backups. This descriptor is essential for recovery and for future watch‑only views.
6. Test with a small deposit. Observe confirmations in the watch‑only wallet. Confirm that all signers can rederive the same receive address on their screens.

With a multi‑sig watch‑only wallet in place, teams can monitor inflows while the authority to spend remains strictly with the quorum of signers. This is popular for family treasuries, clubs, and small Canadian businesses that need separation of duties.

Preparing PSBTs and Finalizing Offline

A practical workflow looks like this. On the online computer, you build a transaction with selected UTXOs, outputs, and a fee rate aligned to your urgency. The watch‑only wallet exports a PSBT, often by QR code, USB, or SD card. The signing device displays the transaction details. You confirm the outputs and change address, review the fee, then approve. The device adds signatures and returns the finalized transaction. The online computer broadcasts it to the network.

• Always verify the destination address on the hardware device screen. Never trust only the computer display.
• Set fees based on current network conditions. For non‑urgent transfers, choose a modest fee rate and allow time for confirmation.
• Label transactions in the watch‑only wallet with purpose and counterparty for smooth bookkeeping.

Privacy Tips for Canadian Users

Privacy is not only about hiding balances. It also limits the risk of targeted fraud or social engineering. Here are practical steps tailored to common Canadian usage patterns.

• Run your watch‑only wallet against your own node where possible. This prevents broadcasting your monitored addresses to third parties.
• Avoid pasting addresses into public search engines. Use your wallet’s built‑in tools for transaction lookups or connect privately to a backend you control.
• Rotate receive addresses for each payment. Watch‑only wallets make this easy. When reconciling with accounting systems, link addresses to invoices through labels, not by reusing addresses.
• If you must use a mobile monitor, secure your device with a strong passcode, disable lock‑screen previews, and consider a separate profile only for Bitcoin apps.
• Treat xpubs like secrets. Share only the minimal information necessary. For example, if a vendor needs to verify payment, provide a single address rather than an entire xpub.

Backups and Documentation: What to Save

A watch‑only wallet is easy to recreate if you keep the right metadata. This documentation also helps with inheritance planning and smooth business operations.

For Single‑Sig

• Wallet descriptor or xpub with exact derivation path.
• Master key fingerprint of the signing device.
• Address type and account index used.
• Label export and transaction notes. Keep these encrypted if stored digitally.

For Multi‑Sig

• Full multi‑sig descriptor that includes the quorum policy and all co‑signer xpubs.
• Each co‑signer’s fingerprint and derivation path.
• Clear naming convention for devices and responsible people.
• Document where each hardware device is physically stored and who has access.

These items do not grant spending power on their own, yet they are sensitive. Store them separately from your private keys and protect them with the same seriousness you would apply to confidential business records.

Canadian Record‑Keeping for Taxes

While this article focuses on security, watch‑only wallets also make Canadian tax compliance more manageable. The Canada Revenue Agency expects accurate records of your transactions and cost basis. A watch‑only wallet helps you export histories without exposing your keys.

• Capture the date, time, transaction ID, value in BTC, approximate fair market value in CAD at the time of the trade, and related fees.
• Use labels to distinguish self‑transfers from disposals. Properly identifying change outputs avoids double counting.
• Keep invoices or exchange receipts that match your deposits. Consistent labels link on‑chain activity with off‑chain paperwork.
• For mining income or business sales, create a dedicated account in your watch‑only wallet. This helps segregate taxable events from personal holdings.

Strong records reduce stress during tax season and simplify conversations with accountants who may not be Bitcoin specialists. The watch‑only model lets you share read access to histories while keeping private keys offline and under your control.

Common Pitfalls and How to Avoid Them

• Mismatched address types: If your watch‑only wallet imports a legacy xpub but your hardware device uses native SegWit, addresses will not line up. Confirm the script type and derivation path during setup.
• Leaking xpubs to third parties: Never paste extended public keys into random websites. Treat them as confidential.
• Ignoring change addresses: When you build PSBTs, verify that change returns to your wallet. Naming conventions help you spot mistakes quickly.
• Too small gap limit: Bulk‑generated receive addresses for campaigns may fall outside the default discovery window. Adjust the gap limit and rescan.
• Unlabeled transactions: Two years later, you will not remember the purpose of a transfer. Label while the context is fresh.
• Mixing personal and business funds: Create separate accounts or wallets to keep reporting tidy and to avoid privacy cross‑contamination.

Use Cases That Fit the Canadian Landscape

Family Treasury

A family can keep a 2‑of‑3 multi‑sig for long‑term savings. Parents hold two signing devices, and a trusted relative holds one. The watch‑only wallet sits on a home computer to track savings goals and print annual summaries for financial planning, while keys remain offline.

Charities and Clubs

Nonprofits that accept Bitcoin donations can let staff view incoming receipts in a watch‑only wallet, issue acknowledgements to donors, and reconcile with accounting software, all without any ability to move funds.

Side Hustles and Small Businesses

A sole proprietor can accept Bitcoin for products or services, generate a fresh address per invoice, and monitor for confirmations in a watch‑only wallet. At month end, they export a CSV for the accountant. Spending keys stay in a separate safe place, reducing operational risk and simplifying insurance discussions.

Miners

Home or small‑scale miners can direct pool payouts to cold storage. A watch‑only wallet tracks payouts, helps label them by month, and produces summaries for cash‑flow planning, while the signing device stays in a secure cabinet.

Operational Checklist

• Confirm a strong backup for your seed phrase and any passphrase. Consider a durable medium that resists fire and water.
• Record and safely store descriptors, fingerprints, derivation paths, and account indices.
• Verify receive addresses on the hardware device screen for every deposit.
• Label transactions at the time of creation. Maintain a consistent naming scheme.
• Keep watch‑only devices patched and protected with disk encryption and a strong login password.
• Test your PSBT round‑trip with a small amount before moving significant value.
• Perform an annual recovery drill. Recreate the watch‑only wallet from your saved metadata and ensure you can synchronize transaction history.

Frequently Asked Questions

Can a watch‑only wallet ever spend my Bitcoin?

No. It holds no private keys, so it cannot sign. It can only observe and construct unsigned transactions. Spending requires your offline signer.

If my computer is compromised, are my coins safe?

Your coins are not at risk of immediate theft through a watch‑only wallet. However, an attacker might learn your balances and addresses. Protect xpubs and use privacy‑preserving connections.

What happens if I lose my watch‑only wallet?

You can recreate it from the descriptor or xpubs and metadata you saved. Losing the watch‑only wallet does not affect your ability to spend from the cold wallet, which depends on your private keys and backups.

Does this help with Canadian tax reporting?

Yes. You can export histories and labels without exposing private keys. This makes it easier to prepare records for your accountant and to keep a clear audit trail.

Should I use Taproot for my watch‑only setup?

Taproot is widely supported and offers efficiency and privacy benefits in many cases. Choose one address type per account and document it clearly, so recovery is straightforward.

Putting It All Together

A watch‑only wallet gives you the best of both worlds. You keep your Bitcoin safe in cold storage while gaining the daily visibility and tooling you need for invoices, donations, mining payouts, and personal finance. For Canadians, it also supports clean record keeping, helps separate duties inside small organizations, and fits well with a mobile lifestyle without compromising security.

If you already have a hardware wallet, you are most of the way there. Export the account’s public information, import it into a watch‑only wallet, label your activity, and test a PSBT flow. Document your descriptors and fingerprints, then store them safely alongside your seed backups. With these pieces in place, you will navigate Bitcoin with confidence, clarity, and a clean security boundary between viewing and signing.