What is an HD wallet?

An HD wallet is a crypto wallet that generates every private key and address from a single starting secret, called the seed. HD stands for hierarchical deterministic. "Deterministic" means the same seed always produces the same keys. "Hierarchical" means the keys are arranged in a tree, with branches for different accounts and purposes. Because of this, backing up the seed once backs up every address the wallet will ever create.

How does an HD wallet work?

BIP 32, the Bitcoin Improvement Proposal that defined HD wallets, describes wallets that can be shared partly or fully with different systems, each with or without the ability to spend coins. It sets out how a master key is generated from a seed and how child keys are derived from parent keys, step by step down the tree. The route a wallet takes through that tree is written as a derivation path, such as m/44'/60'/0'/0/0.

The proposal's stated purpose is a standard that can be moved between different wallet programs. In practice, the seed is usually shown to users as a list of easy-to-write words, a format defined separately in BIP 39, which turns the words into the binary seed that BIP 32 uses. That word list is the seed phrase most people know.

What is the difference between an HD wallet and a non-HD wallet?

Early wallets created each key at random and stored them in a file. Every new address meant a new key that had to be backed up again, and an old backup could miss coins sent to newer addresses. An HD wallet removes that problem, since all future keys already follow from the seed.

HD wallets also make it easy to give each payment a fresh address, which is better for privacy. That is why many bitcoin wallets show a new receiving address after each use, as explained in why your bitcoin address keeps changing. Electrum's documentation, for example, describes a "gap limit" for how many unused addresses ahead the wallet looks when it restores from a seed.

Can an HD wallet share addresses without sharing spending power?

Yes. BIP 32 allows a public branch of the tree to be shared on its own. Software holding that extended public key can generate and watch every address in an account but cannot sign transactions. That is how watch-only setups and some merchant tools work, and it is covered in what an xpub is. BIP 32 also warns that some combinations of shared keys can expose private keys, which is why wallet makers follow the published security notes.

Is my wallet an HD wallet?

If your wallet asked you to write down 12 or 24 words when you set it up, it is almost certainly an HD wallet. The words are the master backup, so anyone who sees them can recreate every address in the wallet.