Hardware wallets store cryptocurrencies offline or “cold”, meaning they are not connected to the internet in any way. These are physical devices that typically resemble a USB stick. The mechanism of operation of hardware wallets resembles simplified computers that were designed for one purpose only. With a hardware wallet, cryptographic transactions are digitally signed on the device with a private key and then securely transferred over a bridge to the blockchain. Hardware wallet prices start at around $30 and can go up to around $400. They provide users with complete and secure control over their digital assets, but in some cases they may be less convenient than mobile or “hot wallets”.
If a participant in the digital currency sector has decided to self-custody some or all of its cryptographic assets, it is absolutely necessary to use all available protection measures to secure digital assets. When used correctly, hardware wallets are an excellent way to store and protect your coins.
If you are reading this, you are probably aware of what a hardware wallet is, but you may have additional questions about how hardware wallets work or why they are more secure than web or software-based wallets. We’ll clear up in advance these and many other burning questions about these offline hardware solutions that are designed to protect your assets like no other method currently available.
What are hardware wallets?
Hardware wallets securely store a digital currency user’s private keys in an offline or “cold” mode, which means they are not constantly connected to the internet, except when the user needs to briefly connect the wallet to a computer to complete a planned transaction . Unlike hardware wallets, online crypto wallets are “hot” or constantly online, giving hackers more potential attack vectors to steal funds from the person who controls the wallet. For this reason, it is widely accepted that hardware wallets are considered a very secure option for keeping crypto assets out of the wrong hands.
New or more casual users of cryptocurrencies may not want to bother with things like private keys or custody of digital assets, and for this reason many cryptocurrency exchanges offer wallet services on behalf of account holders (known as custodial wallets). However, this means that in this case, the exchange user transfers his private keys to a third party. Hardware wallets, on the other hand, allow users to take the security of their private keys into their own hands with physical hardware. This type of wallet, which most often resembles USB flash drives, usually has a small variety of forms and functions, and their sole purpose is to sign cryptocurrency transactions offline and protect users’ private keys.
How do hardware wallets work?
Hardware wallets are most often seen as very simplistic computers that are only designed to perform a few basic but necessary functions, often containing little more than one or two buttons and sometimes a relatively small screen. Hardware wallets themselves are devoid of Internet connectivity, which in practice means that hackers have virtually no way to access the contents of such devices. When a user spends, exchanges, or otherwise sends and receives assets to/from any wallet, the transaction must be “signed” with a private key. In the case of a hardware wallet, transactions are signed on the device itself via a so-called cryptographic bridge. It is nothing more than a simple piece of software that makes it easy to connect your hardware wallet to the blockchain.
When the user connects his hardware wallet to the PC, the cryptographic bridge transmits unsigned transaction data to the device. The hardware wallet then signs the transactions with the private key and sends them back to the bridge, which then shares them with the rest of the blockchain network as authenticated data. From a practical point of view, it is extremely important that at any moment of the process described above, the private key remains with the hardware wallet. This means that the key will not leave the wallet.
Why do people use hardware wallets?
In general, hardware wallets are preferred by more advanced and security-minded digital currency users, as well as those who have a significant amount of crypto assets to protect. This range of preferences demonstrates the high level of security that the hardware wallet offers to those who want to take care of themselves. In fact, crypto best practices generally state that for broad security reasons, a user should never store large amounts of cryptocurrency in a “hot” online wallet.
Best practices when using a hardware wallet
For the most part, using a hardware crypto wallet just requires a common sense approach along with standard good crypto security practices.
Be careful where you buy your hardware wallet from
In any case, the user should only buy a hardware wallet from a reputable manufacturer. In particular, the purchase of used hardware wallets is not recommended. Most hardware wallets include a clearly visible security feature on the package, such as a holographic sticker, alerting the potential buyer if the device has been tampered with. If something looks suspicious, do not use this wallet under any circumstances.
Always triple-check and test addresses when transferring large amounts of cryptocurrencies
Even though a hardware wallet is widely regarded as by far the most secure way to store private keys, generally accepted security best practices in the cryptocurrency sector still apply. Never send large amounts of crypto between wallets before verifying the recipient’s address with a small test transfer, and don’t transact with unknown wallet addresses. If your hardware wallet has a screen, always make sure the recipient’s address on the computer screen matches what the wallet displays before you initiate a transaction.
Protect your wallet and seed phrase
For obvious reasons, every hardware wallet owner will want to store their device in a safe place. A similar situation will also take place with the seed phrase. The seed phrase, also known as the recovery phrase, is a series of 12-24 randomly generated words that are used as a method of emergency backup recovery in case of loss, deletion or other destruction of the hardware wallet. Initial phrases should be protected with the same level of security as the private key. This is because both will give anyone who owns them full access to your digital assets. Keep your secret sentence on a piece of paper or create some other non-digital notation.
Protection from the elements
Even if you keep your assets offline, you need to protect them from the elements. Next to hackers and scammers, fire and water are the two biggest threats to protecting your digital currencies. It’s a great idea to use a fire retardant and waterproof protector. If that’s too much of a hassle, store your hardware wallet and seed phrases in a fireproof vault.
Using multiple wallets for multiple use cases
From a practical point of view, one potential disadvantage of a hardware wallet is the inability to use this type of wallet for users who often pay for purchases with cryptocurrencies. Fortunately, nothing stands in the way of using multiple cryptocurrency wallets. In fact, there are many benefits to doing so.
A hardware wallet should be thought of as a bank vault, where piles of gold bars and large bags with US dollar signs are kept behind giant steel doors. This is perfect from a security point of view, but not as efficient in terms of spending money. Using a mobile wallet in tandem with a hardware wallet gives users the best of both worlds, making it easier to access funds without compromising too much on security.