Investing in cryptocurrencies is widely known to be associated with risks due to the volatile nature of the crypto market, regulatory concerns, and high-profile incidents of hacks, scams, and fraudulent activities.
According to Chainalysis’ midyear report on cryptocurrency-related crimes in 2022, approximately $1.9 billion worth of cryptocurrency was stolen in various hacking incidents and fraudulent activities, compared to under $1.2 billion at the same point in 2021.
Storing and managing cryptocurrency assets safely comes with its own set of challenges, and traders need to educate themselves on the best options available. One such option is a crypto hardware wallet, which is a physical device designed to securely store cryptocurrencies offline. It provides additional layers of security for individuals who hold large amounts of crypto and want to keep their holdings safe for a long time.
This article will discuss what a hardware wallet is, how to use one, the benefits of hardware wallets compared to software wallets, and whether it is advisable to keep crypto coins in a hardware wallet. Additionally, it will provide information about the available hardware wallets for safely storing crypto assets.
Related: How to mitigate security risks associated with crypto payments
What is a crypto hardware wallet?
Crypto wallets can be broadly classified into two categories: hot wallets and cold wallets. Hot wallets are software-based crypto wallets that are connected to the internet, while cold wallets are physical devices. Cold wallets are considered a more secure storage option than hot software wallets because they are not connected to the internet and do not interact with potentially vulnerable software and web viruses. Among cold wallets, hardware crypto wallets are considered one of the safest options for storing cryptocurrencies.
A hardware wallet is a physical device that typically resembles a USB drive or a small plugin device. It is designed to securely store cryptocurrencies and other digital assets, such as non-fungible tokens (NFTs). Hardware wallets do not actually store the cryptocurrencies themselves; instead, they store the private keys that allow access to the stored digital assets.
Most hardware wallets support popular digital assets like Bitcoin (BTC), Ether (ETH), stablecoins like Tether (USDT) and USD Coin (USDC), and other assets like Ripple’s XRP and Litecoin (LTC).
Hardware wallet vs. Software wallet
While software wallets offer ease and convenience, hardware wallets are known for their secure storage. Understanding the differences between the two options, considering user requirements, and evaluating the level of digital asset custody needed can help users make informed choices about their preferred wallet.
How does a hardware wallet work?
Before understanding how a hardware wallet works, it is essential to have some knowledge about crypto wallet keys.
Public and private crypto wallet keys
Cryptocurrency data resides on the blockchain, and crypto wallets store this information. Unlike fiat currencies, there is no physical money, and ownership of assets is determined by the data on the blockchain.
Every crypto wallet has a pair of keys to access it: a private key and a public key. The public key is similar to a bank account number and can be accessed by anyone. The private key, on the other hand, is like an ATM pin code and needs to be securely stored by the user.
Private keys grant access to cryptocurrency funds and should be safeguarded by the owner. They are a unique combination of letters and numbers that function as digital signatures or passwords, granting access to and control over the cryptocurrency holdings. Hardware crypto wallets typically store these private keys, which are required for signing transactions.
Hardware wallet self-custody
When users hold their cryptocurrencies on a centralized exchange (CEX), they essentially transfer custody and control of their private keys and digital assets to the exchange. Users rely on the exchange to securely hold and manage their funds on their behalf, making them vulnerable to scams, hacks, and other security threats if the exchange comes under attack.
Hardware wallets, on the other hand, empower users with full control and self-custody over their digital assets. Users hold their private keys and are not reliant on third-party custodians or exchanges. To engage in cryptocurrency transactions using hardware wallets, the transactions require the private key to be “signed.” This signing process takes place within the hardware wallet itself, using a cryptocurrency bridge that facilitates the connection between the hardware wallet and the blockchain.
The hardware wallet uploads the signed transaction to the bridge, which then broadcasts the signed transaction to the blockchain network. Importantly, at no point during the entire process does the user’s private key leave the hardware wallet, ensuring safety and security.
Related: What is a Bitcoin Wallet? A beginner’s guide to storing BTC
How to use a hardware crypto wallet
The exact steps and procedures may vary slightly depending on the specific hardware wallet. Users should refer to the manufacturer’s instructions and follow security practices to learn how to use a particular hardware wallet.
Here are some common steps to understand how hardware wallets can be used:
Step 1: Purchase and install software
Obtain a crypto hardware wallet from reputable manufacturers such as Ledger, Trezor, and Ngrave, or their authorized resellers. Ensure that the device is sealed and tamper-free. Visit the official website of the hardware wallet manufacturer, download the wallet software, and install it on desktop or mobile devices. Make sure to read the device specifications, such as the required operating system and processor.
Step 2: Connect the hardware wallet
Connect the hardware wallet to a desktop or mobile device using the provided USB cable or the appropriate wireless connection (Bluetooth or NFC). Follow the on-screen instructions to initialize the hardware wallet, which involves selecting a PIN or passphrase, creating a backup recovery seed phrase, and securely storing the seed in multiple offline locations. The recovery seed is crucial for restoring access to funds if the hardware wallet is lost or damaged.
Step 3: Add funds and transact
Within the wallet software, locate the option to receive or deposit cryptocurrencies. Copy the public address displayed or scan the QR code to add the desired amount of cryptocurrency to this public address from an exchange or another wallet.
To send cryptocurrencies from the hardware wallet, select the option to send or transfer funds, enter the recipient’s address and the amount to send, and confirm the transaction details on the hardware wallet’s screen.
Step 4: Confirm, sign, and verify transactions
After confirming the transaction details on the hardware wallet, provide additional authorization by entering a PIN or passphrase. The hardware wallet will then sign the transaction with the private key stored within it, and the funds will be transacted.
Track the progress of the transactions using blockchain explorers or within the wallet software, and verify that the transaction has been confirmed and added to the blockchain.
Remember to securely disconnect the hardware wallet from the desktop or mobile device after completing the transaction and ensure its safekeeping.
Popular hardware wallets
Hardware cryptocurrency wallets have become increasingly popular among crypto enthusiasts, investors, and large-scale holders. Leading brands include Ledger and Trezor, which offer secure and user-friendly solutions for storing and managing digital assets. Other notable names in the market include Ellipal, CoolWallet, SafePal, and Ngrave, among others. Some hardware wallets also offer additional features like staking and earning opportunities through their associated apps.
The superiority of hardware wallets in securing cryptocurrencies became even more evident in 2022 due to the exchange debacles of FTX, Celsius, BlockFi, and Vault, which resulted in the loss of access to billions of dollars. As a result, hardware wallet providers like Ledger and Trezor experienced an unprecedented surge in sales as crypto holders sought storage safety and reliability.
Are hardware crypto wallets secure?
For those in the crypto space, there is a common saying: “Not your keys, not your crypto.” This phrase emphasizes the importance of taking control of one’s own security and ensuring the protection of digital assets. It encourages the use of hardware wallets and other cold storage solutions to keep private keys offline and away from potential cyber threats.
Crypto hardware wallets are widely recognized as secure solutions for storing, managing, and taking custody of digital assets and cryptocurrencies. While no security measure can guarantee complete safety, hardware wallets provide additional layers of security and safeguards for storing cryptocurrencies.