A hardware wallet is a physical device that stores and protects your bitcoin’s private key in an offline mode. They are a form of cold storage and are typically small devices that connect to a computer or mobile phone via USB or Bluetooth. Hardware Wallets are designed to provide an additional layer of security for storing bitcoin, as the private keys are stored offline and are not directly accessible to hackers or malware.
Personal asset management is often disregarded or left to the control of others, as usually happens with stocks or other commodities. The good news with Bitcoin is that you can be your own bank and manage it directly without intermediaries. You can buy, sell and withdraw bitcoin from a platform to your own wallet, but you must take full responsibility for its administration and security. Hardware wallets were designed to allow self-sovereign individuals to bypass online threats and secure their funds in a practical and affordable way. Here’s your guide to learning about hardware wallets and how they can benefit your asset’s security.
How Do Hardware Wallets Work?
Bitcoin funds live on the blockchain and you need a private key to unlock access to yours. The private key is the only tool you have that proves ownership of those funds in case, for instance, you lose the PIN or the device where you initially set up the wallet. Whoever holds the private key of an address owns the bitcoin stored at that address. For this reason, wallets’ private keys are crucial and should be maintained with extreme care and safety; hardware wallets are among the most secure options for doing that.
Hardware wallets typically connect to a computer via USB or bluetooth through a web, mobile, or desktop app. Air-gapped wallets are even more secure options as they do not connect to the internet and are completely disconnected from any type of wireless communication. COLDCARD and micro USB cards are good examples of such types of wallets. They allow you to digitally sign and verify transactions offline, drastically reducing the risk of handing the funds over to online attackers.
The internet application allows you to monitor your bitcoin balances and to spend the funds, but the private keys are stored in the hardware wallet and never leave the device. When you confirm a payment, you sign the transaction within the hardware wallet and the output is sent to the app.
When accessing the hardware wallet for the first time, the bitcoin holder must take care of a series of 12 or 24 words that form the seed — or mnemonic phrase — necessary to recover the private key in case the device gets lost, damaged, or the wallet PIN is forgotten. It can never be stressed enough that the seed phrase must be protected and secured in a safe place, offline. One of the most secure options for seed phrase storage is to back it up on a steel plate. Never share it with anyone or keep it in the cloud, as it can be stolen if your computer or smartphone is compromised, and the funds can be lost with no chance of recovery.
Hardware wallets secure your private key using a protected microcontroller — a compact integrated circuit, a microcomputer — where two chips are utilized. One connects to the internet, and a separate one contains the private key. This way, the private key is protected from online penetration attacks secured by EAL5+ chip technologies. Only isolation from internet-connected devices can ensure hacking thefts do not occur.
The user can use a touch screen or physical buttons to navigate through the screen and enter the PIN to access the wallet. Once the wallet is accessed, the user can confirm all transactions using the device, including confirmation of addresses where to send the bitcoin.
It’s always worth practicing with small transfers of funds from your cold storage to gain some experience, as using cold wallets can be intimidating at the beginning.
- First, you must plug the device into your internet-enabled computer, connect the relevant wallet software account and unlock it with your PIN.
- Once you initiate a transaction online, this is transferred temporarily to the offline device, which can be a USB drive, a compact disk, a hard drive, paper, or an offline computer.
- The transaction is digitally signed to prove ownership before being transmitted to the online network and confirmed.
The private key never comes into contact with an online server during the signing process; therefore, even if online hackers detect the transaction, they cannot access the private key used for it because it is protected offline.
Read more >> How To Use A Hardware Wallet
Why You Need A Hardware Wallet
Unfortunately, bitcoin theft occurs regularly because owners have been negligent with their private key management or keep funds exposed to an internet connection. If malicious actors get access to a user’s private key through online hacking, they would steal it, insert it in their own wallet and move the honest user’s funds there. Nothing can be done to retrieve the funds because only the private key proves ownership and gives control over the bitcoin holdings.
The hardware wallet helps prevent such incidents and dramatically reduces the chance of having your bitcoin stolen by working offline. Although hot wallets are more convenient and straightforward, they are better suited for small transactions, and it’s like having a checking account or cash in your pocket. Hardware wallets, in comparison, are a better fit for secure, long-term storage of bitcoin, like a savings account or cash in a vault.
Hardware wallets’ prices range from as little as $50 to over $300, depending on the features and level of security you are seeking. However, once your bitcoin stack becomes substantial, it’s worth considering the purchase of a hardware wallet for more peace of mind. We always think that hacking through the exposure of recovery phrases online will never occur to us, but there’s never such a thing as being too careful with your funds.
Benefits
It should be clear by now that hardware wallets are among the most secure methods to minimize threats such as major data breaches at cryptocurrency exchanges or malware that exploits vulnerabilities in mobile and desktop operating systems. Here are hardware devices’ benefits worth considering when choosing a wallet:
- Security: Most computer viruses are designed to attack system software, but they can’t compromise the security of a hardware wallet device that operates offline. The private key always remains unexposed since you will only be required to enter it on your encrypted hardware device and never on online software that can be compromised. If you are asked to enter the seed phrase or private key online, you should assume it is on a fraudulent website.
Moreover, hardware wallets provide three or more levels of security access. PIN encryption, a passphrase on the website, biometric login, and a seed phrase ensure that your device is extremely difficult to hack. Hardware wallets allow you to be the self-sovereign Bitcoiner, control your own private keys and funds.
- Reliable backup: A hardware wallet’s backup primarily occurs through a seed phrase (or recovery phrase) that allows you to regenerate your private keys in case you lose the device or it gets damaged. You can use the same phrase on another wallet to restore access to your funds; therefore, you should take extra care to ensure the seed phrase is safely stored offline.
- Redundancy: Hardware wallets are redundant, which is a necessary feature for your ability to access your funds at all times via Bluetooth or a USB on multiple devices and computer operating systems. The physical device can also be replaced, and your funds accessed in other wallets as long as you safely store and still own your private key/seed phrase.
Drawbacks
Although hardware wallets cannot be hacked, and their private keys are protected offline, they still require security measures to prevent them from being damaged, lost, or stolen. You may lose your bitcoin if you misplace your device or forget your PIN code or recovery seed.
- Accessibility: hardware wallets are considerably less flexible than online wallets, as you need to have the physical device with you to move your bitcoin in and out of your wallet.
- Price: An initial up-front investment is required to buy the device, so the amount of bitcoin stored must be worth it. The wallet’s price becomes irrelevant if you have a significant sum of bitcoin to protect.
- Deterioration: Your hardware wallet may deteriorate and usually comes with a limited warranty of a couple of years; therefore, you might have to buy a new device with your own money if it gets damaged. Always make sure your private keys are safely stored and can be retrieved through a seed phrase, or your money may be lost. You can buy a new device — even from your hardware wallet manufacturer’s competitor — and access it with your seed phrase.
Best Practices When Using A Hardware Wallet
When Buying
Over the years, there have been reports of malicious shipments that can lead you to lose your funds if the device you buy is compromised. Always buy a hardware wallet from a trusted source; there’s nothing safer than the manufacturer’s website. If you are buying from resellers like Amazon or eBay, always make sure you are buying from the manufacturer’s official presence there. Do not buy second-hand devices to save money, as they could have been tampered with before shipping and the reseller might compromise it and steal your funds once you transfer bitcoin there.
Back Up The Seed Phrase
There are several ways to backup your seed phrase; however, every method has flaws that should be considered carefully before choosing.
One thing is sure: never store your recovery phrase online or in the cloud. That means avoiding taking a picture of the phrase, keeping it through a note-taking app or any service that gets synced to the cloud, as it may be compromised, putting your funds at risk of being stolen.
You should consider protecting your wallet and the seed phrase from destruction if there is a fire in the place where you store the key. You may also ask yourself if you have a backup stored elsewhere to recover your funds if a fire or other dramatic event destroys your key. Provided that an intruder doesn’t steal your recovery phrase in any form it’s stored, backing it up on a steel plate is always a better option in case of natural disasters as it doesn’t perish as easily as paper.
For enhanced security, you can use a 25th word to add to the 24-word seed phrase for an extra layer of protection for your cold storage device. It’s also worth considering a multisig solution requiring more than one set of private keys to sign off a transaction. This adds another layer of security, specifically if one set of private keys is compromised.
Sending And Receiving
Sending and receiving bitcoin works similarly to transactions executed with a web or a desktop wallet. The main difference is that you’ll need to take an extra step, connect the physical device to the online platform, and confirm the transaction on the device when sending the funds. Always double-check that the address is correct on both the sender and receiver tools to avoid potential malware from altering the wallet address when copy-pasting, thus tricking a user into redirecting their bitcoin to malicious actors.
Using a different public address every time you move your bitcoin is recommended for better operational security (OPSEC). It makes it harder to trace all your transactions to one device and enhances your privacy.
Storing The Wallet
The same safety measures recommended for protecting your seed phrase apply to the physical device. Ultimately, no one wallet solution is 100% secure; however, hardware wallets are the most secure option for most. Coupled with extra security precautions like multisig, deep-cold storage, security features, and best practices, hardware wallets can offer peace of mind to the bitcoin holder.
FAQs About Hardware Wallets
How Safe Are Hardware Wallets?
Since they operate offline, hardware wallets are considered safe to protect a user’s private key. However, even the most secure devices are managed by a human who must apply best practices and avoid all negligence, which could be costly if one’s private keys are misplaced.
Which Hardware Wallet Is The Best?
New innovative wallets are produced regularly to help users safeguard their funds. Therefore, it’s difficult to keep up and determine which hardware wallet is the best. Trezor and Ledger are popular options, along with COLDCARD and Jade, which are bitcoin-only hardware wallets and are generally better options to align with Bitcoin ethics and security focus.
What Are The Risks Of A Hardware Wallet?
While a hardware wallet cannot be hacked through online malware, attackers can still gain access to your wallet through the following means:
- Phishing scams occur when scammers attempt to trick users into sending them private keys — or seed phrases. It’s essential to remember never to enter the seed phrase online, not even when a request looks genuine. The seed phrase must only be entered in exceptional cases on the physical device.
- The $5 wrench attack is a typical expression to indicate someone using physical force to attempt to take control of your bitcoin. The solution is never to tell anyone how much bitcoin you have to avoid instigating temptation in potential attackers. It’s also advised to consider a multisig setup for an extra layer of security.
- Altered and tampered-with hardware wallets during shipping have been reported over the years. Also, fake wallets have been sent to users to phish private key details. The best way to protect yourself from such threats is to purchase the device from authorized sellers, best if it’s the manufacturer.
Is A Hardware Wallet Necessary?
A hardware wallet is not essential, as there are other ways to protect your private keys safely, as we’ve highlighted in the cold storage article. However, it is the most popular and practical method recommended for the average non-techie bitcoin hodler.
What Happens If The Hardware Wallet Dies?
Deterioration of your hardware wallet is likely to occur over the years. If your seed phrase is protected and available, you can acquire a new wallet and use the existing recovery phrase to access your funds.
Can You Get Hacked With A Hardware Wallet?
Hardware wallets are designed to store bitcoin private keys offline and are, therefore, impossible to hack and are not vulnerable to malware. However, you should always take extra care when plugging your hardware wallet into a computer. If this has been compromised, there is a risk when you attempt to send bitcoin because a virus could change the destination address and you may approve the transaction unwittingly. To offset such a threat, you could take the following precautions:
- Before the transaction: you should preferably connect your hardware wallet to a dedicated computer or on a more secure OS with less chance of a virus affecting the device.
- During the transaction: carefully verify the transaction address is correct on the hardware wallet before sending.
Can A Hardware Wallet Be Banned?
While custodial wallets are susceptible to authority’s intervention, noncustodial hardware wallets cannot be banned, similar to cryptography or other technologies. However, authorities can make it harder for sellers to produce them and for users to receive them anonymously. More authoritarian governments could detect the address of the hardware wallet’s shipment and coerce you to hand over the device.
How Much Bitcoin Justifies Buying A Hardware Wallet?
Considering that a hardware wallet can cost anywhere between $50 and $200+ on average, the amount of your stack should be over the cost of the device, or if you plan to increase your accumulation to justify the purchase.
Summary
Regardless of which hardware wallet you choose, you should remember to keep your recovery seed phrase safe because you can use it to restore your keys if your device is ruined or lost and you must get a new one. Keep a secure copy of the recovery phrase somewhere safe, definitely not online and not in your cloud or disk drive. Follow the best practice recommended in this guideline to be on the right path to securing your funds.
Although Bitcoin’s 14 years of existence sounds like a lifetime, the technology is still considered in its infancy and will evolve over time. If you’re unsure about your bitcoin protection, you may ask yourself if you believe in the digital asset in the long run. If that’s the case, then it’s worth investing time and money in a high-security strategy, which would likely involve acquiring a hardware wallet. If you believe bitcoin will be worth much more in the next few years, a small investment now to secure your future should definitely be an option.
