Investing in cryptocurrencies is widely known to be associated with risk, given the crypto market’s volatility, regulatory dilemmas 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.
Safely storing and managing cryptocurrency assets has its own set of challenges, and traders must educate themselves on the best options. As a type of cold storage, a crypto hardware wallet is a physical device designed to securely store cryptocurrencies offline, providing additional layers of security for those 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 and the benefits of hardware wallets vs. software wallets, and it will answer the lingering question: Should you keep your crypto coins in a hardware wallet? Additionally, there’s information on the available hardware wallets to store your crypto assets safely.
Related: How to mitigate the 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 connected to the internet, while cold wallets are physical devices. Cold wallets are considered a more secure storage option than hot software wallets, as 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 to store cryptocurrencies.
A hardware wallet is a physical device typically resembling a USB drive or a small plugin device designed to securely store cryptocurrencies and other digital assets such as nonfungible tokens (NFTs). Hardware wallets do not actually store cryptocurrency; instead, they store the private keys that allow access to the stored digital assets.
One may check the price, model and specifications as per requirement. Bitcoin (BTC); Ether (ETH); stablecoins like Tether (USDT) and USD Coin (USDC); and other popular digital assets like Ripple’s XRP (XRP) and Litecoin (LTC) are supported by most hardware wallets.
Hardware wallet vs Software wallet
While software wallets allow ease and convenience, hardware wallets are known for their secure storage. A good understanding of the differences among the two options, user requirements and the level of digital asset custody needed can help users make informed choices on their wallet preference.
How does a hardware wallet work
Before understanding how a hardware wallet works, it is essential to have some know-how into crypto wallet keys.
Public and private crypto wallet keys
Cryptocurrency data lives on the blockchain, and crypto wallets store this information. There is no hard money like fiat, and this data on the blockchain determines one’s ownership of the assets.
Every crypto wallet has a pair of keys to access it — a private key and a public key. The public key is akin to a bank account number and is free to access by anyone. The private key, however, is like an ATM pin code and must be secured by the user.
Private keys give access to the cryptocurrency funds and need to be safeguarded by the owner and should not be shared with anyone. They are a unique combination of letters and numbers, functioning as digital signatures or a password that grants 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 while themselves using login credentials provided by the CEX. This implies that 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 in the event an 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. A crypto bridge facilitates the connection between the hardware wallet and the blockchain.
The hardware wallet uploads the signed transaction to the bridge, which in turn 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, thereby 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 can refer to the manufacturer’s instructions and follow security practices to learn how to use a particular hardware wallet.
The following are some common steps to understand how hardware wallets can be used:
Step 1: Purchase and install software
Obtain a crypto hardware wallet from known and reliable manufacturers such as Ledger, Trezor and Ngrave — and/or their authorized resellers. Ensure that it is sealed and tamper-free. Visit the official website of the hardware wallet manufacturer, then download and install the wallet software on desktop/mobile devices. Make sure to read the recommendations for the device specifications — operating system, processor, etc.
Step 2: Connect the hardware wallet
Connect the hardware wallet to a desktop/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. This 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 ever 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 in order 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, and enter the recipient’s address and the amount to send. Confirm the transaction details on the hardware wallet’s screen.
Step 4: Confirm, sign and verify transactions
Upon confirming the transaction details on the hardware wallet, one will be prompted to 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. Verify that the transaction has been confirmed and added to the blockchain.
It is important to remember to securely disconnect the hardware wallet from the desktop/mobile device after completing the transaction and ensure safekeeping.
Popular hardware wallets
Hardware cryptocurrency wallets have become increasingly sought after by crypto enthusiasts, investors and crypto whales. These include wallets such as Ledger and Trezor, which offer a secure and user-friendly solution for storing and managing digital assets. Other common names in the market include: Ellipal, CoolWallet, SafePal and Ngrave, among others. Furthermore, certain hardware wallets like Ledger offer staking and other earning opportunities through their Ledger Live app.
The superiority of hardware wallets in securing cryptocurrencies became even more apparent in 2022 due to the crypto 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 unprecedented sales as crypto holders rushed for storage safety and reliability.
Are hardware crypto wallets secure
For anyone who has been in the crypto space long enough, there is a common saying: “Not your keys, not your crypto.” In essence, this phrase serves as a call to action for cryptocurrency users to take control of their own security and ensure the protection of their 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 one’s digital assets and cryptocurrencies. Although no security measure can guarantee complete safety, hardware wallets provide additional layers of security and safeguards for storing cryptocurrencies.