Hardware Wallet

There are two main types of crypto wallets: software-based hot wallets and physical cold wallets. A hardware wallet, also known as a hardware wallet, is a type of cold wallet that provides the most secure way to store your cryptocurrency. A crypto hardware wallet is a physical device used to store private keys for offline access to cryptocurrencies. These devices, which often look like USB drives or key fobs, can be thought of as portable pocket vaults that digitally store important information needed to access your crypto funds. They work by storing your private keys in an external physical device.

How Do Hardware Wallets Work?

Hardware wallets can be thought of as highly streamlined computers designed to perform only a few basic and necessary functions, often containing only one or two buttons and sometimes a small screen. It itself cannot connect to the internet, which means it is nearly impossible for hackers to access its content. When users spend cryptocurrency, exchange, or otherwise send and receive assets to a wallet, the transaction must be "signed" using their private key. With a hardware wallet, transactions are signed inside the device via a so-called cryptographic bridge, a simple piece of software that facilitates the connection of the hardware wallet to the blockchain.

When a user connects their hardware wallet to a PC, a cryptographic bridge transfers unsigned transaction data to the device. The hardware wallet then signs the transactions via the private key and uploads them back to the bridge, which broadcasts them to the rest of the blockchain network as completion. During this process, the user's private keys never leave the hardware wallet.

How to Use a Hardware Wallet?

Each hardware wallet is used slightly differently, but the steps are generally the same:

1. Connect the hardware wallet to your computer or smartphone.

2. After you set up your device, you'll need to set up a PIN to add an extra layer of security to your device.

3. Your hardware wallet application will provide you with the wallet address (public key) used to send and receive cryptocurrencies.

4. When you send tokens from your hardware wallet to another address, confirm the transaction by physically entering the PIN on the device.

5. Wait for transaction confirmation.

Advantages of Hardware Wallets

The Holder Has Full Control

Hardware wallets allow you to manage your own private keys, granting you full ownership and control of your funds.

High Security

Because private keys remain offline at all times, they are immune to malware unless the device malfunctions. Since they are able to sign transactions without the private key ever leaving the device, they are more secure than software wallets.

Backup Possible

If you do lose your wallet, you can use a mnemonic phrase (also called a recovery phrase) to regenerate your private keys and restore access to your funds using a different wallet. Just like your private key, it's crucial to keep your seed phrase safe and offline, preferably in a safe.

Disadvantages of Hardware Wallets

High Cost

Hardware wallets are expensive to use.

Difficulty to Operate

The setup process for a hardware wallet can be quite tedious for beginners.

Difficult to Access

Hardware wallets are less convenient for everyday transactions because they require you to physically plug them into the device before accessing your cryptocurrencies. Hardware wallets are best for those who plan to hold assets for the long term rather than trade them.

Things to Consider When Using a Hardware Wallet

Choose a Reputable Supplier

It goes without saying that you only buy hardware wallets from reputable manufacturers, but never buy a used hardware wallet. Most hardware wallets include a clearly visible security feature, such as a holographic sticker, to alert buyers if the device has been tampered with. If anything looks inappropriate, don't use it.

Use Triple Check and Test Addresses

Although hardware wallets are considered the most secure way to store private keys, generally accepted cryptographic security best practices still apply. Never send large amounts of cryptocurrency between wallets before verifying the receiving address with a small test transfer, and do not conduct transactions with any unknown wallet addresses. If your hardware wallet has a screen, be sure to make sure the payee address on your computer screen matches the address displayed on your wallet before starting a transaction.

Save the Mnemonic Phrase

You'll also want to keep your hardware wallet and recovery phrase in a safe place. A seed phrase, also known as a recovery phrase, is a series of 12-24 randomly generated words used as an emergency backup recovery method in case a wallet is lost, deleted, or otherwise compromised. The seed phrase should be protected just like your private key, as both will give whoever possesses them full access to your property. Write your secret phrase on a piece of paper or make another non-digital record.

Pay Attention to Fire Protection and Waterproofing

Even if your assets are offline, you need to protect them from the elements. Aside from hackers and scammers, water and fire are the two biggest threats to protecting your crypto assets. It’s a good idea to use a fireproof and waterproof mnemonic phrase protector. Or keep your hardware wallet and mnemonic phrase in a fireproof safe.