Investing in cryptocurrencies is widely known to come with risks due to the volatile nature of the crypto market, regulatory challenges, and incidents of hacking, scams, and fraud. According to Chainalysis’ report on cryptocurrency-related crimes in 2022, approximately $1.9 billion worth of cryptocurrency was stolen through hacking and fraudulent activities, compared to under $1.2 billion in 2021.
Safely storing and managing cryptocurrency assets presents its own challenges, and traders must 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. This provides 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 explore what a hardware wallet is, how to use one, the benefits of hardware wallets compared to software wallets, and answer the question of whether you should keep your crypto coins in a hardware wallet. Additionally, we will provide information on the available hardware wallets for storing your crypto assets securely.
What is a crypto hardware wallet?
Crypto wallets can be divided into two categories: hot wallets and cold wallets. Hot wallets are software-based wallets connected to the internet, while cold wallets are physical devices. Cold wallets, particularly hardware crypto wallets, are considered more secure because they are not connected to the internet and are not exposed to potentially vulnerable software and web viruses. Hardware wallets are among 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 nonfungible tokens (NFTs). Hardware wallets do not actually store the cryptocurrency itself; instead, they store the private keys that grant access to the stored digital assets.
Most hardware wallets support popular digital assets such as 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
Software wallets offer convenience and ease of use, while hardware wallets are known for their secure storage. Understanding the differences between these two options, considering your specific requirements as a user, and assessing the level of custody you need for your digital assets can help you make an informed choice about which type of wallet to use.
How does a hardware wallet work?
To understand how a hardware wallet works, it is essential to have some knowledge about crypto wallet keys.
Cryptocurrency data resides on the blockchain, and crypto wallets store the information needed to access and manage that data. Unlike traditional fiat money, there are no physical coins or notes; ownership of assets is determined by the data on the blockchain.
Every crypto wallet has a pair of keys: a private key and a public key. The public key is similar to a bank account number and can be freely accessed by anyone. The private key, on the other hand, is like an ATM pin code and must be kept secure by the user.
Private keys grant access to cryptocurrency funds and must be safeguarded by the owner. They are unique combinations of letters and numbers that function as digital signatures or passwords, allowing 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, which makes them vulnerable to scams, hacks, and other security threats if the exchange is compromised.
Hardware wallets, on the other hand, give users full control and self-custody over their digital assets. Users hold their private keys and are not dependent on third-party custodians or exchanges. To engage in cryptocurrency transactions using a hardware wallet, the private key must 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 transaction to the blockchain network. Importantly, the user’s private key never leaves the hardware wallet during this process, ensuring safety and security.
How to use a hardware crypto wallet
The exact steps for using a hardware wallet may vary slightly depending on the specific device. Users should refer to the manufacturer’s instructions and follow security practices to learn how to use their particular hardware wallet. However, here are some common steps to understand the process:
Step 1: Purchase and install software
Acquire a crypto hardware wallet from reputable manufacturers such as Ledger, Trezor, or Ngrave, or their authorized resellers. Ensure that the device is sealed and tamper-free. Visit the official website of the hardware wallet manufacturer and download and install the wallet software on your desktop or mobile device. Make sure to check the device specifications, such as the operating system and processor requirements.
Step 2: Connect the hardware wallet
Connect the hardware wallet to your 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. 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 regaining access to funds if the hardware wallet is lost or damaged.
Step 3: Add funds and transact
Within the wallet software, find 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 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
After confirming the transaction details on the hardware wallet, you 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.
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 gained popularity among crypto enthusiasts, investors, and large-scale holders. Leading brands in the market 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. Some hardware wallets, like Ledger, even offer staking and other earning opportunities through their Ledger Live app.
The superiority of hardware wallets in securing cryptocurrencies became even more evident in 2022 due to the debacles faced by crypto exchanges such as 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 familiar with the crypto space, the saying “Not your keys, not your crypto” is well-known. 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.