It is well known that investing in cryptocurrencies comes with risks given the volatility of the crypto market, regulatory dilemmas and high-profile incidents of hacks, scams and fraudulent activity. According to Chainalysis’ semi-annual 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 less than $1.2 billion at the same point in 2021.
Safely storing and managing cryptocurrency assets has its own set of challenges and traders should 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 period of time.
This article discusses what a hardware wallet is, how to use one, and the benefits of hardware wallets vs. software wallets, and it answers the lingering question: should you store your crypto in a hardware wallet? In addition, there is information about the available hardware wallets to safely store your crypto assets.
Related: How to mitigate the security risks of 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 because they are not connected to the internet and do not interact with potentially vulnerable software and web viruses. Among the cold wallets, hardware crypto wallets are considered one of the safest options to store cryptocurrencies.
A hardware wallet is a physical device that usually resembles a USB drive or small plug-in device designed to securely store cryptocurrencies and other digital assets such as non-fungible tokens (NFTs). Hardware wallets don’t actually store cryptocurrency; instead, they store the private keys that allow access to the stored digital assets.
One can check the price, model and specifications as per requirement. Bitcoin (BTC); Ether (ETH); stablecoins such as Tether (USDT) and USD Coin (USDC); and other popular digital assets such as Ripple’s XRP (XRP) and Litecoin (LTC) are supported by most hardware wallets.
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, user requirements and the level of digital asset custody needed can help users make informed choices about their wallet preference.
How does a hardware wallet work
Before understanding how a hardware wallet works, it is essential to have some knowledge of 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 similar to a bank account number and is freely accessible to anyone. However, the private key is like an ATM PIN and must be secured by the user.
Private keys provide access to the cryptocurrency funds and must be secured by the owner and not shared with anyone. They are a unique combination of letters and numbers, which function as digital signatures or a password that allow access 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 hand over custody and control of their private keys and digital assets to the exchange, using credentials themselves provided by the CEX. This means that users trust the exchange to securely store and manage their funds on their behalf, making them vulnerable to scams, hacks, and other security threats in the event that an exchange is attacked.
Hardware wallets, on the other hand, give users full control and self-custody over their digital assets. Users keep track of their private keys and do not rely on third-party custodians or exchanges. To perform 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, 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.
Below are some general steps to understand how to use hardware wallets:
Step 1: Purchase and install software
Get a crypto hardware wallet from well-known and reliable manufacturers such as Ledger, Trezor, and Ngrave — and/or their authorized resellers. Make sure it is sealed and cannot be tampered with. Visit the official website of the hardware wallet manufacturer and then download and install the wallet software on desktop/mobile devices. Be 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 supplied USB cable or the appropriate wireless connection (Bluetooth or NFC). Follow the on-screen instructions to initialize the hardware wallet. This includes 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 money and make transactions
In the wallet software, find the option to receive or deposit cryptocurrencies. Copy the displayed public address or scan the QR code to add the desired amount of cryptocurrency to this public address from an exchange or other wallet.
To send cryptocurrencies from the hardware wallet, select the option to send or transfer money and enter the address of the recipient and the amount to be sent. Confirm the transaction details on the hardware wallet screen.
Step 4: Confirm, sign and verify transactions
After confirming the transaction details on the hardware wallet, you will be asked to provide additional authorization by entering a PIN or password. The hardware wallet then signs the transaction with the private key stored in it and the money is traded. Track the progress of 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 popular among crypto enthusiasts, investors, and crypto whales. These include wallets such as Ledger and Trezor, which provide a secure and easy-to-use solution for storing and managing digital assets. Other common names in the market include: Ellipal, CoolWallet, SafePal, and Ngrave. In addition, 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 with 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 vendors like Ledger and Trezor experienced unprecedented sales as crypto holders scrambled for storage security and reliability.
Are hardware crypto wallets safe
For anyone who has been in the crypto space long enough, there is a common saying: “Not your keys, not your crypto.” Essentially, 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. While no security measure can guarantee complete security, hardware wallets provide additional layers of security and safeguards for storing cryptocurrencies.