Let’s create a hypothetical scenario. You just bought cryptocurrency through an exchange. However, after a point, you want to move your funds into a cryptocurrency wallet. When we talk about a cryptocurrency wallet, we aren’t talking about the leather wallet that we carry everywhere. Instead, a cryptocurrency wallet allows users to send and receive cryptocurrency. More importantly, it stores the user’s private key and the public address. Most exchanges have digital wallets that store your cryptocurrency. Now, as mentioned earlier, the wallet gives you access to your public key and private key. The private key should not be shared with anyone and ideally kept offline. Since hardware wallets fulfill both these conditions, they have gained in popularity.
The Two Types Of Wallets
Cryptocurrency wallets can be divided into two broad categories – hot wallets and cold wallets. Hot wallets are connected to the internet and are easy to use, allowing users to transact easily. However, while convenient, these wallets are vulnerable as they can frequently be targeted and hacked, leaving your cryptocurrency vulnerable. Examples of hot wallets are mobile wallets (Electrum), exchange wallets, and desktop wallets (Exodus).
Cold wallets are offline wallets, keeping them safe from any attempted hacks. As a result, cold wallets are ideal for users who want to store their cryptocurrency without having to constantly fret over it being stolen. Hardware wallets combine the ease of transactions of hot wallets with the heightened security of cold wallets.
What Is A Private Key?
So what is a private key? A private key is just a string of letters and numbers required to move or spend your funds. A private key acts like a key securing your funds; you cannot spend your cryptocurrency without your private key as it is needed to unlock your funds before spending them. If your private key is compromised, then your funds can be easily stolen. If you manage to lose your private key, then you lose access to your funds too. Therefore, your private key has to be kept a secret at all costs as it is essential.
Small wonder then that private keys are a constant target of hackers and scammers who employ tactics such as phishing or utilize malware to gain access to them.
What Is A Hardware Wallet?
A hardware wallet stores your private keys securely. Hardware wallets are offline wallets and are considered safer than desktop, mobile, or exchange wallets because they are not connected to the internet. In addition, because a hardware wallet is offline, it dramatically reduces the risk of hacking or any other malicious attempt to steal funds as it is impossible to access the device remotely.
Hardware wallets store the private keys securely and can be plugged into a computer when you want to access your funds. Once plugged in, the user can view their balance, initiate a transaction, or receive funds. As a result, hardware wallets greatly reduce risks that users would have to deal with if they were using an online or exchange wallet. Although hardware wallets are not entirely secure, they offer far greater security than the other options.
A user can create a transaction and send it to the hardware wallet. The transaction then needs to be signed by your password/pin code. The user is then prompted to confirm whether the amount and the address are correct. Once the transaction is signed and sent back to the software, it is broadcasted to the network.
Best Hardware Wallets For Crypto
Trezor and Ledger are the two biggest hardware wallet makers.
- Trezor: Trezor was built by SatoshiLabs and was the first legitimate and secure Bitcoin hardware wallet.
- Ledger: The Paris-based Ledger is probably the most popular hardware wallet company in the world. Ledger Nano X and Ledger Nano S are the two most popular models.
Why Are Hardware Wallets Important?
Private keys stored on wallets that are connected to the internet could potentially put your funds at risk, leaving them vulnerable to hacking attempts and malware, which could drain user funds from the wallet. Hardware wallets securely store your private keys, which helps you access your funds stored on the blockchain. This can be defined as the primary function of a hardware wallet, keeping your private keys away from the internet safe and secure from hackers.
Hardware wallets also let you sign and confirm transactions. The private key is unique and impossible to copy, and it is used to sign and confirm your transaction on the blockchain. Private keys on hardware wallets are secured by a PIN, with the addition of an optional passphrase. This double-layered security ensures that even if you lose access to your hardware wallet, no one can access what’s inside. The seed phrase can be used to regenerate the private key if you lose access to your hardware wallet or misplace it. The seed phrase allows you to move your private key to another hardware wallet. This is why it is crucial to generate your seed phrase and ensure that it is stored in a safe and accessible way.
Advantages Of Hardware Wallets
Using a hardware wallet has several advantages, some of which are
- Security – Hardware wallets are more secure than software wallets and online wallets and are preferred by users who hold their cryptocurrency. A hardware wallet secures the user assets even if the computer it is connected to is not secure, providing an added layer of security against attacks and intrusions.
- Hold multiple cryptocurrencies – A single hardware wallet can work with multiple blockchains, allowing you to hold various cryptos in one hardware wallet. They can all be backed up using a single recovery phrase.
- Convenience – Hardware wallets allow you to access your cryptocurrencies from anywhere. Hardware wallets are small, easy-to-carry devices that can be safely plugged into any device and access your funds.
- The private key is secured – Your private key is completely secure in a hardware wallet and is used only through encrypted hardware devices,
- Wallet-to-wallet trading – You can trade directly from your wallet, allowing you to maintain custody of your assets at all times. You also avoid depositing your assets in an exchange wallet, allowing you to save time and avoid exchange fees.
Disadvantages Of Hardware Wallets
Hardware wallets are probably the most secure mode of safeguarding your cryptocurrency. However, there are some drawbacks as well. Hardware wallets do not have the same convenience as a mobile or exchange wallet, and they can be quite cumbersome to use. Although there has not been any successful real-world hack of a hardware wallet and any vulnerabilities are quickly patched, attacks against popular hardware wallets always remain a possibility.
Another risk that users of hardware wallets face are supply chain attacks, which could compromise the wallet’s security. Supply chain attacks occur when malicious actors acquire hardware wallets before delivery to the user. These actors could tamper and compromise the security of the wallet.
Hardware wallets are a highly secure way of securing your funds, offering layers of security, making it extremely difficult for hackers to access them. They offer much more security than software and exchange wallets that are connected to the internet. While they may have some limitations, the pros of using hardware wallets far outweigh the cons.
Before buying a hardware wallet, it would be prudent to research the available options when it comes to hardware wallets, as each hardware wallet has its unique features.