Hardware Wallet: Everything to Know
By Beluga Research September 5, 2023
- Hardware wallets are secure offline devices that store private keys, and offer protection against hacking and unauthorized access
- These wallets are physical devices that are typically made of plastic and metal
- Hardware wallets have security features like secure element chips, PIN codes and passphrase encryption
- User-friendly interfaces, support for multiple cryptocurrencies and backup and options are key features of hardware wallets
Hardware wallets are secure offline devices that store private keys, and offer protection against hacking and unauthorized access. A hardware wallet is also called a cold wallet or hardware security module (HSM). Unlike a software wallet, a hardware wallet does not have a component that is constantly connected to the internet. A hardware wallet shows a user their current crypto holdings. It also allows a user to send, receive or trade cryptocurrencies.
A Brief History
Hardware wallets originated in the early days of Bitcoin. As Bitcoin gained traction, early adopters sought enhanced security for their digital assets. The first hardware wallet to enter the market was Trezor, developed by SatoshiLabs in 2013. Trezor introduced the concept of using a separate device to securely store private keys away from online threats.
Following Trezor's success, other companies developed their own hardware wallets. In 2014, Ledger, a prominent player, launched its first product, the Ledger Nano. The Nano gained popularity for its compact design and robust security.
Since then, hardware wallets have evolved. New models regularly enter the market. Today, reputable companies offer a range of hardware wallets with different features and security measures.
Hardware Wallet Crypto: Everything to Know
- Security Features: Hardware wallets include secure element chips, PIN codes, passphrase encryption and two-factor authentication (2FA) for cryptocurrency security. Secure element chips securely store private keys and perform cryptographic operations. PIN codes and passphrases add security layers by restricting device access and encrypting private keys.
- Offline Storage: Hardware wallets excel at offline storage of private keys. By keeping keys away from internet-connected devices, they mitigate the risk of remote hacking. Even if a computer or smartphone is compromised, an attacker cannot access the stored private keys. The only way the attacker could access these keys is if they got physical possession of the hardware wallet.
- Compatibility: Hardware wallets support various cryptocurrencies. Bitcoin was the first cryptocurrency that hardware wallets supported. Currently available hardware wallets support a wide range of other coins, known as altcoins. A user should determine which cryptocurrencies they want to store before purchasing a hardware wallet. They should learn whether the wallet will support those coins.
- User-Friendly Interface: Hardware wallets aim to provide a user-friendly experience. Most come with companion applications for managing cryptocurrencies. These applications offer intuitive interfaces for transactions, balance checks and firmware updates.
- Recovery Options: Hardware wallets offer robust recovery options in case of device damage or loss. During setup, users receive a recovery seed or mnemonic phrase. This seed consists of words to restore wallet access if the device is lost or damaged. A user should securely store the recovery seed in an area that is not in the same space as the wallet.
- Third-Party Integrations: Hardware wallets integrate with third-party wallets and services to improve user experience. Users can access their hardware wallet accounts through popular cryptocurrency wallets and platforms. A user should employ trusted and verified integrations to avoid account manipulation and the loss of funds.
- Choose a reputable brand and purchase the device. Popular brands include Ledger, Trezor and KeepKey.
- Connect the hardware wallet to a computer or mobile device. Then follow the instructions to set it up. Generate a new wallet and set a strong PIN code. Make sure this PIN code is not easy to guess.
- Receive and store a recovery seed. After a user purchases and sets up a wallet, the company that sells the wallet will send them a recovery seed. This is a list of randomly generated words. The user should write down the list and keep it in a secure place. If they lose or damage the hardware wallet, they can use the recovery seed to regain access to their funds.
- Provide an extra layer of security . Even if a computer or mobile device is compromised, malicious actors cannot access the user's funds. The exception is if they gain physical possession of the user's wallet.
- Securely sign transactions. When a user wants to send cryptocurrency, the transaction details are sent to the device for verification and signing using their private key. This process ensures the user's private key stays within the hardware wallet. The process minimizes the risk of attacks.
- Have a built-in display. This display allows a user to verify transaction details directly on the device. It ensures the user is sending funds to the correct recipient with the accurate amount. The display guards against phishing attacks that try to trick users into sending funds to fraudulent addresses.
- Enhanced Security - Hardware wallets keep private keys offline, reducing the risk of online attacks. Additional security measures include PIN codes and biometric authentication.
- Protection against Malware - Hardware wallets are resistant to malware. This is because they operate independently from computers and mobile devices. Private keys remain secure even if the accessing device is infected.
- Offline Storage - Hardware wallets store private keys offline, disconnected from the internet. Isolating private keys from online connectivity defends against remote attacks.
- User-Friendly Interface - Most hardware wallets have user-friendly interfaces with screens and buttons. This allows easy management for novices. A user can navigate menus, confirm transactions and verify addresses directly on their wallet.
- Multiple Cryptocurrency Support - Hardware wallets typically support various cryptocurrencies, from popular ones like bitcoin, ether and litecoin to lesser-known altcoins. Users can manage multiple cryptocurrencies in one device. This eliminates the need for multiple wallets.
- Backup and Recovery Options - Hardware wallets offer backup and recovery options to protect against device loss and damage. Users can generate a recovery seed to restore access if the wallet is lost or broken.
- Cost - Hardware wallets are more expensive than software wallets and keeping cryptocurrencies on exchanges. Prices range from $50 to hundreds of dollars. Cost is a deterrent for users with smaller amounts of cryptocurrencies.
- Physical Vulnerability - Hardware wallets are not invulnerable to physical damage or loss. Losing, stealing or damaging a hardware wallet risks permanently losing access to stored cryptocurrencies. Users must keep their hardware wallets safe and secure.
- Dependency on the Device - Accessing cryptocurrencies with a hardware wallet requires the physical device. Users may face challenges if the hardware wallet is not readily available. This makes hardware wallets inconvenient for users who engage in frequent transactions or fund management on the go.
- Learning Curve - Setting up and operating a hardware wallet involves a learning curve. Platforms and the wallet makers should educate new users about seed phrases, firmware updates and different wallet interfaces. Hardware wallet manufacturers often provide detailed instructions and support. Web forums also provide support and information to new users.
- Limited Functionality - Hardware wallets primarily focus on securely storing and managing cryptocurrencies. They may have limited functionality compared to software wallets. This makes it harder for users to engage with decentralized finance applications (dapps) and participate in certain blockchain networks.