What is a Hardware Wallet – The Definitive Guide
With the recent spike in interest for cryptocurrencies, many new crypto related terms are floating around the web. One of the most important terms being the hardware wallet, a confusing concept for many.
This type of wallet is designed to securely store crypto currency on a hardware device. There are many advantages to this type of wallet, particularly when comparing to similar wallets that work through computer software.
From a general perspective, hardware wallets are convenient, secure, and immune to many of the hazards other wallet types can fall victim too.
What is a cryptocurrency wallet?
Before going over hardware wallets, it is important to understand what a cryptocurrency wallet actually is. A cryptocurrency wallet does not actually store coins or currency.
Crypto wallets store the private keys that allow users to access their wallets on the blockchain. They also act as a personal ledger of all transactions made from that wallet.
Always remember, crypto coins are always stored on the blockchain. They are not physical in the sense that one can remove them from the blockchain. Crypto coins are simply digital records kept on the blockchain ledger.
Hot vs cold
There are two main categories of crypto wallets:
- Hot wallet – This is an online, cloud or software wallet that is always connected to the internet. Hot wallets are great if you need fast access to your coins (ex. for day trading on an exchange). Users can access their coins from anywhere in the world via a phone or computer. But hot wallets are less secure and prone to hacking attempts.
- Cold Wallet – Think of a cold wallet as the safe in your closet. It is offline (not connected to the web) and therefore highly secure. There are a variety of cold storage types, with paper and hardware wallets being the most popular. Some people even etch their private keys into pieces of metal to ensure their key is never lost.
What is a hardware wallet?
A hardware wallet is a physical device on which a user stores their private keys to access their blockchain wallets. These devices don’t have to be electronic. Any physical item that can store a private key is considered a hardware wallet.
So writing the keys down on a piece of paper or placing the keys in a text file on a USB thumbdrive is considered a wallet. They key is these types of wallets are not connected to the internet. They are offline.
As mentioned above, hardware wallets are considered cold wallets and hence very secure.
Advantages and Disadvantages
Hardware wallets offer a variety of different advantages over other wallet types. But they are a more intimidating option for newcomers due to a general lack of understanding and being harder to setup. Yet the advantages far outweigh the extra work required for setup.
Hardware wallets are considered offline storage devices. This is also referred to as “cold storage”. Their greatest advantage is the enhanced security this offline storage capability offers when storing private keys. This type of wallet is more secure than a software wallet due to its invulnerability to cyber hacking methods.
Being offline reduces the risk or completely removes the potential of computer hacks or viruses that are designed to penetrate through a wallet’s security system.
Private data keys are generated and stored within the micro controller of the device. This prevents malware, viruses, and other hacking tools from gaining access to the wallet.
Many hardware wallets are also offer easy access via a PIN code. This prevents unauthorized users from physically gaining access to the private keys.
In the event of a lost hardware wallet, a recovery seed phrase allows owners to retrace their hardware wallet and regain its contents.
Ease of access (Advantage)
There are more benefits than just security, one of which is ease of access. Once setup, hardware wallets are a breeze to use. Usually all one needs to do is hook it up to a computer via USB and start sending transactions.
Setting up a hardware wallet is typically more involved than other wallet types. This is due in part to the learning curve when working with a hardware wallet and the extra steps involved during setup.
Wallet Tampering (Disadvantage)
When purchasing a hardware wallet, it is important to always purchase it directly from the manufacturer. Buying hardware wallets from unverified third parties is a bad idea. While not common, there are people that tamper with hardware wallets, sell them to unsuspecting buyers and then steal their crypto funds.
Hardware vs software wallets
A software wallet is typically a “hot wallet”. It is less secure but has its own advantages. Both wallet types perform the same function of storing a user’s private keys and providing access to the blockchain.
In more traditional terms, think of software wallets as an online bank or paypal account while a hardware wallet is more like a safe kept in a bedroom closet.
When comparing hardware wallets to software wallets, there are a few major factors that differentiate the two types. These factors include wallet security, convenience, and cost.
Hardware wallets like the Ledger Nano S are expensive (around $100). Those that value the security of their crypto coins choose to pay for a more secure device like a hardware wallet. In doing so, they greatly reduce the odds of hacks or malware.
Most software wallets are free to install. This makes them a very popular choice for those looking to save money.
Hardware wallets can range from tens to hundreds of dollars. The price depends on the quality of the design and additional features that come with the device.
Some people like the concept of software wallets more because they are managed through a website, desktop interface or mobile app. This requires less tech knowledge to operate than a hardware wallet.
Users can also access the coins much faster and easier than using a hardware wallet, which requires connecting the device to a computer.
Unfortunately, this ease of access increases the security risks of using software wallets.
As mentioned earlier in this post, the most important distinction between these two types of crypto wallets is the security protection. Hardware wallets are considered much more secure.
Summary (Hardware Wallet)
- Much more security (safe from malware & viruses)
- Very convenient
- Some hardware wallets are pricey
Summary (Software wallet)
- Risk of cyber security threats (hackers, malware & viruses)
- Easy to access coins
- Most software wallets are free to setup
Should I use a hardware wallet?
When compared to other types of digital wallets, hardware wallets stand out from the pack. They are easily the most secure option for storing value on a blockchain.
Online or cloud wallets are becoming more popular. They offer digital wallets that can be accessed through the cloud for a transaction fee. While many advocates boast about the security of these types of wallets, they are still considered hot wallets and less secure. Users can also avoid transaction fees by paying the one time cost of a hardware wallet. This ensures they will not have to pay additional fees or monthly dues to access their funds.
Examples of hardware wallets
One of the most well known hardware wallets is the Trezor hardware wallet, currently available for $97.00. This hardware wallet is known for its security protection features as well as its easy setup.
The Trezor is operated through a community driven open source environment which allows this hardware wallet to function transparently and honestly.
This hardware wallet may be one of the most impressive storage devices being utilized in crypto. It features include:
- Support for over 500 coins
- High quality construction
- USB 2.0 compatible
- Easy backup
Ledger Nano S
Its features include:
- Support for over 50 coins
- Is a USB stick so no need for a cable
- Great community
- Compact size
- Very easy to use
Paper wallets are one of the cheapest and easiest ways to store a private key. To create a paper wallet, one simple needs to print out the private key and wallet address onto a piece of paper and put it in a safe place. That’s it!
There is a very cool free service that helps you create a free paper wallet called bitcoinpaperwallet.com. We highly recommend it.
Its features include:
- Highly secure
- Free to make
- Easy to setup
- Susceptible to natural disasters or fire
- Access funds is less convenient, so it’s better for long term holding
Metal wallets are very similar to paper wallets except the private key is etched or engraved into a piece of metal. This ensure the key will never be lost to natural disasters or fire.
The one issue we have with metal wallets is, unless you are doing it yourself, you have to give your private key to a third party to engrave it. That’s a big no no in our book.
Its features include:
- All the same strengths of a paper wallet
- Fireproof. Much harder to destroy
- A high rank in the coolness factor
As the cryptocurrency market grows around the world, the popularity of hardware wallets will only increase. They are already considered the safest method of storage and are becoming the most prominent way to store coins.
After taking a close look and comparing the design and features of hardware wallets to their counterparts, we recommended using hardware wallets. They offer convenience and reliability without sacrificing security.
As for software wallets, until there are ways to guarantee their security, we only recommend using them for short term needs.
The only problem we see with hardware wallets on the market are their higher prices in comparison to their competitors. This is the only real factor that could potentially hold back the rapid expansion of hardware wallets into the crypto world.
Only time will tell whether a large majority of crypto users will evolve towards hardware wallets. One important factor that could help determine this is the future security enhancements to software wallets. If software wallet providers can find a way to significantly enhance their security benefits, it could spark trouble for hardware wallets.
It is hard to imagine that cyber threats will ever end, so the need for a secure offline wallet will likely never disappear. This means that hardware wallets should continue to become more popular, particularly to people that want to avoid the stress of losing their cryptocurrencies to unwanted intruders.