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Hardware Wallet. A Detailed Guide 

 July 8, 2021

By  Brian Forester

A hardware wallet (a Bitcoin wallet or a cryptocurrency wallet) is the best way to secure or crypto assets. Hardware wallets are small-sized USB devices that store private keys for cryptocurrency operations offline. That means that your private key never gets exposed online and is 100% secure.

In this guide, we will explore the concept behind hardware wallets, explain the way they work, and tell you about the best hardware wallets.

How Bitcoin Wallets Actually Work

Before we delve into hardware wallets, let’s take a look at how bitcoin wallets actually work.

And the first thing we must begin with is terminology. Bitcoin wallet is really a confusing term. In fact, a bitcoin wallet is not some sort of place or storage for your bitcoin funds. In reality, a bitcoin wallet is a software program that you use to buy and sell cryptocurrencies.

A software Bitcoin wallet stores your unique customer password (or a private key). With that key, your wallet gets access to crypto assets related to the blockchain – a cryptocurrency transaction ledger.

Using bitcoin wallets, you get to know two basic terms:

  • a Bitcoin address
  • a private key

Bitcoin address is an address you use to receive bitcoins from other people. Just like you do, let’s say, with a Paypal transaction.

A private key is a tool that grants you access to your own crypto assets. Without it, you cannot control the bitcoins (or other cryptocurrencies) you own. Simply put, such a key is pretty much like a password to your email.

Another procedure where your private key is necessary is signing your cryptocurrency transactions. Your wallet does that on your behalf and then transmits your digital signature online. In simple terms, a digital signature is a tool that lets you prove that you own your private key without having to show the said key. The whole procedure becomes possible due to certain intricate mathematical operations called cryptography. While the whole scheme may seem confusing, in reality, there is nothing conceptually new about it since it looks pretty much like authorizing your regular money transaction.

When you have signed the transaction, it will then need to be validated. To do that, your wallet will transmit your transaction further in the blockchain, where it will be entered by Bitcoin miners. After that, your transaction will be complete.

Software Wallets vs. Hardware Wallets

In the previous section of our guide, we explained how software bitcoin wallets work. In this section, we will explain why you might need to consider switching to a hardware bitcoin wallet.

The keyword is security

Today, with a certain amount of skills and know-how, it is straightforward to steal information from a computer. If a computer that you’re using for your bitcoin transactions gets infected with malware, then your private key’s security is under threat of being stolen and used by hackers.

If hackers get access to what is displayed on the screen of your computer, they will most likely get a hold of your private key while you’ll be performing one of your cryptocurrency operations. And if that happens, and hackers know your private key, they will be able to use it in any way they want. You will no longer be in control of your cryptocurrencies. Your crypto assets will be transferred practically anywhere, and you will not be able to do anything about it.

To make your crypto transaction more secure, you can use two basic approaches:

  • Trying to make your computer 100% malware-proof. But this is not as easy as it sounds since hackers try to disguise their malicious software as legit programs making most of them virtually untrackable by any antivirus systems.
  • Using a different type of wallet that will be impossible to hack. And that is exactly what hardware bitcoin wallets are like.

“Cold storage” rules!

As you can tell from the term, a bitcoin hardware wallet is not a computer program but a separate physical device. Visually, a bitcoin hardware wallet will look like a USB flash device or a car alarm remote control.

Hardware wallets are designed with one simple idea in mind – to keep private keys safe. According to this concept, hardware wallets are minimalist devices which makes them virtually impossible to hack. The basic feature about hardware wallets is that they price so-called “cold storage” for cryptocurrency private keys. That means that not once will a customer need to expose their private key online. Even when the hardware wallet is plugged into a computer (and even if this computer is malware-infected), the key still stays secure.

You can’t connect your bitcoin hardware wallet to the net or run any sort of complicated application on it since they are designed for one task – to serve as offline storage (“cold storage”) for your private key.

Below, we will delve deeper into the specifics behind the operation processes of hardware wallets.

How Hardware Wallets Work

How do you make bitcoin transactions using cryptocurrency hardware wallets?

First of all, you should plug your hardware wallet into a computer. That is because a hardware wallet but itself does not do anything – it is only a tool for crypto exchanges that needs a more complex device to run the whole transaction procedure and transmit it online.

Hook your hardware wallet to a computer with internet access and a companion app installed to be able to buy and sell cryptocurrencies. The said app will serve as a bridge between your offline wallet and computer, preparing a transaction for signing.

Being a highly protected device, a hardware wallet can only receive and work with a certain type of data – cryptocurrency transactions. When a transaction software sends such data from a computer to a hardware wallet, the wallet signs the transaction and then sends it back to the cryptocurrency exchange software.

Throughout the whole procedure, your private key always stays safe and offline – it never leaves your hardware wallet device. The only thing that passes through the device is the transaction. The wallet received an unsigned transaction, and then it sends back the signed one.

Hardware wallet providers specifically designed their products to be small-sized and portable so that customers could use them anywhere with any computer at hand. And when doing so, customers can rest assured that their funds are fully safe. To make it even more clear – with a hardware wallet device, you can trade crypto coins and tokens even through a computer at your local public library.

The only thing users must take care of is to make sure that transactions displayed on the wallet’s screen and shown in the program match.

Recovery Seed Phrase

When you unpack your newly purchased hardware device, you will need to set it up for further use. Setting a hardware wallet is pretty easy with the main step of initializing it.

Initializing a hardware wallet will take you writing down a recovery seed phrase. This phrase is a set of words used in a recovery process for restoring private keys on hardware wallets. A seed phrase is generated by your hardware wallet when you launch it. It is important to keep your wallet’s seed phrase secret. Because whoever knows this phrase potentially can gain control of your cryptocurrencies.

Security Risks

Above, we mentioned how protected hardware wallets are and how they are better in security compared to software and desktop wallets. And while this statement stays true still, we have to bring up several security risks that may compromise your hardware wallet.

A hardware wallet can tamper

Security researchers warn customers that they may receive a tampers device. And if a hardware wallet had tampered with, it can no longer be trusted. You may get a tampered hardware wallet if you choose to buy it from an unofficial retailer, or the device may be tampered with during the delivery. To make sure customers are using secure wallets, top hardware wallets manufacturers secure their products with holographic stickers.

If a customer receives a device with such a sticker intact, this means the wallet is safe to use. If the sticker seal seems broken, it is not advised to use such a device.

SECURITY TIPS:

  • To be sure that you’re using a 100% secure device, buy it from the manufacturer’s website.
  • Should you choose to buy a hardware wallet from a retailer, make sure, it is authorized to sell such devices.
  • It is also recommended to check with the manufacturer’s list of authorized retailers.

A seed phrase and/or a PIN code can be preconfigured (i.e., unsafe to use)

This is very important:

  • A recovery seed phrase must be generated by the device during the initializing procedure. There is no other way a customer can receive such a phrase. For example, written on a card.

There was a case when a customer purchased a hardware wallet with a recovery phrase and a PIN code printed on the pieces of paper. The instruction read to use this security data to initialize the device. Since the customer was not aware of any risks, the initializing procedure was performed as instructed.

So, when the customer proceeded with the cryptocurrency transactions, they realized that the previously deposited coins were withdrawn by the hacker who used the preconfigured phrase to be able to control the cryptocurrencies attached to the wallet.

A hardware wallet can be stolen.

When someone steals your crypto wallet, the first thing you must do is use your recover phrase to secure your cryptocurrencies and transfer them to a new wallet. This procedure will leave your stolen hardware wallet completely empty and useless to a thief.

Our advice is to perform this procedure ASAP without taking any chances. Even though all hardware wallets are protected with PIN codes that take time to break, your best bet is to secure your funds before a thief succeeds.

You may get robbed

The last risk is the most unpleasant experience since it means physical interactions. A $5 wrench attack that’s what it’s called when you are threatened physically by someone trying to rob you. If an offender knows that you have a bitcoin wallet and want to take it from you, they will most likely know that to use the wallet, and they will also need a PIN code and a seed phrase.

There are models – like Trezor wallets – that will allow you to secure them by not only PIN codes but also by using a passphrase. So the trick is that you can attach a passphrase to a dummy crypto account with a smaller amount of crypto coins on it. And while your wallet may seem unlocked to a robber, in reality, they will only get access to a tiny fake account while most of your coins will stay unexposed and secure.

The Best Hardware Wallets on the Market

If you are deeply into Bitcoin and other cryptocurrencies or planning to dive into crypto trading, there is no way you can do it without getting a hardware wallet. And if you’re choosing one, you must know that there are three leading brands to choose from:

  • Ledger
  • Trezor
  • Keepkey

In this section, we will go through the main models from the aforementioned brands covering their main features, as well as the pros and cons of each model.

Keepkey

We’ll start from the bottom of our top wallet manufacturers list, introducing the Keepkey hardware wallet.

Keepkey wallet device has a beautiful design. However, the model may seem a bit bulky, especially compared to its closest rivals. Because of its size, Keepkey is the least convenient model on this list. Most users might find it difficult to carry it in a pocket. Comparing to the models by Ledger or Trezor, the Keepkey wallet is twice as big.

Other features that place the Keepkey device on the bottom position are:

  • The device supports a limited amount of coins;
  • There are poor Amazon customer reviews regarding the quality of products and the client support team’s work.

Pros:

  • Stylish design
  • In-wallet exchange provided by the parent company of Shapeshift

Cons:

  • A limited number of coins are supported.

Keepkey hardware wallet is available at the price of $49.

Trezor

Enough said is that Trezor was the first company to introduce the concept of a hardware wallet. By the way, in Czech, trezor means “vault.”

The Trezor brand boasts a solid reputation on the market, with one of its founding members, Marek “Slush” Palatinus, being the creator of the first Bitcoin mining pool back in 2010.

However, all of this comes with an irritating feature that may become a real dealbreaker for many of Trezor’s potential customers. When upgraded, Trezor wallets firmware, for some inexplicable reason, tends to delete the whole wallet. Well, as soon as you have your recovery words at hand, the problem is quickly solved, but it sure can cost a lot of nerves for a beginner who is not aware of this software bug.

Trezor company’s pros:

  • Open-source hardware and open-source software devices
  • Solid long-time reputation
  • Products support more than 1,000 coins and tokens

Trezor company’s cons:

  • Frequent upgrading bugs (deletes wallets)
  • Trezor One model does not support XRP

Trezor hardware wallets include:

  • Trezor One
  • Trezor Model T

Trezor One

Trezor One (the original name of the model was simply “TREZOR”) was the first hardware wallet to ever appear on the market. And the device has its solid reputation to this day.

Trezor One is stylishly designed. It’s tiny and is extremely portable. The model has an instinctively understandable user interface. Trezor One also supports a lot of cryptocurrencies, including Bitcoin & Bitcoin Cash, Bitcoin Gold, Ethereum & Ethereum Classic, NEM & LTC, Dash, ZCash, etc. However, there is one popular crypto coin that is not supported by Trezor One – XRP.

If you want to buy Trezor One, it will cost you $55.

Trezor Model T

Being Trezor One’s next incarnation, Trezor Model T offers just the same set of features but comes equipped with a touch screen. And while at first, a touchscreen display may seem to be of no practical value in terms of functionality, in fact, it’s quite the opposite.

Imagine initializing or restoring your wallet. To do so, you will need to enter a seed phrase. But if your wallet does not have a suitable input device (such as a touchscreen), you will have to enter the phrase on your PC. But if your computer’s operating system is infected with malicious software, entering any sort of information of such importance is not safe since it can get stolen. But with Trezor Model T, you get to avoid any risks by entering the recovery words using the wallet’s touchscreen.

However, Trezor Model T is pricey. It will cost you $170. In addition, we will say that there is even a more expensive model called Trezor Corazon Titanium. Coming in various color options, Trezor Corazon Titanium costs from $600 to $2000.

Ledger

At number one comes the company we can hardly find anything bad to say about – Ledger Wallet. Ledger is, without a doubt, the leading wallet manufacturer on the market. With the models like Ledger Nano S and Ledger Nano X, this brand deserves its place as today’s best hardware wallet producer.

Ledger uses its own software called Ledger Live to control Nano S and Nano X wallets. With the Ledger Nano X device, Ledger Live received a new incarnation as a mobile app to control the wallet remotely from a mobile device via Bluetooth.

Ledger hardware wallets are, beyond any doubt, the best hardware wallets around.

Ledger Nano S

Ledger Nano S is an impressive tiny device for bitcoin transactions supporting a number of the world’s most popular cryptocurrencies such as ETH, LTC, ZCash, XRP, Dash, Dogecoin, and lots of ERC-20 tokens.

The Ledger Nano S is also a very affordable option. Coming at the price of only #59, Ledger Nano S makes for the best entry-level hardware wallet.

However, while being one of the best hardware wallets around, Ledger Nano S has its downside:

  • It has a limited amount of internal memory. That means that with Nano S, you can install up to only five apps for different crypto coins.

Ledger Nano X

Finally, our number one pick – Ledger Nano X, the best of all hardware wallets these days.

What makes the Ledger Nano X great is the ability to store up to a hundred crypto coins while managing the wallet through a mobile phone using a Ledger Live mobile app. This is definitely another security upgrade since with that option, and you don’t even have to connect your wallet to a PC or a laptop.

However, we still have to admit that there are some things to work on for the Ledger team. Mainly, it is related to user interface experience, which could have been better. Another downside is that the Bluetooth connection is far from being perfect in terms of app productivity and speed. But even with that said, it is impossible to deny that Ledger Nano X is a huge step ahead of all other security hardware wallets out there, leaving Trezor and Keepkey wallets behind.

With Nano X, Ledger managed to lay new grounds in terms of private keys security and safer crypto management. We consider Nano X the best hardware wallet on the market.

Hardware Wallets From the Lesser-Known Brands

CoolWallet

A credit card-shaped hardware wallet. It is a good quality private keys offline storage with a relatively low market presence.

Bitfi

John Mcafee’s hardware wallet and a marketing disaster – despite being advertised as unhackable, the wallet was destroyed by security experts exposing several security flaws.

Safe-T Mini

The manufacturer brand is Archos. The model is a fundamental type of hardware wallet with an extremely limited interface demanding additional software to buy/sell coins.

BitLox

A hardware wallet back from 2016. Not too user-friendly.

Ellipal

The most curious model on the list. The Ellipal wallet is an attempt to create an offline wallet that would offer a very interesting approach to securing private keys. The model is not connected to computers, nor is it controlled through an app via Bluetooth. Ellipal uses QR codes. Such QR-code controls became possible due to a built-in camera to the wallet’s construction. The principle is plainly obvious – you point the wallet’s camera at a QR code to sign transactions. You can learn about the Ellipal model by following the link.

What Customers Ask the Most about Hardware Wallets

What is the best Ledger hardware wallet?

Without a doubt, the best Ledger wallet is Nano X. It has an improved design, supports up to 100 coins at a time, and comes with a mobile app. On the other hand, if you want to save more cash and are looking for a simpler model, go for Nano S.

Ledger or Trezor?

As for us, we think that Ledger and Trezor are both great brands providing amazing solutions for securing private keys. Maybe one of the best choices is to try using two wallets from these brands. However, we should add that while Ledger has some new features presented in their Nano X model, Trezor utilizes open-source software which is considered to be safer.

How to access a Trezor wallet?

To gain access to your wallet by Trezor, connect the device to your PC or laptop and visit https://wallet.trezor.io.

What if a wallet brand chooses to quit the business?

Should your wallet’s manufacturer quite the business, you can transfer your bitcoin funds to another brand’s wallet by using your recovery seed words. These words are not attached to a specific company or one specific physical wallet (like a PIN code is). So with a secret recovery word set, you don’t have to worry about your wallet’s brand going out of business leaving you empty-handed with a piece of useless plastic.

A Warp-Up

Hardware wallets are the best way to secure your private keys and keep your crypto funds safe. So if you’re seriously into crypto trading, our recommendation is to consider getting one of the top hardware wallets from our guide.

FAQs

Should I use a hardware wallet?

You definitely should consider choosing one of the best hardware wallets if you are seriously into crypto trading. With hardware wallets, you will secure your private keys (by sorting them offline), and rest assured that your fund is out of reach by hackers and scammers.

What is the best hardware wallet?

The best hardware wallet for its cost is Nano S by Ledger. However, it comes with certain limitations. So if you want wider cryptocurrency trading options, you should consider buying Nano X or go for one of the Trezor models.

Can hardware wallets be hacked?

Hardware wallets are designed to avoid hacking threats. They are offline storage USB devices that keep private keys in so-called cold storage (meaning, the keys don’t get exposed online). Some hardware wallets come with a password manager or 2FA services, touchscreens, or other useful features for power users.

What happens if a hardware wallet breaks?

If your hardware wallet breaks, this does not mean you lose access to your funds. What you will need to do in this situation is use your recovery words to restore access to your funds online and transfer them to another wallet.

Brian Forester


Brian is an experienced journalist and crypto enthusiast. Founder of CryptoCurry - famed for his insightful input on the future of cryptocurrencies and blockchain technologies.

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