hardware wallet

Hardware wallets are designed to store the private keys of your cryptocurrencies offline on a physical piece of equipment. Generally, hardware wallets are plugged into a computer using a USB port.

There are several kinds of crypto wallets on the market; desktop, mobile, web, and hardware. This article is concerned primarily with hardware wallets. However, in order to distinguish between the two, I do talk about other kinds of wallets.

When discussing crypto-wallets it is hard not to talk about the security because the security risks involved in storing private keys and keeping track of your account balance.  

How do you store your bitcoin?

If you want to own bitcoin or any other kind of cryptocurrency, you need a way to safely store and safely access your funds. That means you will need some kind of wallet.

You can think of a bitcoin wallet somewhat like a typical credit card. With a credit card, the physical card is not what is really important, but your account number that holds a history or your transactions and credit. So if your card were lost or stolen, you simply replace the card, but the history of credit and transactions will still be there.

A wallet works in a similar way. A bitcoin wallet is used to store your private keys, which you need to in order to authorize transactions from your account. Wallets also keep track of private keys and facilitate sending and receiving bitcoin.

Remember, bitcoin and other cryptocurrencies are not actually stored in a single physical location. Transactions using cryptocurrency are only ever passed from one owner to another using private key to unlock the encryption. The transactions themselves are maintained on the blockchain.

In much the same way that cryptocurrencies are pseudonymous, so are wallets. Just as when you look up an address, you will not find a name or a home address, instead, you will find a history of transactions. The same level of anonymity applies to a wallet. There is a great deal of privacy, but you are in fact storing sensitive information on a physical device.

Read more about private keys here.

Types of Wallets

In contrast to bitcoin’s exclusively digital existence, hardware wallets are actual physical objects used to store pertinent and sensitive information on; hence they are hardware.

At any rate, if you want to store your cryptocurrency securely and for a long-term, then it is highly recommended that you use a hardware wallet. To date, there have been no verifiable incidents of bitcoin stolen from hardware wallets. Although hardware wallets are relatively new, so far they have maintained a good track record, and there is a much greater risk from Internet-connected computers.

Bitcoin’s security model requires that only full node wallets can be used. A full node refers to a network that is fully verified with all of the rules of bitcoin.

Full node wallets

A full node wallet ensures the legitimacy of the transaction and can verify that is not a counterfeit or incorrect currency. Without a full node wallet, it is possible to be paid with a transaction of some currency other than bitcoin.

A hardware wallet is a specific kind of bitcoin wallet that stores a user’s private keys in a secure device. Typically, hardware wallets are more secure than other kinds of wallets, such as desktop or mobile wallet. However, hardware wallets have limitations as well.

Features of hardware wallets

Hardware wallets have several features that make them desirable. First of all, for hardware wallets, private keys are often stored in a protected area of a microcontroller. The design of the hardware is such that the private keys cannot be transferred out of the device in plaintext, this makes them immune to computer viruses that are able to steal from software wallets.

Hardware wallets can only keep the private keys safe as well as create spending transactions, and cannot tell you if you have actually received coins and in what quantity.

The security of hardware wallets is higher than other kinds of wallets for a few reasons. Many hardware wallets can be used securely and interactively without the private keys ever needing to be touched. Because private keys never need to be shared, there is decreased potential for it to become vulnerable.

Better security

There are many good reasons to consider using a hardware wallet to keep your currencies secure. There are also, quite obviously, limitations, which I will discuss at the end of this article.

In contrast to hardware wallets, software wallets are more susceptible to vulnerabilities because they use open source. When a wallet uses an open source, a user is allowed to validate the entire operation of the device, this includes the private keys.

Hardware wallets – definition

Hardware wallets, however, are physical devices that mathematically generate and store your private keys, they do not store your cryptocurrencies on a device. Instead, the currency lives on their respective blockchain. However, because all blockchains are public ledgers, anyone, at any time, has access to your account balance, as long as they know your public address.

Bitcoin hardware wallets are tamper-proof devices designed to store your private keys offline. Both the private keys and digital signatures required to spend coins are generated with these wallets. And as your keys are offline, the wallet itself cannot be hacked. To successfully transfer coins from your hardware wallet, you must have a secret pin code.

Seed phrases

Seed phrases are an excellent way of backing up and storing bitcoin. So they are a common feature for wallet security. A seed phrase, seed recovery phrase or backup seed phrase is a sentence or a list of words which stores all the information you need to recover a bitcoin wallet. Typically, the wallet software will generate a seed phrase.

Using the seed phrase, if the user’s computer breaks or their hard drive becomes corrupted, they can download the same wallet software again and use the paper backup to get their bitcoins back.

A good recommendation is to store your recovery phrase (also called a seed word) in hard copy, offline -a piece of paper works well for this. A major benefit of a hardware wallet is that if you lose or damage your hardware wallet, you will be able to restore your bitcoin. As long as you have the correct recovery phrase. You can use the seed phrase in the event of loss, damage or theft to recover your crypto assets. Anybody else with the phrase has access to your wallet information, so it is imperative to keep it safe.

Private keys and public addresses

Private keys and public addresses are always working together to communicate with the blockchain. The private keys own every public address they generate. Anytime a user wants to transfer funds they will use the private key to unlock the public address, sign the transaction, and broadcast it to the blockchain.

Without private keys, you cannot participate in transactions. However, private keys are vulnerable and sharing them potentially puts your funds at risk. The best first step towards security is keeping your private keys on a hardware wallet. So, while your hardware wallet securely holds your private keys, all actual crypto assets live on their respective blockchain.

Security benefits of hardware wallets

One of the security benefits of a hardware wallet is that no spy screen recorder or Trojan can record the information on it. A hardware wallet does not use your laptop or system resources. Certain kinds of hardware wallets even have a dedicated LCD screen built in.

Moreover, hardware wallets use cold storage. Cold storage is when you keep a reserve of Bitcoins in an offline location. Cold storage means that all or some of your account balance is not present on the web server or any other computer. If you are dealing with large amounts of Bitcoin, keeping a reserve in cold storage is highly advisable.  

Essentially, cold storage minimizes the possibility that an intruder could steal one’s entire reserve in the event of a security breach. By using cold storage, you can keep just what you need at the moment on that server while safely securing the bulk of your crypto assets elsewhere.

Close-up on hardware wallets

Here are a few of the hardware wallets on the market, as well as a few of their selling features. As an aside, this article is not really an endorsement of these hardware wallets. I primarily want to offer some information about the kinds of gadgets that are on the market.

It is crucial you do the research to ensure that you find a product that meets all of your needs, and so a large part of what is the best kind of wallet will depend on your crypto-needs.

Trezor

The Trezor was the first model of its kind, a hardware wallet for Bitcoin storing and signing. It also has stood the test of time and continues to respond to demands. Trezor plugs into your computer, tablet or phone to access your coins. One of the central and appealing features of a Trezor wallet is that it has a “recovery seed.” In the event that you lost your Trezor wallet or have it stolen, a recovery seed is a 12 to 24-word passcode that makes the recovery of contents possible. This includes the recovery of private keys, account balance, and transaction history.

KeepKey

KeepKey is a USB device to stores and secures cryptocurrencies. Using Keepkey, each transaction you make goes through review and approval when using the confirmation button. This hardware wallet has a mnemonic code to generate deterministic wallets, called BIP 0039 recovery seed. Presently it supports six cryptocurrencies, including Bitcoin.

Swiss Bank in Your Pocket

The Swiss Bank in Your Pocket is a Windows Desktop Application. Each Bitcoin wallet can have up to 5 Receive addresses. Bitcoin Vault, 5 Bitcoin Cash Wallets, Bitcoin Cash Vault, an Ethereum Wallet and an EOT Wallet. It relies on a USB security key to function and perform transactions.

Ledger Nano S

The Ledger Nano S is a battery-less device which you can connect to a PC or mobile device with USB, which supports Bitcoin and eight other cryptocurrencies. This wallet also has a backup seed key to recover your cryptocurrencies if you lose your wallet or have it stolen.

The security risks of hardware wallets

Unfortuanlty, there are several risks that hardware wallets do not protect you from:

  • No hardware wallet can protect you from sending a transaction to the wrong address as the result of malicious malware swaps.
  • Hardware wallets rely on the security of an RNG (Random Number Generator). It is often embedded in hardware, to generate your wallet’s private keys securely. However true randomness (rather than pseudo-randomness) is very difficult, and so it is possible for the generated wallet key to be insecure.
  • Bugs at the software, firmware or hardware level can potentially make it possible for attackers to break into a hardware wallet and gain unauthorized access to private information. Even if with an exceptional design, proving the security of a hardware or software implementation is an ongoing challenge.

Degrees of security

A web server is a higher risk environment to keep your currency compared to an offline wallet. Online wallets have a much greater risk of exposer to potential vulnerabilities. This means that online wallets are much easier to have funds stolen from.

Offline wallets cannot be hacked for two central reasons. First, they are not connected to an online network. Secondly, they do not need to rely on a third party for continued security.

While there are degrees of risk involved with any wallet, the crucial thing to remember is that keeping your private keys is the highest priority. If you lose your private keys, you will lose your money.

Unfortunately, no kind of wallet is going to protect you 100% from all kinds of fraud. If your wallet experiences a hack, or you end up sending money to a scammer. Reclamation or reversals are not possible to reclaim lost currency.

Backing up your wallet

As mentioned earlier, it is highly advisable to backup your wallet. Additionally, only store a portion of currency for everyday use online. This way the majority of your funds remain in a high-security environment.

Cold or offline storage options for backup like hardware wallets will protect you against certain computer failures, and also allows you to recover your wallet should it be lost or stolen.

Stay safe

Remember to keep your software up to date with the latest security enhancements available. This includes regularly updating your wallet software, as well as the software on your computer or mobile.

Along with using complex passwords, you may also want to consider a wallet that offers multisig transactions. A multi-signature wallet requires the permission of more than one user before a transaction can be made. These are all important considerations when you are concerned with the security of your account.

Again, there is no perfect system, and risks are a part of the system. But if you are informed you can at least do everything possible to mitigate some of these risks.

Read more about security on the blog: What is a 51% Attack

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