What is a hardware wallet?
Sometimes just called a hard wallet, a hardware wallet is a device which stores the private keys to your cryptocurrencies on a secure hardware device. This means that the only way for someone to gain access to your funds is by gaining access to the device itself.
Hardwallets are ultra-popular right now because they allow you to add a physical level of security to the storage of your cryptocurrencies. By using a hardware wallet for storage, there’s no longer the risk of a hacker just accessing your computer and — in doing so — withdrawing all of your cryptocurrencies.
Where does it store the coins?
Before we answer this question, let’s quickly recap how cryptocurrencies work.
In truthfulness, cryptocurrencies don’t really exist — they’re imaginary.
When you own a Bitcoin, that’s because every user on the blockchain agrees that you do indeed own a Bitcoin. What you really own is a private key — a string of numbers and letters — that allows you to transact with the cryptocurrencies you supposedly own.
The purpose of a wallet is to keep these private keys safe. If a hacker were to gain access to them, they would be able to effortlessly seize your funds.
Now — back to the question. A hardware wallet doesn’t store any coins, it just stores private keys. These private keys are encrypted and treasured away in a separate, failproof module of the hardware.
In fact, some hardwallets generate the private keys for you, which means that they’ll never leave the device, and can never be hacked digitally.
What makes a hardware wallet secure?
As we mentioned earlier, hardware wallets are extremely secure because they store the private keys to your coins on an isolated memory chip, having been encrypted, without any exposure to prying eyes. Perhaps this is oversimplifying, though.
In truth, the hardware wallet possesses four main security features:
- Isolation and encryption – Not only are the private keys on a hardware wallet isolated in a protected area of the device, but they’re also encrypted first. This means that they can’t be accessed as plaintext under any practical circumstances.
- Immune to traditional weaknesses – Most wallets are software wallets (the ones you install on your computer) or online wallets (where a company manages the funds for you), so hardware wallets offer a unique benefit in that they can’t be exploited by mainstream viruses.
- Secure but interactive – As opposed to a paper wallet, you’ll never need to “import” the private keys from a hardware wallet to spend the coins. This means that a hardware wallet can use (not just store) cryptocurrencies without any loss in security.
- Open-source software – Finally, most hardware wallets use open-source software. This means that their exact workings can be picked-apart and validated by any user — so there’s no doubt that any software which does have to be used is completely malice-proof.
There are certainly more security features to a hardware wallet, but these are without a doubt the most important, and will guarantee the safety of your cryptocurrencies if used correctly.
Types of Wallets: Soft vs Hard vs Paper vs Online
The world of cryptocurrency does offers an abundance of choice. Not only are there hundreds of altcoins for you to choose from, you’ve even got the option of where exactly to store your coins.
For that reason, we’ve created the following table to help you decide where to store your cryptocurrencies. With the four most popular methods included — online wallets, paper wallets, hardware wallets, and software wallets — this table is sure to be of use.
| Cost | Security | Accessibility | Expertise required | Best for? | |
|---|---|---|---|---|---|
| Software | None | As safe as your computer | Good | Little | Everyday cryptocurrency usage |
| Online | None | As safe as the service | Best | None | Small, quick transactions OR if buying for first time |
| Paper | Trace | Safe from hackers | Poor | Moderate amount | Holding moderate amounts on long-term |
| Hardware | $XX - $XXX | Safest | Poor | Moderate amount | Holding large amounts on long-term |
What are the best hardwallets?
If you’re serious about owning cryptocurrencies, just hearing the above will probably have you interested in purchasing a hardwallet. For that reason, we’ve collected three of what are — in our opinion — the best hardware wallets out there. Starting with the Trezor wallet, let’s see what makes them so special
Trezor
The Trezor starts at €89 directly and can be paid for with Bitcoin or credit card. American buyers could do better than finding the Trezor on Amazon, where it sells for as little as $211.99.
With the Trezor, the device generates the private keys itself, meaning that they can never be accessed digitally. In combination with the unique PIN security system, this makes it a highly-safe solution to storing cryptocurrencies.
Officially speaking, the Trezor supports Bitcoin, Ethereum (and all ERC-20 tokens), Ethereum Classic, ZCash, Litecoin, Namecoin, Dogecoin, Dash, and Bitcoin Testnet. For most, this is more than enough of a selection.
Ledger Nano S
The Ledger, in particular the Ledger Nano S, starts at €69.60 and can be found for just under $200 on third-party marketplaces.
The Nano S stores your data on a banking-grade computer chip that has been tried and tested for decades. Connecting directly to your computer via USB, they Ledger Nano S makes it easy to use cryptocurrencies in the most secure way possible — even on an insecure computer.
You’re also offered Two Factor Authentication which can be paired with a smartphone or physical security card.
It supports most mainstream cryptocurrencies: BTC, ETH, LTC, DOGE, DASH, STRAT, XRP, and more.
KeepKey
Our last favorite, the KeepKey, can be found for as little as $99 purchased directly — so there’s no surprise it’s out of stock as we write this.
Although a little boxier than other popular hardwallets, the KeepKey allows you to physically view and approve every transaction from your private keys.
The KeepKey comes with PIN-functionality and the option of enabling a twelve word recovery password, making it as user-friendly as it is secure.
This device can store Bitcoin, Litecoin, Dogecoin, Ethereum, and Dash, with more coins “coming soon”.
Comparison of Hardwallets
There’s no doubt about it, the three devices we mentioned above dominate the market for hardwallets. That said, it’s not like you need multiple wallets to store your cryptocurrencies — one should provide more than enough security!
For that reason, we’ve compiled the following table to help you decide which of those hardwallets is best for you:
| Hardware Wallets | Official price | Security | Reputation | Portability | Our Score |
|---|---|---|---|---|---|
| Trezor | $89 | Good | Best | Good | 8 |
| Ledger Nano S | $69.50 | Good | Better | Good | 8 |
| KeepKey | $99 | Good | Good | OK | 7 |
Although we’ve given the KeepKey a slightly worse score than its competitors, it might still be the best choice in some situations.
When picking the right hardware wallet for yourself, the most important criteria to consider are the shapes of the devices, reputations of their manufacturers, and of course the compatibility with your desired coins.
How do I use a hardware wallet?
If you’ve just purchased a hardware wallet or are considering doing so, there’s no doubt that you’ll want to know how to use it.
Thankfully, there aren’t too many clever things that can be done with a hardware wallet. The four most important actions you’ll need to be comfortable with are:
- Sending (depositing) coins to a hardwallet
- Withdrawing/spending coins from a hardwallet
- Backing up your coins
- Recovering your coins
So without further ado, let’s get into how you can do each of these activities — and you’ll be ready to get going!
Note: Every hardware wallet has its own usage instructions, which you should refer to in case of any trouble.
How to send coins to a hardwallet
You’re going to want to send coins to your hardwallet — no doubt about it! The good thing is, it’s as simple as any cryptocurrency transaction.
Here are the steps you will need to take:
- Pick the cryptocurrency you want to send to your hardware wallet.
- Using the interface on your hardwallet or the appropriate application, find your receiving address (if it’s your first time using the wallet, you might have to generate one) by pressing the “Receive” or equivalent button.
- Log into your software or online wallet and send the correct cryptocurrency to your wallet’s address.
With any luck, you’ll receive your funds in a matter of minutes. If your hardware wallet isn’t connected to the internet at the time of your transaction, note that you won’t see your balance updated until you reconnect.
How to withdraw coins from a hardwallet
Withdrawing or spending the coins from your hardware wallet can be a little more difficult, considering all of the security precautions.
Nevertheless, taking these steps should do the trick:
- Pick the cryptocurrency you want to withdraw from your hardware wallet.
- Find the receiving address of your software or online wallet, or the address to which you want to pay the coins
- Using the interface on your hardwallet or the appropriate application, press the “Send” or equivalent button. Enter the cryptocurrency, the receiving address, the amount, and then proceed to the device’s second verification (if appropriate) before finalizing the transaction.
In this case, each wallet will have its own safety precautions. For example, Ledger wallets are sold with a ‘security card’ which contains the key to the second authentication stage.
<h3>How to backup your coins</h3>
For the majority of hardware wallets, you can only backup your coins (or rather, the keys which you will use to store) when setting up your device.
If you haven’t yet set up the device, you’ll need to do the following:
- Follow the setup instructions until you are given the option to create a recovery code for your wallet.
- Note down the recovery code — often a phrase of random words — in a safe place.
- Retain any other security information for your wallet until you need.
If you didn’t backup your wallet during setup, you’ll have to consult the documentation for your particular device to find out whether it’s possible now.
How to recover your coins if you lose the wallet
Should you lose your wallet, you can recover the coins by referring to the backup information which you recorded. Of course, you’ll have to buy a new device with which to use the backup.
Here’s how:
- On your brand new hardware wallet, begin the setup.
- When prompted, choose not to set up a new wallet and instead choose the option to restore a lost wallet.
- Enter your recovery phrase and try not to lose your wallet again!