A hardware wallet is a special type of bitcoin wallet that stores the user’s private keys in a secure hardware device. It’s a form of cold storage because private keys are stored offline.
How does a hardware wallet work?
Your bitcoins and other cryptocurrencies are not stored on the hardware wallet itself, but on the Blockchain. The device only ensures that the private data that’s required to get access to your bitcoins is stored on the hardware wallet chip so that you can easily manage your bitcoins. To send bitcoins a physical confirmation is required by using the buttons on the device.
In short, this is how a hardware wallet works:
- The hardware wallet is secured using a PIN that you set up for initial use.
- If you start the wallet for the first time, you will see the 24 words that serve as a backup of your private key. Write them down, and keep them in a safe place; If you ever lose the device, you’ll need these 24 words to re-access your bitcoins.
- Then install the Chrome extension. This is the application that allows you to manage your bitcoins.
- You plug the device through USB into your computer and the application will then sync with your wallet.
- Via this application you can send and receive bitcoins.
Benefits of hardware wallets
Hardware wallets have great advantages over standard software wallets:
- Private keys are often stored in a secure microchip and can not be transferred to the device as plain text.
- Hardware wallets are immune to computer viruses that try to steal bitcoins.
- They can be used safely and interactively, as opposed to a paper wallet that needs to be imported into software when you need access to your coins.
- Often the software is open source, which allows a user to validate the entire operation of the device.
Why is a hardware wallet more safe?
If you are unfamiliar with the concept of hardware wallet, you might wonder what the benefits are opposed to, for example, a paper wallet or an encrypted private key on a computer.
The principle behind hardware wallets is that there is complete isolation between the cryptographic secrets (private keys) and an easy-to-hack computer. Nowadays, you are confronted with computer hacking reports almost daily, so saving your private keys on your computer is not the most wise thing to do.
A paper wallet can be safe, but only until you need to use your money: at that time you need to import your private keys on a computer. And if you think that a password that encrypts your private keys is enough; today’s malware is clever enough to wait for the inevitable private key decryption before you start sending your money.
Hardware wallets are handy, affordable, portable and backed up by a paper wallet, making it easy for recovery at loss. If you have a significant amount of bitcoins, the use of a hardware wallet should actually be a no-brainer.
What do I need to use a hardware wallet?
You need the following:
- A computer with a USB port.
- Windows (not XP), Mac (10.7+) or Linux.
- For hardware wallets like the Ledger Nano S, or the Trezor wallet: Google Chrome or Chromium 50+.
Most hardware wallets do not require software installation, but connect the hardware interface to a Chrome extension.
Most hardware wallets support the most popular digital currency like Bitcoin, Ethereum, Litecoin, Dogecoin, ZCash, Dash, Stratis and Ripple. For a full comparison between the most popular hardware wallets, check out the hardware wallet comparison.
What if I lose my hardware wallet, or if the device is broken?
Then you can restore your wallet in any other wallet that supports 24-word backup techniques:
Examples of wallets that support these techniques are:
- Various other brands of hardware wallets
- Multibit HD (desktop)
- Mycelium (smartphone)
- Bither (smartphone and desktop)
- Coinomi (smartphone)
What are the differences with a paper wallet?
Another form of cold storage is a paper wallet in a physical safe. This can be a very effective solution to protect your bitcoins. The advantage of a hardware wallet is that it has the same security level, but the ease of use is more spacious.
What are the differences with software wallets?
If private keys are stored on your desktop (a desktop wallet) or through a cloud service (an online wallet), they must be available in plain text in your computer memory or at the service where you have the wallet. When your computer is compromised by specialized bitcoin malware, it will be very easy for the malware to steal your bitcoins.
Safety-risks of using hardware wallets
To date, there are no known incidents of bitcoins stolen from hardware wallets. Hardware wallets are relatively new, but they have a good track record, unlike the numerous incidents of bitcoin theft of computers connected to the internet.
Of course, it’s never completely excluded that your private keys get stolen from your hardware wallet, but if you use the hardware wallet in the prescribed way, a hardware wallet is the most secure way to handle your bitcoins.