Crypto Beginner

What is a hardware wallet in crypto, and how does it work?

What is a hardware wallet?

Key Takeaways

  • A hardware wallet is an offline mechanism to secure your private keys.
  • Users can sign crypto transactions directly from the hardware wallet.
  • The seed phrase of the crypto hardware wallet is used to recover the private keys.

If you’re holding crypto, especially for a long time, at some point, you might begin to wonder: Am I storing my crypto right? Is there a better way to do it? You can, of course, store it on your exchange, but is there a wallet that can shield you from some of the risks associated with online storage options? If you find yourself thinking about this, let us stop you right there. Because one such alternative is already in the market—a hardware wallet. And you’ll find everything you need to know about it right here.

What is a hardware wallet?

A hardware wallet is essentially a physical device used in the storing of virtual digital assets like crypto. It is a type of cold wallet—that is, a type of wallet that helps users to store crypto offline. Cold crypto wallets like this one come with several safety-related advantages compared to others—including the mobile and desktop variants.

But hardware wallets don’t actually hold your crypto itself. Instead, they store and therefore secure your private keys—the keys that give you access to your share of crypto that’s residing on the blockchain. In case you aren’t sure what a private key is, there’s a quick recap in the section below.

Public and private keys: a basic explainer

When you buy crypto on a blockchain, you will be given an address via two keys—a private key and a public key. To receive any additional crypto on this address, give the sender your public key, or if there are multiple senders, you could simply make it public. Crypto holders can use the public key to let interested parties validate the amount of crypto reserved in the wallet.

The public key is, therefore, something like your bank account number. It lets you receive funds, and it is proof that you own an account. But unlike bank account numbers, when you disclose the public key, you also make it possible for others to verify the amount held at that address.

Private keys are, as the name suggests, more private. It is akin to the secret bank password that gives you access to your account. Whoever holds the private key(s) can send or buy crypto from the address.

Crypto wallets of all kinds are essentially meant to store and secure these private keys. They control who gets access to the designated crypto, which resides on the blockchain.

A hardware wallet, too, therefore, only stores the private keys. They have an advantage over hot wallets, like the ones on exchanges, because they are not connected to the internet, where hackers and scammers tend to thrive.

How does a crypto hardware wallet work?

Simply put, a hardware wallet is a little like a USB device. They do, however, usually feature a few additional buttons and maybe even a small touchscreen for interacting with the keys. While safer and, therefore, a great fit for those who believe in long-term holding, using it may take a little more time than other wallet options. Because although the wallet is not connected to the internet, to transact, swap, or spend the crypto, you will need to take it online.

When you plug the hardware wallet into any host computer with the internet, it connects to the corresponding blockchain via the wallet’s crypto bridge. A bridge is an inbuilt software functionality that lets the user interact with the blockchain and sign off transactions while ensuring that the private keys stay safe in the wallet.

For an added layer of safety, hardware wallets rely on a security PIN. And while different hardware wallets have different mechanisms, a basic transaction looks something like this:

  • The user connects the wallet to the computer, thus accessing the crypto ecosystem or the platform
  • To initiate a transaction, the user has to select the relevant option on the computer.
  • The next step is to unlock the hardware wallet using a PIN.
  • Finally, one needs to authorize and confirm the transaction on the wallet screen. The wallet can be unplugged afterwards.

What are the advantages and disadvantages of crypto hardware wallets?

There are many benefits of using a crypto hardware wallet. While we did mention a few before, here is a summary of all the advantages involved:

  • Hardware wallets offer better protection against internet-specific threats
  • Transactions can be signed off directly from the wallet
  • They offer multiple layers of security—such as a PIN and a PIN-generating seed phrase
  • Are compatible with multiple crypto assets

As advantageous as hardware wallets are, using them does come with a few challenges. To name a few:

  • Hardware wallet transactions take some time, so they may not be the best option for frequent trading.
  • They can be lost or damaged, and the consequences of such loss and damage are irreversible.

Which hardware wallet is right for you?

Wallets that support Bitcoin are preferable as BTC is still the most popular crypto globally. Data from analytics firm Statista suggests that (excluding stablecoins) BTC is still the biggest crypto in terms of trading volume as of 14 November 2022.

However, even if you prioritize Bitcoin support while choosing your hardware wallet, make sure that it supports other blockchains and crypto assets as well. Some of the best hardware wallets do support multiple cryptos and chains.

Ledger Nano and Trezor are some of the better choices. SafePal S1 is a good option, too, because it supports multiple blockchains like Binance Smart Chain and Ethereum and comes with a mobile application.

While a hardware wallet is a safe bet, you should make sure you keep it and the seed phrase safe. Also, if you plan on moving crypto from one wallet to another, you should always double-check the addresses. If these simple practices are taken seriously, a hardware wallet can easily become the best crypto resource that you can own.

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