Hardware Wallets Explained: How They Work & How to Use Them Like a Whale | BitPay

Summary
Hardware wallets keep cryptocurrency in offline or “cold” storage, meaning they’re not connected to the internet. They’re physical devices, typically resembling a USB stick, which function as stripped-down, single-purpose computers. With a hardware wallet, crypto transactions are digitally signed within the device using your private key, then securely uploaded to the blockchain via a crypto bridge. Hardware wallets start around $30 and can cost as much as $100. They provide users with total control over their digital assets, but may be less convenient than mobile or “hot wallets” in some cases.

If you’ve decided to self-custody some or all of your digital assets, it’s absolutely critical that you use every available measure of protection to safeguard your holdings. When used correctly, hardware wallets are an excellent way to store and safeguard your coins.

If you’re reading this there’s a good chance you already know what a hardware wallet is, but you may have some additional questions about how hardware wallets work or why they’re more secure than web- or software-based wallets. Ahead, we’ll explain these and many other lingering questions about these offline hardware marvels that protect your assets like no other method. If you’re not caught up on wallets, check out our deep dive choosing a Bitcoin wallet and the different types of crypto wallets available.

In this article

What are hardware wallets?

Hardware wallets securely keep a crypto user’s private keys in offline or “cold” storage, meaning they are not connected to the internet, except when a user must briefly connect them to a computer to complete a transaction (more on that later.) Software- or web-based crypto wallets are “hot”, or permanently online, which gives hackers more potential attack vectors through which to steal your funds. Because of this, hardware wallets are nearly universally considered to be a very safe option for keeping crypto assets out of the wrong hands.

Quick primer on keys
Whether you use a hardware or software wallet, it’s important to understand that your crypto holdings aren’t actually stored inside of it the way you keep fiat currency in a regular wallet. Cryptocurrency is simply data that lives on the blockchain, and holders access their funds through what are known as private keys. Every

Whether you use a hardware or software wallet, it’s important to understand that your crypto holdings aren’t actually stored inside of it the way you keep fiat currency in a regular wallet. Cryptocurrency is simply data that lives on the blockchain, and holders access their funds through what are known as private keys. Every crypto wallet contains a pair of these keys, one public and one private. These keys are complex sequences of numbers and letters, usually around 25-36 characters in length. The public key is free to be shared at will, serving something like a bank account number. However the private key is more like a PIN code and must be carefully protected, as anyone who has it obtains full access to a user’s crypto funds, hence the common refrain in crypto circles “not your keys, not your crypto.”

Newer or more casual crypto users might not want to bother thinking about things like private keys or custody, so many cryptocurrency exchanges handle wallet services on behalf of account holders (known as a custodial wallet). However this means you’re trusting your private keys to a third party. Hardware wallets, on the other hand, allow users to take the security of their private keys into their own hands with a physical piece of equipment. Most often resembling USB thumb drives, hardware wallets have a small variance of form factors and features, and their sole purpose is to sign cryptocurrency transactions offline and safeguard a user’s private keys.

How do hardware wallets work?

Hardware wallets can be thought of as highly stripped-down computers that exist only to perform a few basic but essential functions, often containing little more than one or two buttons and sometimes a small screen. On their own, hardware wallets have no way of connecting to the internet, which means it’s virtually impossible for hackers to access their contents. When a user is spending crypto, swapping, or otherwise sending and receiving assets to/from any wallet, the transaction must be “signed” using their private key. With a hardware wallet, transactions are signed within the device itself through what’s called a crypto bridge, a simple piece of software that facilitates a hardware wallet’s connection to the blockchain.

When a user connects their hardware wallet to a PC, the crypto bridge transfers unsigned transaction data to the device. The hardware wallet then signs the transactions via the private key and uploads them back to the bridge, which broadcasts them to the rest of the blockchain network as complete. At no point in this process does a user’s private key leave the hardware wallet.

Why do people use hardware wallets?

Generally, hardware wallets are favored by more security-minded crypto users, or those with a great deal of assets to protect. This preference is a testament to the high level of security a hardware wallet offers those who wish to handle custody themselves. In fact, crypto best practices in general say you should never store large amounts of cryptocurrency in an online “hot” wallet, owing to security concerns.

Benefits

• Keeps your private keys completely offline for maximum security
• Gives users total control over their private keys
• Multiple trusted manufacturers with various price points and features

Drawbacks

• Holdings are harder to access for users who frequently spend their crypto
• They can be lost, stolen or destroyed
• Requires discipline and responsibility to self-custody crypto assets

Best practices when using a hardware wallet

For the most part, using a hardware crypto wallet merely requires some good old-fashioned common sense along with standard crypto security tips.

Be careful with where you get your hardware wallet

Only buy a hardware wallet from a reputable manufacturer, and it should go without saying, but never buy a used hardware wallet. Most hardware wallets include a clearly visible security feature like a holographic sticker to alert the buyer if the device has been tampered with. If anything looks out of place, do not use it.

Always triple check and test addresses when transferring large amounts of crypto

Even though a hardware wallet is considered the most secure way to store your private keys, generally accepted crypto security best practices still apply. Never send a large amount of crypto between wallets before verifying the receiving address with a small test transfer, and don’t transact with any unknown wallet addresses. If your hardware wallet has a screen, always be sure the recipient’s address on your computer screen matches up with what the wallet is displaying before initiating a transaction.

Safeguard your wallet AND seed phrase

You’ll also want to keep your hardware wallet in a safe place, as well as the recovery seed phrase. A seed phrase, also known as a recovery phrase, is a series of 12-24 randomly generated words used as an emergency backup recovery method in case a wallet is lost, deleted or otherwise destroyed. Seed phrases should be protected with the same degree of caution as your private key, as both will give whoever has them complete access to your holdings. Write down your secret phrase on a piece of paper or make another non-digital record.

Protection against the elements

Even when keeping your assets offline, you’ll need to keep them safe from the elements. Right next to hackers and scammers, fire and water are the two biggest threats to safeguarding your crypto assets. Its a great idea to use a fire and water-proof seed phrase protector like hodlr. At the very least, keep your hardware wallet and seed phrases stored in a fireproof safe.

Using multiple wallets for multiple use-cases

We mentioned that one potential drawback of a hardware wallet is its lack of accessibility for users who frequently pay for purchases with crypto. Fortunately, there’s nothing stopping you from utilizing multiple wallets. In fact, there are many benefits to doing so.

A hardware wallet can be thought of sort of like the bank’s vault, where stacks of gold bars and big bags with dollar signs on them are kept behind a giant steel door. Great for security, but not so great for spending. Using a mobile wallet in tandem with a hardware wallet gives users the best of both worlds, making it easy to access funds without compromising on security.

With a mobile app like the BitPay Wallet, users can securely store smaller amounts of crypto for everyday spending. It’s a dead-simple way for active crypto spenders to get the most out of their holdings. It’s one of many safe and convenient ways BitPay offers users looking to convert crypto to cash, along with the BitPay Card, or by purchasing gift cards with crypto from one of our hundreds of partner merchants.

Additionally, if you’re a die-hard devotee to DeFi and Web3 or just interested in exploring these growing ecosystems, a dApp-integrated wallet like MetaMask can be another useful addition to your crypto wallet stack.

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Popular hardware wallets

Some of the most trusted and best-known hardware wallet manufacturers include:

FAQs about hardware wallets

Do hardware wallets have fees?

The hardware wallet devices themselves can cost anywhere from around $30 at the low-end to about $200 at the top of the market. Besides that, the wallets themselves do not impose any fees for users. However, any crypto transactions made through the wallet will be subject to the usual network and exchange fees.

How safe are hardware wallets?

Because they’re offline, hardware wallets are considered one of the safest methods of safeguarding a user’s private keys. However, a hardware wallet won’t replace the usual crypto best safety practices. If a user is careless with their keys or seed phrase, it won’t matter what kind of wallet they use.

Is BitPay Wallet a hardware wallet?

No. The BitPay Wallet is a non-custodial wallet available for desktop and mobile devices. However, it can easily be used alongside a hardware wallet for the perfect balance of security and convenience.

What happens if my hardware wallet breaks? Will I lose access to my crypto?

Thanks to how the blockchain works, losing your hardware wallet or accidentally putting it through the washing machine won’t affect your holdings. As long as you still have your seed phrase your wallet can be recovered. If you lose both your hardware wallet and seed phrase, there’s a good chance your funds could be unrecoverable.