How Hardware Wallets Work

To store your cryptocurrency securely, a hardware wallet is the best way to safely keep your cryptocurrency out of harm’s way. Compared to software wallets, hardware wallets have major advantages and security features. They have also been getting more and more integration with crypto websites so using hardware wallets is easier than ever before.

Gone are the days where sending your crypto into a hardware wallet means you have to leave it there through the long haul. These days, you’re able to connect your hardware wallet with hot wallets such as Metamask and seamlessly send transactions.

But how do hardware wallets really work under the hood and why is it ‘unhackable’ in the general sense? Let’s dive deep into exactly how hardware wallets protect your funds and the major differences on how cold wallets operate.

How do hardware wallets work?

The way someone has access to your crypto accounts is if you have your private key. Anyone can see your public key but they must have the exact private key to decrypt it.

If your funds are in an online wallet, your private key has been exposed to the internet. Now that’s not a bad thing inherently but you never know what can be infected with malicious code on the internet. What are the chances of your hot wallet being malicious? Pretty low, but the chance is not zero.

And when it comes to your money, you would probably want to have 0% chance of your private keys being compromised when it’s being connected to the internet.

So while it’s ok to leave some funds on a hot wallet for convenience, you would generally want to have the majority of your holdings in a hardware wallet like Ledger Nano or Trezor One. These are the most popular hardware wallets in the world and it solves the issues of exposing your private keys to the world.

But how does hardware wallets not expose your private keys to the world? Well, the way you interact with your hardware wallet, is through an interface or program on your computer. Whenever you want to send funds from your wallet, you initiate the request through your computer app while your wallet like Ledger Nano is connected to your computer via USB…

Then the request will go to the Ledger Nano and that device will ‘approve’ the transaction internally and sends back the approved request for your computer to broadcast to the blockchain. This is how your private keys stay private and never touches the internet. Everyone will be able to see that your transaction is legit and ready to go but they can’t see the private key which approved it.

So your hardware wallet is like an active proxy on your transactions, shielding any sensitive information from ever reaching the internet.

The benefits of a hardware wallet

The other security safeguard against hackers stealing your funds from a hardware wallet is that it’s offline and every time you send a transaction, you need to physically approve the request. You would need to press a physical button on your hardware wallet device to confirm the transaction is legit. So, a hacker would never be able to send transactions without having your device.

Now you may be thinking, well what if hackers do get their hand on it, or you lose your device? Well when you first set up your device, for example, Ledger Nano S, you are required to write down a randomly generated set of 12-15 words, known as your ‘seed phrase’.  What this does is in the event you lose your device, as long as you have your seed phrase, you can recover your accounts and your funds are not lost.

You also need to set up a pin as well to access your device every time you use it. The pin number has a maximum length of 8 numbers. So if a hacker or a random person got hold of your device, they would need to break through your pin code to be able to do anything.

Is a hardware wallet necessary?

Yes, hardware wallets are absolutely necessary to be able to store your cryptocurrency with peace of mind. Exchanges are by far the worst place to leave your coins. They can get hacked anytime or they can close down anytime. There was a recent drama from one of the biggest exchange okEx where they disabled withdrawals for a whole month as their CEO was being arrested in China. But while withdrawals were being disabled, okEx gave no announcement on set dates to enable again and it was looking like they may have exit scammed and would never reopen withdrawals again. Thankfully, they did but if funds were in your wallet, you would never fear funds being lost.

There have been numerous cases with exchanges over past years and users losing so much money so if you’re in the game for the long term, we highly recommend investing in a hardware wallet.

The best crypto hardware wallet

There are many great crypto hardware wallets on the market, but the most popular companies are Ledger and Trezor. We have written an in-depth review on those here.

The two versions Ledger offers is their Nano S and Nano X version. The Nano S is the best entry-level hardware wallet as it’s cheap and does the job exactly as you need it to. The Ledger Nano X upgrades some functionality on the Nano S such as giving it a battery, Bluetooth mode, and larger storage space. But in terms of security, it is exactly the same as the Nano S.

Trezor’s product line is a little more expensive with their Trezor One and Trezor Model T – but still excellent if you’re looking for cold storage.

Cold storage is the best way to store any funds long term if you don’t want to lose funds due to hacks or things outside your control. It’s akin to having your own personal vault where you lock up your most valuable items, but unlike a vault, it’s super easy to get your hardware wallet integrated through popular hot wallets. It will just send a request for you to approve the transaction when you want to send funds somewhere and it would be the same as if you had funds on a hot wallet.

We have more articles reviewing some of the best wallets for you to invest in here.