Yes, you probably do need a hardware wallet, if you have anything more than a few hundred dollars invested for the long term, but maybe not for the reason you first think!
Hackers stole over $4 billion in crypto in 2021 from Custodian and Hot-wallets!
However, were you also aware that your crypto can be frozen in a Custodian or Hot wallet, by your own or a foreign government!
The more I read and hear about the vulnerability of crypto wallets and how our assets can be stolen, phished, or frozen, the keener I was to investigate the possibilities of a hardware wallet. Here we look into everything you should know to help you decide if you need a hardware wallet.
What is a Crypto Hardware Wallet?
Also known as a Cold Wallet, Hardware wallets are considered safer and more secure than other wallets because they are not connected to the internet. They are more secure but also currently less convenient.
If you are new to crypto wallets do head over to our general Wallet Guide for everything you need to know, before choosing the right crypto wallet for you!
Each crypto coin you own has a unique public address and private key associated with it. When you transfer your crypto onto a hardware wallet, you are creating new digital copies of your public and private keys.
Once on the hardware wallet, access to these keys is strictly controlled, limiting the chances of hacking, etc, whilst still giving you controlled access via their dedicated software interface.
Wallet Security; the key benefits.
Offline Security is supposedly what sets Hardware Wallets apart from the rest of the crypto wallets (Mobile, Software, Custodian/Hosted etc) available on the market.
They offer you four key security benefits over their competitors:
- You can keep it disconnected from the internet so it is not vulnerable to attack from hackers.
- You can store your device in a safe place, like you would anything else of significant value, like your passport or jewelry.
- You type your passwords and Private Keys directly onto the Hardware wallet device itself, rather than entering this information on your phone or PC which could be hacked quite easily.
Built-in features that make it very difficult to hack or break into the unit itself, should it be lost or stolen.
If you hold your crypto assets on an Exchange, the Exchange can be compelled to freeze your assets and prevent you from trading with your account if compelled to by law enforcement agencies or a government request.
(However, this doesn’t mean your hardware wallet address can’t be flagged or tracked if it’s believed your crypto is stolen or linked to the crime.)
These added layers of security are still totally dependent on YOU keeping your hardware wallet Seed Phrase safe.
If you forget or lose your Seed phrase it will be very difficult if not impossible for you to recover your crypto.
How Crypto Hardware wallets work?
The Hardware Basics
- Hardware wallets come in all shapes and sizes, though are usually small enough to easily fit in your hand or pocket.
- Most have a rechargeable battery that you can charge using a USB cable or USB port on a PC.
- Some wallet devices can connect to your phone or PC via Bluetooth, however, most still have a USB cable for connection.
- Basic devices have a screen and buttons, whilst more advanced models have a touchscreen.
As with other wallets, at set up, you will generate a Seed Phrase for your hardware wallet. This is like a Master Password, giving access to all the private keys stored on the wallet, and it needs to be stored safely.
In most cases, if your hardware wallet device is lost, stolen, or damaged, with your Seed Phrase it is relatively simple for you to access your crypto and move it to another wallet.
Hardware Wallet Operation
You will still need a PC or smartphone (depending on the wallet) with a minimum specification operating system in order to set up, update and use a hardware wallet device.
Do compare these minimum specification requirements with the operating systems you already have on your phone or pc to make sure they are good enough to run the hardware wallet you are looking to buy!
We were surprised how this limited our access to some wallets!
Each wallet has its own software that they connect to, to make it easier to buy, sell or trade your crypto and to update the software on your wallet device.
These can be a mobile or desktop app or simply a web/internet page.
When you want to buy or sell your crypto you do so through the software/app. You follow the instructions from the software/app as you would on any other exchange or online wallet.
What is different, however, is that when required, you enter your password/ private key ONLY on the hardware device itself.
This then generates a separate code that is sent to the software to authenticate the transaction. All without your private keys ever being revealed on the internet.
Limitations of Hardware Wallets
The hardware wallet market is currently dominated by two major brands, Trezor and Ledger. They are the most popular and trusted due to having a proven track record in crypto of 8 years. This doesn’t sound like a very long time but then you have to remember crypto is still in its infancy!
In researching this article, we were actually surprised at how underdeveloped hardware wallet devices seem to be.
Even the newest wallets on the market struggle to offer anywhere near the features of the market leaders and many only have a track record of 4 years or less in the industry.
Whilst it is probably unfair to make the comparison with mobile phones, our first impression is that hardware wallet development is towards the classic Nokia 3310 of that development scale!
They do the job they are designed for but we would expect to see massive progress in how they look and how you can interact with them in the next few years.
Another assumption we made was that all the crypto coins we hold in our portfolio would be supported and some just aren’t, which is frustrating.
We had assumed that there would be good linkups with the major Centralised Exchanges to make it easy to buy, sell, and trade, but this is just not in place yet.
We had also expected wider compatibility with all the big software/hot wallets but this is still patchy.
We like to stake crypto as it is a good way to gain interest on the crypto we hold. Cold Staking directly from the safety of a hardware wallet is still very limited and lacks the juicy returns we get from staking with exchanges.
We had hoped to find a hardware wallet that we could move our entire crypto portfolio into, still earn the same interest we are getting through staking, and would seamlessly work with our favorite exchanges and wallets.
Unfortunately there just isn’t a product ready to do that at the moment though Ledger and Trezor are closer than most.
In buying a hardware wallet it will definitely be a compromise but for the assets we are planning to HODL then the greater security and access control still makes them appealing.
Next: So let’s have a look at the market leaders in hardware wallets and see how close they can get to our desired spec!