Beginner’s Guide to Crypto Hardware Wallets
Hardware wallets are an extremely secure way to store your crypto. Here is everything you need to know about hardware wallets.
You’ve just started investing in crypto, and you’ve heard you may need one of those fancy “hardware wallet” things. You know what I mean: the USB devices you see rich crypto investors passing around on shows like Billions and StartUp.
But what are these devices, and why do people use them? Are they really as secure as everyone thinks? Billionaires like Elon Musk can stand to have their pockets picked from time to time. Normal investors can’t — so digital security is at the top of our list of concerns when investing in crypto. It’s the only way to keep the fraudsters at bay and our digital privacy intact.
In this guide, I’ll explain exactly what hardware wallets are, how they keep your crypto secure, and how you can pick the best one for your needs.
Let’s begin with a basic definition.
What Is a Hardware Wallet?
A hardware wallet is a physical device that can be used to store your private key and sign cryptocurrency transactions.
On cryptocurrency networks, there are no usernames or passwords. Instead, you prove you are the owner of a cryptocurrency account by encrypting a message with your private key.
FYI: A private key is a string of characters produced when you first set up a cryptocurrency wallet. Each private key has a corresponding crypto address, and each address can be accessed only using its private key. For a more detailed explanation of how it works, check out my Crypto User’s Guide to Cryptography.
In the early days of crypto, everybody kept their private keys on their computers or smartphones. That was fine for people who had only small amounts of crypto, but it wasn’t secure enough for people with large crypto holdings.
Many crypto users were concerned their computers would become infected with malware, which could lead to them losing their crypto life savings to digital thieves.
Hardware wallets were invented to solve that problem. If you use a hardware wallet, then your private key is stored on the device itself instead of on your PC or smartphone. That means even if your PC or phone becomes infected with malware, the attacker will not be able to get your private key. That should prevent the attacker from being able to steal your cryptocurrency.
An attacker generally cannot steal your cryptocurrency from a hardware wallet unless they either steal the wallet itself (which is a physical thing) or your paper backup. By contrast, a software wallet can be hacked without the attacker physically stealing your PC or phone.
A hardware wallet is a secure way to store cryptocurrency without taking the risk of losing your crypto from a malware infection or other type of cyberattack. Now here is how a hardware wallet works.
How a Hardware Wallet Works
Hardware wallets do not have Wi-Fi antennas or Ethernet ports. They cannot be connected to the Internet directly. This is exactly what makes them so secure. Since they aren’t connected directly to the Internet, there is essentially no way for a hacker to log into them and steal your crypto.
Pro Tip: Software wallets are less secure than hardware wallets, but they are also more convenient and cost nothing. So they may be better for small accounts that do a lot of transactions. For more info about the different types of wallets (and which are best for different situations), check out my beginner’s guide to crypto wallets.
When you first set up a hardware wallet, it gives you a list of “backup seed words.” This is a set of words that can be used to derive all of your private keys in case your wallet crashes or breaks. Once you write these words down on a piece of paper and store it in a safe place, this paper serves as your backup.
There is no “forgot my password” feature in a hardware wallet. The only way to reset the wallet is by using these seed words. This means that an attacker cannot reset your wallet as long as he doesn’t have your seed words.
When you want to send or receive crypto, you connect your hardware wallet to a PC or mobile device via a USB cord or Bluetooth connection. The wallet generates a “signature” (a transaction message that is encrypted with your private key).
This signature is sent through the connection, into your PC or mobile device. But the key itself cannot be transmitted through this connection. In theory, this should make it impossible for a hacker to steal your crypto without stealing the device.
Just in case your wallet is stolen, it also contains a PIN code lock that should slow down an attacker who gets a hold of it. However, this isn’t effective over the long-run; so if your hardware wallet is stolen, it’s best to move your crypto out of it as soon as you can.
Hardware wallets are also called “cold wallets,” and I’ll unpack this in the next section.
Cold Wallets vs. Hot Wallets
You may have heard the term “cold wallet” used in connection with hardware wallets. In this sense, a “cold wallet” is a private key stored on a device that is not connected to the internet.
A hardware wallet is one example of a cold wallet, but there are other examples. A piece of paper with your seed words on it is a “cold wallet” if there is no copy of these words on any internet-connected device.
Pro Tip: Crypto exchanges are huge targets for cybercriminals, so the best crypto exchanges keep the vast majority of their crypto in cold wallets. Coinbase, for example, keeps 98 percent of its deposits in cold wallets, and Crypto.com claims to keep 100 percent of customer funds in cold wallets. You can read more about these exchanges in our Coinbase review and Crypto.com review.
A laptop with no internet access stored in a bank vault is another example of a “cold wallet” if it contains a copy of a private key associated with a crypto address.
A “hot wallet,” by contrast, is a private key stored on an internet-connected device. Let’s say you generate a crypto address using the popular software wallet Metamask. And let’s say the private key to that address is stored on your PC, which is connected to the internet. In this case, your crypto is in a “hot wallet” because your private key could be stolen if your PC is hacked or becomes infected with malware. Keeping crypto in a hot wallet is more secure than keeping it in an exchange, but it’s still less secure than using a cold wallet.
You may wonder how you can know which hardware wallet is best for you. In the next section, I’ll go over some factors to consider when shopping for a hardware wallet.
How to Choose a Hardware Wallet
There are many hardware wallets available, but here are a few features to consider when choosing one.
Screen Size and Quality
Some hardware wallets have very small screens, which may be black and white instead of color. If you expect to do a lot of transactions with your hardware wallet, then you may want to go for one with a large color display. That can cut down on eyestrain and make for a more pleasant experience when using the wallet.
For desktop, hardware wallets almost always work with Windows, Mac OS, and Linux. For mobile, however, some wallets work only with Android or iOS, not both. If you plan to do transactions on your phone, then you should make sure your wallet is compatible with your phone’s operating system.
Some hardware wallets also have Bluetooth capability. That can make mobile transactions much simpler, since it means you don’t need to connect your phone to the wallet every time you make a transaction.
FYI: On a hardware wallet with Bluetooth capability, the only thing the Bluetooth connection can be used for is to send a signature. It shouldn’t make the wallet less secure.
Hardware wallets differ in terms of which coins they work with. Some wallets work only with the largest networks, such as Bitcoin and Ethereum. Others work with hundreds or even thousands of coins.
If you’re not sure which coins you may want to invest in, consider getting a wallet that works with a great variety of coins. If you already own coins, then you may want to look up the wallet’s coin compatibility before buying it to ensure it works with the coins you hold.
Price obviously can be a significant issue when buying a hardware wallet. Hardware wallets can sell for as little as $39.99 or as much as $699. In general, more expensive hardware wallets have greater coin compatibility, a bigger and higher-quality screen, and Bluetooth capability.
That won’t do you much good if it doesn’t fit your budget, so you’ll need to weigh price vs. features.
Crypto Hardware Wallet Costs
|Keevo||$699||4-factor seedless recovery|
|Ngrave Zero||$415||Large color screen, cordless transactions|
|Trezor Model T||$260||Huge color touchscreen, variety of coins|
|Ledger Nano X||$149||Large buttons, Bluetooth|
|BitBox02||$149||SD card recovery option|
|Ledger Nano S||$79||Works with many different coins|
|KeepKey||$49||Basic wallet on a budget|
Pro Tip: Robinhood offers crypto trades with no fees or commissions. It recently announced that users will be able to withdraw crypto into their own wallets (including hardware wallets). You can read more about it in my Robinhood review.
I’ll unpack these popular hardware crypto wallets in more detail below. For now, let’s consider whether hardware wallets are truly safe.
Is a Hardware Wallet Safe?
Is a hardware wallet truly safe? Or is it just a gimmick marketed to unknowing crypto newbies?
The truth is that hardware wallets are extremely safe and secure. If you hold a large amount of crypto you want to keep safe no matter what, then a hardware wallet is usually your best option. The only other option that can compete with that level of security is an institutional-grade cold wallet vaulting service such as Coinbase Custody.
If you’re just an individual investor, then you probably don’t have access to such elite, institutional-grade security. A personal hardware wallet is the next best option.
Hardware wallets still are not perfectly secure. There are a few ways hackers can get your crypto even if you use a hardware wallet. In the next section, I’ll discuss some of the most common pitfalls to avoid when using a hardware wallet.
Hardware Wallet Pitfalls to Avoid
Despite how secure hardware wallets are, there are a few tricks to watch out for while using them. Here are the two most common ways you can accidentally lose your crypto while using a hardware wallet.
Buying a Used Hardware Wallet or Buying From an Unknown Merchant
The most common way to lose your crypto from a hardware wallet is to buy a used wallet or a wallet from a store that doesn’t have a good reputation.
Some merchants will sell used or low-price versions of popular hardware wallets such as the Trezor Model T or Ledger Nano S, but they may have modified the hardware so it presents you with the store owner’s own seed phrase instead of a randomly generated one. One Reddit user claimed he lost his life savings — $34,000 worth of cryptocurrency — from this type of scam.1
FYI: Not only is some wallet software fake, but there are also cryptocurrencies themselves that are complete scams. It’s important to know how to spot a safe crypto coin.
It’s usually safest to buy a hardware wallet brand new directly from the manufacturer, instead of buying it used or from a third party.
Downloading Fake Software
We call them “hardware wallets,” but they still can’t be used without software. If you download your wallet software from an untrustworthy source, then you may end up with a fake version. The scammers may then be able to trick you into giving away your private key through this interface.
In August 2020, some scammers posted a fake Ledger Live app to the Google Play and Chrome web stores. The app appeared to be from Ledger, but it was a cleverly designed imitation. It even had fake customer reviews that seemed realistic.2 The app asked users to enter their seed words in order to recover their wallets. Once the user entered their seed words, the information was sent to the scammers, who promptly stole all the user’s crypto.
If you ever need to recover your wallet, its software will never ask for your seed words. The only way to recover your wallet is to enter the seed words directly onto the device, using buttons or a touch-screen. There is no way to recover a hardware wallet through desktop or mobile software.
When you download your wallet’s software, consider getting it from the developer’s official website. From there, you can follow a link to the official Google Play or iOS store. That is generally safer than searching for the app in the app store, because there are constantly imposters trying to get their apps to the top of search results within app stores.
These are the two most common ways to lose your crypto while using a hardware wallet, but there are others. For more tips on how to avoid common crypto scams, check out Nine Crypto Pitfalls to Avoid.
In the next section, I’ll list some of the most popular crypto hardware wallets.
The Most Popular Hardware Wallets
If you’ve read this far, maybe you’re ready to take the dive and get yourself a hardware wallet. Here is a list of some of the most popular hardware wallets.
- Trezor Model T: A top-of-the-line hardware wallet with a large, full-color touchscreen and huge coin variety. It doesn’t work with iOS and doesn’t have Bluetooth. Price: $260.
- Ledger Nano X: Another high-end wallet with lots of great features: Bluetooth connection, large buttons, a wide variety of coins, and works with Android and iOS. Price: $149.
- Ledger Nano S: A more budget-friendly Ledger wallet. This one has smaller buttons than the Nano X and doesn’t have Bluetooth. It also doesn’t work on an iPhone or iPad. Because of memory limitations, you can use only three crypto networks at the same time on the Nano S. Other than these limitations, it’s similar to the Nano X. Price: $79
- KeepKey: A small, budget-friendly hardware wallet that supports seven of the top crypto networks and all tokens for those networks. Price: $49.
- Keevo: A beginner-friendly premium hardware wallet that allows you to use four-factor authentication to transact without storing seed words. It also has a large, easy-to-read display. Price: $699.
- Ngrave Zero: Another premium wallet with a large color screen that’s compatible with thousands of coins. It doesn’t use cables, but instead uses QR codes on the screen to communicate with your PC or phone. Price: approximately $415.
- BitBox02: Another premium wallet with easy-backup features that allows you to restore your wallet using an SD card instead of seed words. It works only with Bitcoin, Litecoin, and Ethereum. Price: $149.
Note: Most hardware wallets will allow you to stake your crypto to earn even more crypto. Read my guide to crypto staking to find out more.
Final Thoughts on Hardware Wallets
In the early days of crypto, investors had to keep their crypto on PCs or mobile devices, where it could be vulnerable to cyberattacks.
Some Bitcoin users tried to get around that problem by using “paper wallets” that consisted of a private and public key pair written on a piece of paper, but those paper wallets had to be generated using websites that sometimes turned out to be phishing scams. In addition, paper wallets had to be imported into a software wallet every time the user wanted to make a transaction. They were a real pain to use.
In 2014, SatoshiLabs released the Trezor One, the first crypto hardware wallet. Since then, the industry has grown year after year. There are now many hardware wallets to choose from, so crypto users no longer have to rely on difficult-to-use paper wallets to keep their crypto secure.
Still, all these choices can make hardware wallets seem confusing. Using the information in this article, you should be able to pick the right hardware wallet for you in short order.
Coin Telegraph. (2018, Jan 08). Life Savings Stolen from Second-hand Ledger Hardware Wallet.
Finance Magnates. (2020, Mar 30). Fake Ledger Chrome Extension Crypto Scam May Have Stolen Up to $2.5M.