What is a Hardware Wallet and How Does it Work?

A hardware wallet is a small device, typically resembling a USB drive, which securely stores the private keys needed to send cryptocurrency on a particular blockchain. Hardware wallets are generally perceived as safer than alternative storage methods for crypto, such as software and paper wallets. Unlike these alternatives, hardware wallets are not free and start at around $50. 

While many companies produce hardware wallets, the most popular and well-regarded are made by Trezor and Ledger. Both companies have hardware wallet product lines with varying prices and features. You’ll want to research the differences in hardware wallets and make sure the vendor you’re buying from is reputable before making a purchase. 

How Does a Hardware Wallet Work?

The primary function of a hardware wallet is to store the private keys associated with your crypto. Private keys serve as an authentication method and allow you to access your crypto assets on the respective blockchain. A popular misconception of hardware wallets is that they store cryptocurrency. Crypto lives on the blockchain, and a hardware wallet merely protects the private keys used to interact with the blockchain.  

Most hardware wallets will have you set up a “seed-phrase” and a PIN when you first plug them into your PC. 

  • Seed-Phrase: The seed-phrase is a list of randomly generated words that serve as a mechanism for you to regenerate your private keys in the event that you lose your hardware wallet. Therefore, losing a hardware wallet doesn’t necessarily mean losing access to your crypto assets. It’s recommended to keep your seed phrase securely stored since anyone who can access it could access your crypto.
  • PIN: The PIN you set up on a hardware wallet is simply a password you utilize every single time you plug your hardware wallet into your PC to ensure it hasn’t been compromised. In terms of functionality, the PIN on a hardware wallet is similar to a PIN on a debit card.

How to Use a Hardware Wallet

After the initial set-up, most hardware wallets allow you to access your crypto simply by connecting the hardware wallet to your PC via USB and entering the PIN you created. When attempting to buy, sell or move crypto, you’ll have to verify the transaction using your seed phrase. Keep in mind that without access to your hardware wallet, you won’t be able to trade crypto.

Benefits of a Hardware Wallet

There are two primary benefits to utilizing a hardware wallet for private key storage: a heightened level of security and the ability to store multiple assets on one device. 

  • Security: Since most hardware wallets are cold wallets, meaning they are not connected to the internet, they are not as susceptible to hacking or malware like keyloggers. The physical device also often requires a PIN to access, creating an additional layer of security for users. 
  • Storage Convenience: Depending on the hardware wallet you purchase, you may have the option to store multiple crypto assets on the device. So, if you’re someone who owns Bitcoin, Ethereum, and many other altcoins, then a hardware wallet may offer protection for all of your assets.

Drawbacks of a Hardware Wallet 

There are two main drawbacks of hardware wallets: the physical presence required to execute transactions and the price associated with purchasing one.

  • Physical presence requirement: To trade crypto, you need to access the physical device storing your crypto’s private keys. While this is a handy security feature, it also means lugging around a small physical device whenever you anticipate needing access to your crypto.
  • Cost: Hardware wallets start at around $50 but can cost upwards of $250, depending on the specific features you’re looking to have your hardware wallet equipped with. Popular alternatives, such as software wallets, can often be found for free. Keep in mind that hardware wallets are perceived as the most secure wallet type, meaning it might be money well spent depending on how much crypto you’re holding.  

Hardware Wallet Versus Software Wallet

The main difference between hardware and software wallets, aside from the physical aspect, is internet connectivity. Since software wallets are connected to the internet, commonly referred to as a hot wallet, they allow you to access and trade your crypto more easily. In exchange for this ease of access, there is a tradeoff in terms of security, granted that anything with internet access is subject to hacks.

The better crypto wallet for you will depend on your intended usage. If you’re constantly trading crypto, it might be cumbersome to carry a hardware wallet. However, if you’re someone who simply buys and holds crypto, a hardware wallet could be perfect for your needs. 

It might even make sense to have both a software and a hardware wallet, where the software wallet is used for everyday transactions, and the hardware wallet is used as a long-term storage solution.  

ProTip: Avoid Paper Wallets for Significant Crypto Holdings
Paper wallets refer to private keys written down on a piece of paper or other physical material. While they were popular in the early days of crypto, they are generally perceived to be less secure than software or hardware wallets. The private keys are typically generated by open-source software, which is susceptible to online exploits. Furthermore, losing the paper where the private keys are written effectively renders your crypto lost forever.  

Should You Buy a Hardware Wallet?

As previously discussed, a hardware wallet makes sense for crypto enthusiasts who simply buy and hold their assets. If you have a significant amount of crypto, then it makes sense for you to purchase a hardware wallet. While there is no hard and fast rule, anyone with more than $500 in crypto should at least consider a hardware wallet.

While people with less than $500 might also benefit from a hardware wallet, hardware wallets can be pricey. Additionally, some crypto assets, such as Ether, currently have high transaction fees. Therefore, sending crypto in and out of a wallet could chip away at any gains a user might have. As a result, users with minimal crypto holdings might benefit from an alternative storage method for their crypto.  

If you’re interested in learning more about crypto wallets, read our comprehensive crypto wallet guide, where we cover hardware, software, and paper wallets.