What Is a Crypto Hardware Wallet and How Does It Work?

Hardware wallets are one of the most secure methods for storing crypto. Here we break down what they are, how they work, and if you need one.

Jun 17, 2022

Hardware Wallets

What is a Hardware Wallet?

There are two main types of crypto wallets: software-based hot wallets and physical cold wallets. Hardware wallets, a type of cold wallet, provide one of the most secure ways to keep cryptocurrencies. They work by storing your private keys in an external, physical device (usually a USB or Bluetooth device). 

Before we dive into what exactly a hardware wallet is, we first need to discuss public and private keys. 

How Does a Hardware Wallet Work?

Hardware wallets don’t store your crypto itself, but the keys that access it. Here is how that works:

Public and private key pairs are a core component of public key cryptography, an encryption mechanism designed to protect data from unauthorised access. Together, the keys are used to encrypt and decrypt messages and transactions.

These keys are not physical keys, but long lines of numbers that are mathematically related to one another. Because of this link, data that has been encrypted with a public key can only be decrypted with its corresponding private key.

Why Are Private Keys Important?

Composed as a long, alphanumeric code, private keys enable you to access, receive, and send cryptocurrency in a trustless manner, where a third party is not required to verify the transactions. Private keys convey final ownership and control over your cryptocurrency. 

This concept of trustlessness is a core component of blockchain technology. It seeks to reduce the level of trust participants must place in other individuals, organisations, and even governments, while ensuring that no single bad actor can compromise this system. When you hold your own private keys, you and only you are in control of your finances. No single person or group can tamper with transactions or take control. 

Unlike a public key, which is both searchable and shareable, a private key must be kept, well, private. Bottom line is, if you lose your private key, you lose access to your wallet, where your crypto is held. If someone else learns your private key, then they can perform transactions from your wallet on your behalf. For that reason, it’s always advisable to keep your private key offline to limit any risks of hacking.

Where Can You Store Your Private Keys? In Cold Wallets.

Here’s an overview of different cold wallets that are secure methods for storing your private keys:

  • Hardware wallets — Widely considered to be the most secure option for storing private keys, hardware wallets are physical devices that keep private keys offline
  • An encrypted storage device — For those who don’t want to invest in hardware wallets, offline flash drives can offer a good temporary solution
  • Paper wallet — Less secure than hardware wallets, paper wallets are pieces of paper with your keys printed on it. For maximum security, it’s recommended that you laminate and store these pieces of paper in a safe or safety-deposit box
  • Stainless steel — If you’re concerned about your paper wallet getting destroyed in the event of a fire or flood, consider engraving your private keys on stainless steel

Now that we understand the importance of keeping your private keys safe let us delve deeper into one of the most popular and trusted methods of storing private keys — hardware wallets.

How to Use a Hardware Wallet

Every hardware wallet is a little different, but the steps are generally the same:

  1. Connect the hardware wallet to a computer or smartphone
  2. Upon setting up the device, you will need to set a PIN code to add an additional layer of security to the device
  3. The app of your hardware wallet will provide you with a wallet address (public key) for sending and receiving crypto
  4. When you send tokens from your hardware wallet to another address, confirm the transaction by physically inputting the PIN on the device
  5. Wait for confirmation of the transaction 

Benefits of a Hardware Wallet

  • Control — Hardware wallets allow you to manage your own private keys, granting you full ownership and control of your funds.
  • Maximum security — Since the private keys are kept offline at all times, they are immune to malicious software, except in a scenario where the device is defective. As they are able to sign transactions without the private keys ever leaving the device, they are more secure than a software wallet.
  • Backup options — If you do happen to lose your wallet, you can make use of the seed phrase (also known as recovery phrase) to re-generate your private key and recover access to your funds using a different wallet. Like your private key, it’s crucial that you keep your seed phrase safe and offline, ideally in a safety-deposit box.

Disadvantages of a Hardware Wallet

While the security advantages of a hardware wallet are clear, there are some disadvantages that you should be aware of:

  • Upfront cost — There are no two ways about it: Hardware wallets are expensive.
  • User experience — The setup process can be quite cumbersome for beginners.
  • Accessibility — Hardware wallets are less convenient for day-to-day transactions, as they require you to physically plug them into a device before accessing your crypto. Hardware wallets are best suited to those planning on holding their assets long-term, and not for trading.

How to Choose a Hardware Wallet

  • Security features — Does it offer two-factor authentication and multi-signature? Does it have a backup feature, such as a recovery seed phrase?
  • Interface and ease of use — Some wallets are better suited for beginners, others for more advanced users. Do your research first to avoid disappointment. 
  • Supported currencies — Ask yourself, are the coins and tokens you want to store supported by the wallet?
  • Supported operating systems — Not all wallets are compatible with all operating systems, so check before you buy.
  • Platform compatibility — Can you connect the wallet to the exchanges you regularly use? Does it offer decentralised app (dapp) and decentralised exchange (DEX) integration?
  • Portability — Consider how easy it would be to carry with you on a day-to-day basis.
  • Reputation — The reputation and longevity of the wallet maker is of the utmost importance. Check customer reviews to get a better picture of what to expect. 

The Best Hardware Wallets

There are dozens of cold wallets on the market today. Popular hardware wallets include devices by Ledger and BC Vault.

Crypto.com has collaborated with CoolBitX on a limited-edition Crypto.com x CoolWallet Pro hardware wallet. Readers can enjoy Pay Rewards of up to 2% in CRO when checking out with Crypto.com Pay

Final Thoughts – Do You Need a Hardware Wallet?

Although hardware wallets are very secure, they are not suitable for everyone, especially not for inexperienced users. Typically, a hardware wallet is cumbersome and includes relatively complex operations and settings that are not beginner-friendly. A hardware wallet user has to back up their information regularly in case of loss, theft, or destruction. 

However, if it is peace of mind that you are after and you don’t require the flexibility that comes with hot wallets, then a hardware wallet is usually the best solution.

Due Diligence and Do Your Own Research

All examples listed in this article are for informational purposes only. You should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained herein shall constitute a solicitation, recommendation, endorsement, or offer by Crypto.com to invest, buy, or sell any coins, tokens, or other crypto assets. Returns on the buying and selling of crypto assets may be subject to tax, including capital gains tax, in your jurisdiction. Any descriptions of Crypto.com products or features are merely for illustrative purposes and do not constitute an endorsement, invitation, or solicitation.

Past performance is not a guarantee or predictor of future performance. The value of crypto assets can increase or decrease, and you could lose all or a substantial amount of your purchase price. When assessing a crypto asset, it’s essential for you to do your research and due diligence to make the best possible judgement, as any purchases shall be your sole responsibility.

Share with Friends

Ready to start your crypto journey?

Get your step-by-step guide to setting up an account with Crypto.com

By clicking the Get Started button you acknowledge having read the Privacy Notice of Crypto.com where we explain how we use and protect your personal data.
Mobile phone screen displaying total balance with Crypto.com App

Common Keywords: 

Ethereum / Dogecoin / Dapp / Tokens