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What is a Bitcoin Hardware Wallet?
Shailee Adinolfi
&
Annie Pei
General Wallet Use
Securing your Bitcoin with a hardware wallet is critical, as users fall victim to hacks almost every day. According to data from DefiLlama, a crypto analytics site, over $9 billion has been hacked in crypto.
A Bitcoin wallet is a tool that stores your digital assets and private keys, allowing you to manage and secure your Bitcoin. The best way to protect yourself from falling victim to a hack and losing your digital assets is by purchasing a hardware wallet.
Hardware wallets are one of the more secure ways for users to store their digital assets since they keep your most important information offline. Let’s explore hardware wallets and understand how they provide that added security so many users need.
Understanding Hardware Wallets
Hardware wallets are specialized devices designed to store cryptocurrency private keys securely offline. These private keys, which are randomly generated codes, are essential for authorizing transactions — without them, you can't access or transfer your assets.
Storing offline means your private keys are not exposed to the internet, reducing the likelihood of a malicious actor accessing your assets. Overall, using a hardware wallet is one of the safest ways for a user to store their cryptocurrency while maintaining full custody over their assets.
How Does a Hardware Wallet Work?
When you first set up a hardware wallet it will generate a private key, used to authorize transactions, and a public key, which is your public address that you can send assets to. The key generation is done entirely on the device, meaning only you have access to these keys.
When a user needs to make a transaction, they connect the hardware wallet to a computer or mobile device, but all the sensitive operations happen on the hardware device itself. Hardware wallets are ideal for users seeking to securely store assets over a long period of time.
Custodial vs. Non-Custodial Wallets
There are two major categories of crypto wallets — custodial and non-custodial. The first allows a third party like centralized exchange Coinbase or Binance to manage a user’s crypto keys. Non-custodial wallets keep assets solely in the possession of the user.
Custodial wallets are a popular choice for many crypto users.They offer great convenience and quick access. For those coming from traditional finance, third-party custody may seem like a good thing. However, third-party crypto institutions are typically not insured the way banks and other traditional custodians are. In addition, giving up custody of your digital assets goes against the principles on which Bitcoin was founded.
Non-custodial, or self-custodial wallets provide much greater security and control. They do have some trade-offs, however. With a non-custodial wallet, you’ll need to manage and secure the private keys yourself. Creating a plan for proper storage and safeguarding can also be more complex, requiring a higher level of user responsibility.
Both types of wallets have their place in a crypto investor’s arsenal. Often, users will trade or buy crypto using a custodial wallet. Then, for more secure day-to-day storage or even long-term “HODLing,” non-custodial wallets become the best choice.
Hardware Wallets Vs. Software Wallets
In crypto there are two types of wallets users can choose, hardware wallets and software wallets, like Leather.
Hardware wallets are designed for highly secure long term storage of funds. Since they require you to connect them to your computer or mobile device every time you want to transact, they are not the most convenient. Hardware wallets typically cost users anywhere from $50 to a few hundred dollars for a device.
On the other hand, software wallets are perfect for users who make a lot of transactions. It provides a more convenient way to quickly transact onchain, but keep in mind it is generally less secure as your private keys are connected to the internet. Software wallets are most often free and can be downloaded as an application on your phone or extension on your web browser.
What are the Benefits of Hardware Wallets?
Hardware wallets offer a number of benefits, which include:
Security: Hardware cold wallets have the best security due to private keys remaining in the user’s possession.
User control: Hardware wallets give users complete ownership of their digital assets. There is no need to rely on third-party services or custodians.
Long-term storage: HODLers love hardware wallets because they can leave large amounts of bitcoin untouched for the long term, without worry.
Phishing resistant: Because they’re offline, hardware wallets have an extra layer of defense against rampant phishing attacks.
Recovery options: Most hardware wallets offer recovery options, allowing users to regain assets with a recovery seed phrase in case of loss, damage, or device theft.
Versatility: Hardware wallets are compatible with various cryptocurrencies. They can sometimes also be integrated with hot wallets.
How to Find the Right Hardware Wallet
Both hot wallets and cold wallets are necessary for most crypto users. But there are certain times when hot wallets are preferable and other times when a cold wallet is absolutely essential.
If you're in for the long haul and have large amounts of crypto to secure, a cold wallet should be your fortress. But when you need to make quick transactions or trades, a hot wallet keeps digital assets at your fingertips.
Can You Integrate Software and Hardware Wallets?
Today, hardware wallets can sync seamlessly with various software wallets. Hot wallets act as bridges between cold storage and the blockchain. When users need access to their assets for transactions, having a hot wallet that is compatible with your hardware wallet is a huge advantage.
The integration between hot and cold storage can help streamline your backup plan. If dedicated hardware wallet applications experience downtime, integrations allow you to move assets to a non-custodial hot wallet. This ensures uninterrupted access to your crypto assets. There is not much value in high security and offline storage if you, as the asset owner, cannot access your own crypto.
Hardware and software wallet integration still maintains security, however. The best hardware wallet designs ensure using a hot wallet will not compromise safety since private keys never leave the hardware device.
Bitcoin storage and security should be a top priority for every investor. And knowing what types of wallets to use at different times in your crypto journey is also important. Especially with new and improving features and products being created every day.