What is a Bitcoin Hardware Wallet?
One of the most important aspects of owning Bitcoin is security. Having a reliable wallet to store your crypto is critical. Hacks, accidents, and simply losing access to a wallet are all very real dangers.
So, how can you keep your crypto safe and what are the best wallet options to do so? From online software wallets and traditional paper wallets, to hardware wallets, there are many options. Let’s talk about hardware wallets and how a physical device that stores your private keys offline provides unparalleled security for your Bitcoin
Custodial vs. Non-custodial Wallets
There are two major categories of crypto wallets — custodial and non-custodial. The first allows a third party like 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 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.
What are Cold and Hot Wallets?
Besides custodial and non-custodial, there are some other categories of crypto and Bitcoin wallets.
Cold wallets provide asset storage completely disconnected from the internet. They can include things like Ledger hardware wallets or even paper wallets. This type of storage, known as “cold storage,” is by far the most secure against online threats.
Putting crypto coins or NFTs in a cold wallet is like putting cash in a vault — it becomes more difficult to access, but more secure. Cold wallets like Trezor and Ledger are the best choice for long-term storage because they’re not connected to the internet and cannot be hacked online. They often act almost like a savings account for your digital assets.
Hot wallets are wallets that connect to the internet. They include browser wallets, app wallets, and other types of software wallets. Being connected to the internet makes transacting fast and easy. Most crypto users keep small amounts of crypto in a hot wallet for actively trading or daily transactions.
The dangers of hot wallets come from their continuous exposure to the online world. This makes them extremely susceptible to potential hacks or unauthorized access. Some of the most common ways investors lose crypto are through phishing, hacks, and accidental transactions. These only happen with hot wallets.
Choosing the Right Wallet for the Occasion
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.
Here are some of the features and uses of both cold and hot wallets.
What are Hardware Wallets?
Hardware wallets are a specific type of cold wallet that uses a physical device like a dongle. The first hardware wallet, Trezor One, was designed explicitly for Bitcoin in 2014. It was created by SatoshiLabs and was the brainchild of Marek "Slush" Palatinus and Pavol "Stick" Rusnák, pioneers in the crypto space.
Trezor One set the standard for hardware wallets by offering a secure, offline storage solution for Bitcoiners. It was created out of a need for better security measures as the popularity of Bitcoin surged and hacks began to increase.
What are the Benefits of Hardware Wallets?
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.
Can You Integrate Software and Hardware Wallets?
Today, hardware wallets can sync seamlessly with various software wallets. These 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.