Liminal secures FSP license from FSRA in ADGM   Read more

What is a Crypto Hardware Wallet, and How does it work?

| November 17, 2023

Share this article

As digital currencies and tokens such as NFTs continue gaining mainstream adoption and widespread popularity, it’s crucial to learn how to keep them secure. A hardware wallet is one of the most reliable methods of safeguarding your private keys and cryptocurrencies.

Here, we’ve outlined the fundamental definition of a crypto hardware wallet and its functions, providing you with the necessary knowledge to use your favourite hardware wallet effectively.

Key Takeaways

  • A hardware wallet for cryptocurrency lets you spend, swap, store, send, and receive assets securely. 
  • Hardware wallets offer you complete control over your digital assets.

Unlock the potential of digital assets for your institution

What are crypto hardware wallets?

A hardware wallet is a physical device that securely stores your private keys. It allows you to manage your cryptocurrencies and digital assets offline effectively.

The crypto hardware wallet works by generating and storing your private keys offline, away from the internet, and downsizing the risk from potential hackers.

When you want to transact, the crypto hardware wallet device signs the transaction with your private key and broadcasts it to the blockchain network. This means that even if your computer or mobile device is compromised, your hardware wallet for cryptocurrency remains safe.

Most hardware wallets include additional security features like PIN codes, two-factor authentication, and seed phrase backup to protect your assets further. In fact, according to experts, crypto hardware wallets are universally considered the safest option for keeping your digital assets.

Secure and manage your digital assets with Liminal

How does a hardware wallet work?

A crypto hardware wallet is a single-purpose computing device. It is designed to manage and perform one single function. Often, it consists of one or two buttons or a small screen. There is no direct way to connect the hardware wallets to the internet connection. Because the hardware wallet is not connected to the internet, your device is not at risk of being compromised by a hacker. No hacker can access your wallet content without access to your physical device.  

Any transaction from the crypto hardware wallet must be “signed” using the private key. The transaction is signed with the help of the hardware wallet and software known as a crypto bridge. Crypto bridge is designed to establish a connection between the wallet and the blockchain network and to support transactions executed using a hardware wallet.    

You can connect your cryptocurrency hardware wallet to the PC. With the help of a crypto bridge, you can transfer your crypto-transaction data from one computing device to another. After transferring the data, your hardware wallet signs the transaction using a private key. Once signed, the hardware wallet uploads them back to the bridges. The bridges broadcast the signed transaction to the rest of the blockchain ecosystem to complete the process.   

Throughout the process, your private key never leaves your hardware wallet. The single-purpose hardware wallet for cryptocurrency helps ensure that your private keys remain completely offline. 

Why is protecting the private key important?

“Not your keys, not your asset” 

The blockchain protocol uses the cryptographic private keys to establish a connection between the crypto-holder and the digital assets. It serves as a critical link between the asset and the asset holder.  

Let’s understand how keys work. Every blockchain address (account) is associated with a public and private key. The role of the public key is to function as the address that the crypto holder can share to receive cryptocurrencies and digital assets from other parties. On the other hand, the role of the private key is to grant exclusive and unrestrictive access to the cryptocurrencies and digital asset-related data stored at that address. 

The significance of private keys lies in enabling users with blockchain wallets to exercise control over their blockchain address and its contents.  

Most scammers and malicious actors target your private keys, either via physical means or via your internet connection, because the ownership of the asset is directly linked with the wallet’s private key. 

The Upsides of a Hardware Wallet

Security 

One of the most prominent benefits of utilizing a cryptocurrency hardware wallet as opposed to a web or mobile wallet is its increased security level. The private keys are always kept offline on the device with hardware wallets. This makes your keys far less susceptible to cyber threats or other phishing attacks.  

On top of that, you need to confirm your authorization before executing the transaction on the best crypto hardware wallet to complete the process. Often, this process is referred to as 2FA. It helps ensure that no external entity executes the transaction using your private keys. 

Convenience 

A hardware wallet for cryptocurrency is designed to be portable. It enables you to manage your digital assets while on the move effortlessly. Though hardware wallets are less prompt than web-based or mobile-based wallets, the portability factor is advantageous if you regularly engage in cryptocurrency transactions. 

Compatibility

Managing multiple digital assets on a single crypto hardware wallet device is highly convenient. Numerous hardware wallets in the market are compatible with a wide variety of cryptocurrencies and crypto-tokens, such as Bitcoin, Ethereum, and Bored Ape Yacht Club.  

The downside of a Hardware Wallet

Cost  

Software wallets that are web-based or mobile-based are free. Hardware wallets can be relatively costly compared to alternative choices, such as software wallets. The hardware wallets are shipped with a proprietary OS and a secure chipset. 

Damage 

In the event of a lost, corrupted, or damaged hardware wallet, you may lose access to your cryptocurrency unless you have a backup of your private keys. Most cryptocurrency hardware wallets come with key backup features. 

User-friendly Interface 

 Certain types of hardware wallets for cryptocurrency may possess intricate features that are challenging for certain users to comprehend and utilize. Over the years, using a hardware wallet has become easy, thanks to recent updates both on the hardware and software levels. But most modern hardware wallets make it easy for everyone to use. 

What happens when you lose your hardware wallet?

You may be curious about the security and safety of your digital assets in case you misplace your cryptocurrency hardware wallet. Don’t worry; the good news is that your assets remain entirely secure. 

Digital assets and cryptocurrencies, such as Bitcoin and Ethereum, are stored on the blockchain rather than within the crypto hardware wallet. Its sole function as a tool is to provide access to your private keys. Your holding remains at its original address over the main chain. Additionally, all your assets can easily be retrieved using the recovery or seed phrases. 

When it comes to the possibility of unauthorized access to your crypto, the answer is still negative. Take, for instance, the Trezor or Ledger hardware wallet. Each cryptocurrency hardware wallet is safeguarded by a PIN code that only you know. Without that PIN, no one else can access your private data, even if someone discovers or steals your physical device.

Best Practices

Purchase a brand-new crypto hardware wallet.  

For every user, it is critical to exercise caution when purchasing a hardware wallet. Avoid buying a used or secondhand device and purchase hardware wallet devices from reliable manufacturers. Usually, most hardware wallets and manufacturers feature a visible security guideline, such as a holographic sticker or tags, that alerts you if the respective hardware has been tampered with. When purchasing an ideal device, try to look for damages. If anything appears suspicious or not in its right place, refrain from employing the respective crypto hardware wallet. 

Check addresses before transacting large amounts. 

Hardware wallets are regarded as one of the most secure methods for storing private keys. Still, it requires adherence to standard security best practices. Before transferring a significant amount of cryptocurrency between wallets, verifying the receiving address using a small test transfer is important. It helps eliminate the risk of transacting with unfamiliar wallet addresses. Suppose your crypto hardware wallet features a screen. In that case, ensuring that the recipient’s address on your computer screen matches what the wallet is displaying before initiating a transaction is essential. 

Protect your seed phrase.   

It’s crucial to keep your hardware wallet and recovery seed phrase secure. A seed phrase is a set of 12-24 randomly generated words that serve as an emergency backup recovery method if a crypto hardware wallet is misplaced, erased, or damaged. Every user should treat seed phrases with the same level of care as your private key since whoever possesses them can gain unrestricted access to your holdings. Record your secret phrase on paper or another non-digital medium to protect it. It’s also essential to keep both the hardware wallet and the seed phrase in a safe place. 

Conclusion

Hardware wallets offer superior security, portability, and compatibility with various digital assets. Additionally, they are typically user-friendly. However, it is crucial to remember that they can be expensive and may be lost or damaged. 

Ultimately, whether a hardware wallet is suitable for you will depend on your unique requirements, budget, and personal preferences. If you prioritize security and convenience and are willing to invest in a hardware wallet upfront, it could be an excellent option.

Related Articles:

More on Crypto

Liminal Custody received initial approval for a VASP license from Dubai’s VARA, paving the way for secure institutional custody services. Learn more. ……
May 27, 2024
As we move toward standardized and regulated usage of digital assets, it is remarkable to see more jurisdictions develop improvised versions of compliance with laws to help individuals and institutions stay safe and resilient. ……
May 23, 2024

Find out what is the Ideal Custody Solution for you