Hardware Wallet 101: The safest way to hold your own crypto
Wallets carry money, cards, and random scraps of paper. They have been leaving lines in our dad-jeans since paper money was introduced during the 1600s. But as credit cards and IDs get integrated into smartphones, we may not need those butt-lumps anymore.
Now, a new kind of wallet is becoming important. In the era of cryptocurrency, you need a crypto wallet.
And it won’t look like this stock-photo gem:
What is a Crypto Wallet?
Crypto wallets store private keys. Private keys are what you use to approve transactions with cryptocurrencies. Technically, your crypto coins aren’t inside your wallet, but in the blockchain. The private keys give the blockchain your permission to move the coins to someone else’s ownership.
Your wallet’s job is to hold the keys you need to interact with the blockchain. Here’s the important part: if you don’t have your private key, you can’t access your coins.
If you lose your private keys -- NO ONE can help you get them back. At any price.
This can be catastrophic. For example:
From this NYT Article: Lost passwords lock millionaires out of their Bitcoin fortunes
Keep your keys in your wallet. Keep your wallet safe.
Here is a glossary to understand how crypto wallets work:
Private Key
This is a unique number that allows you to sign transactions (transfer your coins to someone else) and generate a public key. No, this is not your password on your Coinbase account. Also, no, you can’t change or reset your private key.
Do not share your private key with anyone else. Anyone with your private key can make irreversible transactions (send your crypto) on your behalf.
Public Key
Also known as Public address. Think of it as your email address or bank account number. The public key allows you to receive crypto. These is given out, the address where you receive coins.
Together, these work like a locked mailbox:
Give out your public key (address) so people know to drop your coins in your mailbox.
Keep your private key, which is the only way to get access to the coins IN your mailbox.
Cold Wallet
These are wallets that are not connected to the internet in any way. The private key could be stored on a piece of paper or in hardware wallets.
Hot Wallet
Wallets that are connected to the internet are called hot wallets. Wallets stored in online exchanges like Coinbase or Binance are hot wallets.
What is a Hardware Wallet?
Hardware wallets are electronic devices. They are often pocket-sized, and usually have a USB or Bluetooth to connect to your computer. Hardware wallets have a small display and a few buttons. Your wallet is completely disconnected from the internet until you plug into a device or connect to a computer.
To make transactions, you connect your crypto hardware wallet to a laptop or computer, then enter the PIN code on your wallet.
Once you start the transaction on your computer, it sends a request to your hardware wallet. The transaction shows on your hardware wallet’s display for you to verify. You just tap the screen or press the button on your wallet, and then the transaction’s done! Since the hardware wallet holds the keys, the system knows that it is the right person approving the transaction.
(It’s like 2-factor Authentication, but on a standalone device instead of your phone. Why? Because your phone can get hacked, lost, stolen, or sim-swapped, and used to verify transactions and steal your crypto.)
What kind of Crypto Wallet should I use?
Is a hardware wallet necessary to invest in crypto? Not immediately. If you’re just starting out with crypto, using a hot wallet (Metamask, Coinbase, or Trust) with a popular and trusted exchange such as Coinbase or Binance is perfectly fine.
If you only ever have a small amount of assets (whatever that means to you) in Crypto, a hardware wallet may not be worth the investment.
Hot wallets are a little more convenient, but as you grow your investment, you should think about keeping your cryptocurrency safe. Hot wallets are prone to get hacked.
Blockchains may be unhackable, but you are not. There are plenty of instances where people get hacked and lose 6-digits worth of crypto:
@arrdub.eth left their private keys and seed phrases in txt files in their Mac’s Dropbox folder. Hackers stole $375,000 worth of NFTs and crypto tokens from 2 of their Ethereum wallets.
@JasonHitchcock lost $500,000 of RUNE, more than $100,000 of ARCX, and some ETH February of this year from hackers. He had no idea how it happened and is still working with the authorities about the incident. Oh, and this happened to his dad too.
Jason recommends multi-signature wallets and/or hardware wallets for anyone who has crypto worth $10,000 or more. Listen to my podcast with Jason Hitchcock to learn more about what happened.
@JoeHertler got his ETH hacked through a sim-swap attack after the crypto boom of 2017. He recommends everyone get a hardware wallet too. Link to the Podcast with Joe Hertler.
How safe are hardware wallets?
With hardware wallets, the crypto in those wallets is safe even when connected to compromised computers, because your private key never leaves your wallet. (I think?)
When using the device for the first time, you will be asked to record a 24-key seed phrase. This can be written down on paper -- or etched into metal for longevity, like a badass. Hide that somewhere safe that you won’t forget. Like a safety deposit box. Or multiple.
Having a physical recovery like this protects you from sim-swap attacks, attacks using fake URLs, and stolen devices.
Recommended Crypto Hardware Wallets
The hardware wallet market is still young, but there are already plenty of options out there.
Update: A previous version of this article had links out to Amazon, and a few crypto-pro readers told me they recommend only ordering hardware wallets direct from the manufacturers. You never know who could have tampered with it before reselling on Amazon.
Ledger Nano X
The Ledger Nano X are considered by some as the best hardware wallet for 2021. It allows multiple wallets to be installed at the same time without having to delete other wallets. It is certified by ANSSI and CC EAL5+. I don’t know what that means, but it sounds good. The Nano X uses a pin code to access the device and uses a 24-word recovery phrase for back-up
Connectivity: USB-C, Bluetooth
Price: $119
Trezor Model One
This wallet is one of the most popular today. The Trezor Model One generates an RNG (Random Number Generator) that you type into your keyboard for every transaction. This protects your wallet from keyloggers since the RNG is changed all the time. The Model One is CE and RoHS certified.
Connectivity: Micro USB
Price: $59
KeepKey by ShapeShift
Among the three so far, KeepKey uses the largest screen. It provides limitless wallet addresses on one device.
Connectivity: USB-C
Price: $35
Lattice1 by Gridplus
This was the hardware wallet recommended by Jason Hitchcock in our defi podcast. He described it as “probably overkill.” Others have called it an “Absolue Unit.” It is chonky touchsreen and has cards that make it extensible to endless accounts. It also looks badass sitting on your desk.
Price: $349
New Crypto Hardware Wallets for 2022
Trezor Model T
The Model T is the updated version of the highly-popular Trezor One. It features a bigger color touchscreen which greatly enhances usability. Its firmware has been written from scratch so it should be more secure than previous models. The Model T supports over 1200 coins and tokens. It can also switch to a Bitcoin-only firmware if you plan to use this crypto hardware wallet solely for Bitcoin
Price: $195
CoolWallet Pro
This hardware wallet comes in a credit card-sized form factor. It’s also tamper-proof and water-proof. Aside from being a crypto hardware wallet, the CoolWallet Pro allows users to direct stake Polkadot(DOT), Tron(TRX), and Cosmos(ATOM). It also plans to support several ETH2.0 tokens in the future.
Price: $149
Compatibility
One thing to look out for -- not ALL hardware wallets support ALL blockchains (Layer1s or L1s). If you’re sticking with Bitcoin and Ethereum, you should be safe with all of these. If you plan to play around with other Layer1 blockchains (like Solana, Terra, Osmosis as of this writing) then do some googling to be sure your hardware wallet choice is supported by your L1.
Final Thoughts
Blockchains may be unhackable, but you are not. Crypto is safer with a hardware wallet. If you’ve got meaningful crypto assets, it’s by far the best way to hold them.