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What is a Cryptocurrency Hardware Wallet?

A crypto hardware wallet, also called a cold wallet, is a device that generates and stores the private keys for a crypto wallet offline. Some hardware wallets resemble a USB thumb drive, while others might be a touch screen device similar to a cell phone. A third type of wallet looks like a bank card and even contains an NFC chip that allows the wallet to communicate with a mobile app on an NFC-enabled smartphone.

We’ll discuss the importance of protecting private keys in more detail shortly, but a hardware wallet creates an additional layer of security by authorizing transactions on a device that you physically control. This reduces the risk of loss due to compromised private keys — or the seed phrase used to generate those keys. More on that in a bit.

How do Hardware Wallets Work?

Hardware wallets can be used to authorize crypto transactions by approving or declining the transaction from an offline device. The process works similarly to two-factor authentication (2FA), in which you use a device you control to authenticate a login to a bank account, for example.

Let’s say that you’re using MetaMask as your Ethereum wallet. MetaMask generates a seed phrase, a people-friendly way of encoding the private keys. Typically, seed phrases are 12-24 words long. MetaMask, however, is a hot wallet. The private keys are generated on an online device and stored on that same device used for online activities.

The keys from hot wallets can become compromised in a number of ways, ranging from software exploits to keyloggers that record your keystrokes. The wallet addresses generated by MetaMask are less secure compared to hardware wallet addresses because the private keys can be more easily compromised with hot wallets.

But MetaMask also supports popular hardware wallets like Ledger and Trezor. You can generate private keys offline using your hardware wallet and then import the public addresses from your hardware wallet to MetaMask. This lets you use MetaMask to see your assets and connect to decentralized applications (dApps) like Uniswap.

However, if you need to authorize a transaction for the hard wallet addresses, you’ll need to connect your hardware wallet to accept or decline. MetaMask asks the device for authorization but never has access to the private keys in your hardware wallet.

If there is no input from the hardware wallet, the transaction can’t be authorized, and your crypto remains in your wallet.

Hardware wallets provide an extra layer of security, much like when your bank sends you an email or text to be sure it’s really you logging into your account.

Wired or Wireless Connections

Many hardware wallets use a USB connection to connect to your computer and accept or decline transactions. Newer models may use Bluetooth, which allows support for mobile use, or even an NFC chip that can connect to an NFC-enabled mobile device.

Regardless of which connection type a hardware wallet uses, there’s still an additional layer that requires input from a separate device you physically hold.

Advantages of Hardware Crypto Wallets

The advantages of hardware wallets compared to software wallets or exchange wallets center on security. You may have to sacrifice some convenience, but the goal is to protect your crypto. By keeping some or all of your crypto in a hardware wallet, you greatly reduce the risk of losses.

Hot wallets like MetaMask, Electrum, or Trust Wallet make crypto transactions more convenient. However, all hot wallets bring similar risks because the private keys are generated and stored on a device connected to the internet. Someone on the other side of the world can drain the wallet if they gain access to private keys (or the seed phrase).

By contrast, a hardware wallet forces the transaction to be approved or declined on a device you hold.

Hardware crypto wallets also allow you to split your stack for safety. Similar to traveling with pocket money while the rest of your money is safe in the bank, you can keep some crypto available in a convenient hot wallet while using your hardware wallet to safeguard the bulk of your holdings.

Using a Hardware Wallet to Move Your Crypto Off Exchanges

You don’t need to be active in the crypto ecosystem to benefit from a hardware wallet. One of the most common reasons to choose a hardware wallet is for the secure storage of cryptocurrencies you’re holding as an investment.

As a beginning investor, you might choose to keep your crypto on the exchange where you trade. Exchange wallets are called custodial wallets because the exchange has custody of your crypto. It’s convenient. And when your balances on the exchange are lower, your financial exposure is also lower.

As your balances grow, however, you’re at risk of losing much more. Using a self-custody crypto hardware wallet can protect you against exchange-related risks.

• Your exchange login can be compromised. About a third of us use password managers that offer a way to create unique passwords for each website. Others may be re-using passwords or using insecure passwords. However, even a password manager can create risk, as the app itself or an online vault can be a target for exploits. LastPass, a popular password manager, has suffered more than one breach.
• The exchange might freeze withdrawals. The collapse of crypto platforms like Voyager, Celsius, and FTX — all of which declared bankruptcy — are examples of why it may be wiser to move your crypto off exchanges. Once you move some or all of your crypto to a hardware wallet, any insolvency issues pose less risk to you.

If you need to keep a certain amount of crypto on the exchange for trading purposes, consider moving the rest to a hardware crypto wallet for safekeeping.

Hardware Wallets vs Software Wallets

Moving your crypto to a wallet you control is often the best move, but is a software wallet just as good a choice? Probably not.

A software wallet like MetaMask (Ethereum) or Electrum (Bitcoin) generates and stores the private keys on an internet-connected device. The private keys used to authorize transactions are on your device at all times. If multinational companies like Microsoft and Oracle have security vulnerabilities in their applications, hot wallets developed by smaller teams may be at risk as well.

Conversely, hardware wallets store your private keys on a separate device not connected to the internet. Even when temporarily connected to a computer or mobile device, the hardware wallet’s firmware limits interaction with your wallet to accepting or declining a transaction by clicking a button or taking a similar action on the device in your possession.

Both types of wallets share some similar risks, however. Specifically, safeguarding the wallet’s seed phrase or private key is tantamount, but sometimes, they get out into the wild.

If someone else has this seed phrase, also called a recovery phrase or mnemonic phrase, they can create a duplicate of your wallet (and its keys) and send your crypto to another wallet you can’t access. Any compatible software wallet can be used to access a crypto wallet created by a hardware device if someone has the seed phase.

The seed phrase and private key look different, but either can be used to make a carbon copy of your wallet. They’re really just two ways of expressing the same value.

This concern applies to both hot and cold wallets because they both use seed phrases and private keys. Choose a secure way to store your seed phrase so you can recreate your wallet if needed while preventing someone else from making a copy of your wallet elsewhere.

Generally, avoid storing your seed phrase in cloud storage or leaving it somewhere where others can find it.

How to Choose a Hardware Cryptocurrency Wallet

Which cryptocurrency hardware wallet is right for your needs depends on your risk profile and how you think you’ll use your wallet. Cost, transparency, security features, and even mobile support can all play a role in your purchase decision.

Security Features

Consider how you’ll use the wallet and which security features are most important to you.

Often, there’s a trade-off between security and convenience. The most secure wallets are air-gapped, meaning they can’t connect to the internet in any way. Instead, they typically use QR codes. You scan the QR code in an app or on the device itself and then approve or deny the transaction on the device. This may require more steps to complete transactions compared to a device that connects via Bluetooth or USB.

Also, consider security features like a Secure Element chip. But weigh the benefits against the trade-offs for this as well. For example, Ledger states it can’t fully open-source its firmware due to the Secure Element chip. Trezor, by contrast, does not use a Secure Element chip on the Model T or Model One and provides full transparency with open-source firmware for these devices.

Supported Coins and Blockchains

Many popular wallets support multiple blockchains. However, some wallets only support one blockchain, most commonly seen with Bitcoin-only wallets. Choose the best crypto hardware wallet for your overall needs while weighing which assets you think you’ll need to store. For example, if you’re considering a Trezor but need to store XRP, you’ll need to jump up to a Model T. Trezor’s Model One doesn’t support XRP.

Most multi-chain wallets support the Bitcoin and Ethereum networks at a minimum. Ethereum Layer 2 support may be limited, however. You may not see assets you hold on the Abitrum Layer 2 blockchain, for example, even though they are in your wallet. If needed, you can use a portfolio app like Debank or a blockchain explorer like Etherscan (for Ethereum) or Arbiscan (for Arbitrum) to verify transactions or tokens that don’t show in your hardware or software wallet.

Cost

Software wallets are typically free to use. By comparison, you can expect to pay $50 to well over $200 for a hardware wallet, depending on which model you choose.

Cost is a consideration, but paying a lot doesn’t always translate to more secure storage. Plenty of people store large amounts of crypto on inexpensive yet reliable and well-supported devices like the Trezor Model One.

Also, it might not make sense to spend hundreds of dollars to protect a smaller amount of crypto. If you choose a less expensive device to start, you can always upgrade when you have more to protect.

Fees

The top hardware wallets generally don’t charge an additional fee to use the wallet after you’ve purchased it. However, many wallets enable crypto swaps or purchases from within the wallet’s software app. In this case, you may encounter fees or other costs.

There are several ways to trade crypto, ranging from centralized crypto exchanges to decentralized exchanges and peer-to-peer exchanges. Ledger Live, for example, offers ways to buy crypto from within Ledger’s wallet software suite. Transaction fees vary depending on the provider you choose within the app.

In most cases, buying on an exchange will be less expensive compared to using your wallet’s app. But you may prefer to buy through your wallet app. If so, compare buying fees before choosing the best crypto hardware wallet for your use case.

Mobile Experience

Not too long ago, mobile and hardware wallets didn’t belong in the same sentence. Most cold wallets worked via a USB cable plugged into a computer. However, with Bluetooth connectivity available on some hardware wallets or even NFC support, as seen with the Ledger Nano, crypto hardware wallets can go wherever you go.

Some models, like Ledger wallets, can connect to Android phones via an optional OTG cable that uses the USB-C port on your phone.

If you think you might need to use your hardware wallet on the go, consider models that work with a cell phone or tablet. Check the App Store or Play Store reviews for the mobile app that accompanies the wallet you’re considering. Ledger Live scores well here with a 4.8 out of 5-star rating on Google Play Store.

In some cases, you may also be able to use the mobile wallet app as an on-the-go portfolio to track your investments.

Open-Source or Closed-Source Software and Firmware

Bitcoin, the first cryptocurrency, was open-source, meaning the Bitcoin Core code was and is available online. The alternative would be closed source, in which we don’t know what the software really does, what security flaws it may have, or if it phones home with sensitive transaction details. Many in the crypto community insist on open-source software for crypto wallets.

Crypto hardware wallets use two sets of code:

• Wallet firmware: You can think of firmware as software that lives on the hardware wallet device itself. Trezor, for example, makes the Trezor firmware available to view. If so inclined, you could even modify the firmware and run a customized device. Ledger is taking steps to open-source its firmware following a crypto-community kerfuffle over Ledger’s planned private key backup service.
• Wallet software: The software suite is an important tool to interact with the wallet device, particularly during device setup and updates. The wallet software talks to the wallet’s firmware but often also brings other features, like charting, swaps, or the ability to connect with other apps. Both Ledger and Trezor open-source their software suites.

The big advantage of open-source software and firmware is transparency, but security can also benefit from open-source code. An army of coders around the world poring over the code may be more likely to identify a potential issue than a smaller development team.

Lastly, open-source code for firmware gives the community a way to keep older devices active even after the manufacturer ends support. If Trezor ends firmware support for the tried-and-true Model One at some point in the future, the community can fork the code and make updates as needed.

Ease of Use

Top hardware wallets like Ledger and Trezor balance security with ease of use. Both wallets offer beginner-friendly software suites that make maintenance like firmware updates a breeze. By comparison, Ellipal requires you to update the device using an SD card (not included).

Durability

The Ledger Nano series of crypto wallets were tough to break. The same is true of the Trezor Model One. Newer devices with large touch screens, like the Ellipal Titan or Ledger Stax, are akin to a small smartphone and may not survive accidental drops on a tile floor well. Consider your use case and where you’ll use your device before making a choice.

Your Risk Profile

The best crypto hardware wallets can help protect any amount of crypto, large or small, but for smaller amounts of crypto, it may be more prudent to let your balance grow before buying the latest crypto wallet gizmo. For some, a hardware wallet is a must-have piece of gear. Others may be well-served with a software wallet as a starting point.

Limitations of Hardware Wallets

Using a hardware wallet is an important security measure, but it creates some extra steps, and there are still some risks. Using software wallets alone is much easier, and you aren’t tied to a physical device that’s probably safely stored at home. However, software wallets are also less secure.

Pairing a software wallet with a hardware wallet makes sense in many situations.

You’ll have to weigh some considerations before making a choice.

• Form factor: Roughly the size of a thumb drive, Ledger Nano wallets are easily pocketable. Devices like Ellipal or Ledger Stax might have a touchscreen as large as 4 inches, making them portable – but not always convenient to carry.
• Wear and breakage: The internal batteries in hard wallet devices can fail, just like those in your phone or tablet. These batteries may not be replaceable. Simpler devices like the Trezor Model One don’t use a battery, instead powering on when connected via USB. But that’s also a consideration. The connector (micro USB in the case of the Model One) could fail. Or, the buttons might stop working. The screen could break. In short, there’s a useful lifetime for hardware wallets, after which you’ll likely have to replace the device. Software wallets don’t suffer the same issues.

Even the best crypto hardware wallets won’t make you 100% secure. You’ll still need to take steps on your own to secure the seed phrase. It’s also wise to conceal the hardware wallet itself. You may not want visitors or the occasional home repair worker to see your Bitcoin hardware wallet lying around.

Conclusion

The field of options continues to grow, making choosing the best crypto hardware wallets a bit more challenging. For most crypto investors and traders, well-established brands may still make the best choices. Wallet makers like Ledger and Trezor led the market and still make some of the most compelling products.

We were particularly impressed with the Ledger Nano X due to its sturdy construction, convenient size, security features, and wireless connectivity option. As a lower-cost alternative, the Ledger Nano S Plus offers many of the same features, less Bluetooth support. Ledger offers a well-built and well-priced solution for most common uses.

FAQs

What is a hardware wallet?

A hardware wallet is a type of crypto wallet that generates and stores the wallet’s private keys on a device that’s not connected to the internet.

Are hardware crypto wallets safe?

Hardware crypto wallets offer a safer alternative to software wallets because they store the wallet’s private keys offline. Many hardware wallets also use a Secure Element chip, a specialized chip designed to be tamper-resistant and safely store sensitive information.

What is the most secure crypto hardware wallet?

Air-gapped wallets that cannot connect to the internet in any way — instead using QR codes to communicate with an external app — offer the most security.

Should I put my crypto in a hardware wallet?

Storing your crypto in a hardware wallet is the safest option to protect against compromised exchange logins, exchange hacks, or exchange insolvency.

Does my crypto still grow in a hardware wallet?

The value of the crypto in your wallet tracks the value of the same cryptocurrency traded on exchanges.

Are hardware wallets worth it?

Software wallets may offer enough security for smaller balances, but as your balances grow, a hardware wallet becomes a worthwhile investment due to its increased security.

Can you put any crypto on a hardware wallet?

Many of the best crypto hardware wallets support up to 10,000 cryptocurrencies, but you need to be sure your wallet supports the cryptocurrency you want to store and choose the correct wallet address before transferring crypto to your wallet.

References

• https://www.ledger.com/blog/ledger-metamask-strengthen-partnership-ledger-nano-x-soon-compatible-with-metamask-mobile-app
• https://blog.trezor.io/6-features-that-make-trezor-the-1-hardware-wallet-5e3bcbdb2c31
• https://blog.lastpass.com/2022/12/notice-of-recent-security-incident/
• https://www.reuters.com/technology/bankrupt-crypto-lender-voyager-digital-predicts-35-customer-payout-2023-05-17/
• https://www.reuters.com/legal/crypto-lender-celsius-sends-bankruptcy-plan-creditor-vote-2023-08-14/
• https://www.nytimes.com/2022/11/11/business/ftx-bankruptcy.html
• https://www.cisa.gov/news-events/cybersecurity-advisories/aa23-215a