If you want to trade cryptocurrencies such as Bitcoin (BTC), Ethereum (ETH), Litecoin, or ERC-20 tokens, you need to have a cryptocurrency wallet. A crypto wallet is used to store your private keys, i.e. a very large Random Generated Number (RGN) that allows you to unlock and own crypto assets on the blockchain.

There are three types of cryptocurrency wallets that you can use: software wallets, hardware wallets, and paper wallets.

With paper wallets, the user’s private and public keys are printed on a piece of paper in the form of a QR code. Software wallets, also known as hot wallets, are online wallets, meaning that in order to use them, you’ll have to be connected to the internet. These kinds of wallets can be found on any cryptocurrency exchange, be it Coinbase, Kraken, or Binance, for instance.

However, in this article, we’ll direct our attention to hardware wallets in particular and explain how they work.

How Does a Hardware Wallet Work?

What Is a Hardware Wallet?

A hardware wallet—also known as cold storage—is a physical device that you can use to store your crypto assets. It’s a secure hardware device, usually the size of a keychain, and it looks like a USB drive. Hardware wallets are considered the most secure wallets available on the crypto market due to the fact that you can use the hardware wallet offline, and consequently, the crypto assets aren’t exposed to hacker attacks or malware.

Moreover, hardware wallets use two-factor authentication (2FA), meaning you’ll need to insert your PIN code or an optional passphrase to gain access. This PIN code protects your crypto assets if your hardware wallet gets stolen, and by using the recovery seed phrase, you can regain access to your cryptocurrencies.

Cold wallets are suitable for storing a large number of crypto assets over a long period of time. The only downside of hardware wallets is that you have an initial cost to cover when buying the hardware device. Plus, the initial setup can be a little bit challenging.

How to Use Your Hardware Wallet

A hardware wallet basically has two main functions.

First of all, the wallet stores your private keys, not your crypto assets, as they’re actually stored on the blockchain and your cold wallet only helps you access them. So, the first function of a hardware wallet is to store the user’s private keys offline, meaning you don’t need internet connectivity in order to access your crypto assets. This is how they are safe from malware and hacker attacks. Keep in mind, though, that you need your assets to be online in order to make transactions. This only means that you’ll need to connect your hardware wallet to your exchange of choice in order to complete a trade.

The second function of the hardware wallet is to enable you to sign transactions on the blockchain and verify them afterward. The private keys resemble a digital signature that helps you to sign off, for example, on your transaction whenever you buy, sell, or exchange any cryptocurrency. Private keys are impossible to forge.

When you plug your hardware wallet into the USB port of your computer or mobile device for the first time, you get a 24-word recovery seed phrase that you can use to re-generate your private key. It’s best for you to write down this seed phrase right away and keep it somewhere safe. Using this 24-word seed phrase, you can recover your wallet using another wallet, such as Electrum, Trezor, and Mycelium (a Bitcoin-only wallet).

White Trezor on top of cryptocurrency coins

The process of using a hardware wallet is quite simple and it goes like this:

  1. Plug in your hardware device into the USB port or Bluetooth of your computer or smartphone;
  2. Enter the PIN code;
  3. Create a transaction, for example, a Bitcoin transaction;
  4. And, at the end, confirm (or sign) the transaction with your private key.

Benefits of Using a Hardware Wallet

Hardware wallets have numerous benefits, such as:

  • High security – hardware wallets provide you with high security even when you use a computer, iOS device, or Android device that isn’t quite secure. They give you an extra level of protection from hacker attacks and malware intrusions.
  • Multiple currencies – even though you have one wallet, you can choose to buy, sell, or exchange multiple digital currencies at the same time. One hardware wallet can manage BTC, ETH, and other altcoins, depending on the hardware wallet you choose and the cryptocurrency that the wallet supports.
  • Convenience – due to their size, they are portable and quite convenient to use. You can access your crypto assets from anywhere, as long as you have a computer or mobile device to plug in your hardware wallet.
  • Wallet-to-wallet trading – users can trade their crypto assets directly from cold storage using different trading platforms. This way you avoid depositing your crypto assets to an exchange wallet, and at the same time, you save a lot of time and avoid withdrawal fees.

Best Cryptocurrency Hardware Wallets

At the moment, there are three hardware wallets manufacturers that are considered the best ones on the market: Ledger, Trezor, and Keepkey.

Ledger Hardware Wallet

The Ledger hardware wallet supports over 1,000 cryptocurrencies. You can access a Ledger hardware wallet using Ledger Live, which is a free desktop app that allows you to control all of your Ledger devices, check your balance at any time, and receive and send crypto assets.  

Currently, there are two types of hardware wallets that Ledger offers to its clients: Ledger Nano S and Ledger Nano X.

Trezor Hardware Wallet

Trezor is a pioneer when it comes to hardware wallets, meaning it was the first of this kind. It’s a company with a great reputation and supports more than 1,000 cryptocurrencies, such as BTC, ETH, LTC, and BCH, but doesn’t support XRP.

A major downside of Trezor is that when you want to upgrade the firmware of the hardware wallet it may delete your whole wallet. If something similar happens to you, don’t panic, simply use your recovery seed, and you will easily restore the wallet.

Currently, there are two types of hardware wallets that Trezor offers to its clients: Trezor One and Trezor Model T (the only hardware wallet with a touch screen).

Keepkey Hardware Wallet

Keepkey has a beautiful design, but the downside of this wallet is its size – it’s twice as big as Trezor One or Ledger Nano S. Plus, Keepkey doesn’t support enough cryptocurrencies. On the upside, the Keepkey company has been acquired by Shapeshift, therefore it already has a wallet-to-wallet exchange that offers you to trade cryptocurrencies, and you don’t need to use an external exchange.

A Few Words Before You Go…

Hopefully, after reading this article you have a better idea of hardware wallets and whether they will be useful for you or not. Although there is a limited choice of hardware wallets, the offered ones are quite good and provide top-notch security, which attracts users that want to be more protected from hackers. So, if you’re one of these traders, and you don’t mind the hardware wallets’ complexity and low price, these wallets may be the right choice for you.