What is a Cryptocurrency Hardware Wallet?

Digital assets are now widely accepted, and their popularity continues to increase. While cryptocurrency promises to be more secure than most traditional banks, it’s essential for anyone owning cryptocurrencies to have a safe place to store them. Since cryptocurrency is decentralized, users need to take measures to guarantee the security of their assets.

This article will acquaint you with the two types of cryptocurrency storage: hot and cold wallets, highlighting the advantages and disadvantages of each before zooming in on the cryptocurrency hardware wallet.

Hot vs. Cold Wallet

Hot and cold wallets essentially have the same function to store digital assets.

Hot Wallet

Hot wallets act as storage for cryptocurrency users to send and receive their digital assets; this software tool has been around since the early years of Bitcoin. Hot wallets are those that exist within a certain cryptocurrency company’s server. Users can access these digital wallets through an app or website. Desktop wallets, exchange wallets, mobile wallets, and web wallets are all hot wallets.

Hot wallets have the advantage of being free to use without the user needing to invest in a specific service or hardware. The wallet also frees the user from the tedious process of migrating assets somewhere else to trade, buy, or sell cryptocurrency -- the hot wallet allows them to do that. Hot wallets also allow the convenience of 24/7 access and ease of installation. Hot wallets also allow users to offload their responsibility for safekeeping their assets to a third-party custodian, minimizing the risk of losing all their assets when they lose their keys. You may also use the services of a crypto mixer like Unijoin.

However, hot wallets are vulnerable to privacy breaches, a great disadvantage brought about by storing your public and private keys online. Once hackers get access to them, your digital assets are compromised. There is also the tendency to lose all your assets when the exchange that provides your hot wallet shuts down, and you have not insured your assets. While it’s difficult to hack a hot wallet because of how blockchain technology is structured, there’s always a way for people to access your wallets as long as it’s online. Once the assets are stolen, they are almost impossible to recover.

Cold Wallet

Meanwhile, cold wallets, sometimes called offline wallets, store your digital assets in USB-like hardware, so you do not need to connect to the internet to access those assets. These are your cryptocurrency hardware wallets. As an alternative to hardware wallets, your public and private keys may be placed on a piece of paper or paper wallet.

Cold wallets offer the benefit of security. Since these are accessed offline, hackers cannot get through them unless you carelessly carry them around with you or simply leave them where anybody can access them. Typically, hardware wallets apply an extra layer of security through pin-protected encryption and, at times, biometric authentication. When you configure your cold wallet for the first time, you will be provided with a unique, device-generated recovery phrase, known as recovery seed, consisting of 12 to 24 words. The phrase will allow you to recover your digital assets in the event your hardware wallet is damaged, lost, or stolen,

On the downside, your cold wallet is something you cannot use for quick transactions because it takes a while to access the device. The device is also expensive. Furthermore, a cold wallet limits the number of cryptocurrencies it can carry.

When making a crypto investment and playing the long game to wait for the value of your stored assets to increase, it’s always better to invest in a hardware wallet that guarantees your assets’ security.

Choices of Cryptocurrency Hardware Wallets

Just like you have choices in cryptocurrency and trading platform, such as Coinbase and Binance, you also have choices of cryptocurrency hardware wallets. Here, we feature two of the best-built hardware specifically designed to work as cold storage.

Trezor Model T

Trezor’s second-generation Model T has one feature that makes it stand out from other hardware wallets in the market: The code that supports the software, Trezor Suite, is open-source and is therefore open for the user to study and determine the level of security it offers. The software is designed to run natively on any desktop, making it possible for users to directly trade or invest in crypto coins without setting up a digital wallet.

Satoshi Labs manufacture Trezor Model T, and the company has been around for almost the same time that Bitcoin has been in the fintech spotlight. The wallet is small and portable, with a touch screen display to enter your PIN code to access your cryptocurrency.

Most wallets are not equipped with this feature, so they are often not as good as Trezor Model T in user experience and interface readability.

Ledger Nano S

This cryptocurrency hardware wallet is user-friendly and reliant on the company’s solid security protocols. It works well for all types of users, whether as a beginner or an occasional investor who only wants the assurance that their digital assets are safe.

Although its price is only about a quarter of the Trezor Model T, Ledger Nano S supports more than a hundred cryptocurrencies and more than a thousand tokens. Like most cold wallets, it doesn't support storing fiat currencies the same as hot wallets, but it supports storing stablecoins. This is also fairly cheap hardware compared to Trezor Model T at only $59.

Ledger Nano S also has its software called Ledger Live. It may not have the convenience of having BlueTooth support, but it’s not much of a concern. Hackers can also use Bluetooth-supported devices for their malicious attacks, so the absence of BlueTooth support adds an extra layer of security, a wonderful trade-off for convenience.

Reasons to Invest in a Cryptocurrency Hardware Wallet

Many are satisfied with simply having a good hot wallet to store their digital assets, but one must always remember the responsibilities of owning cryptocurrency. Simply put, you're solely responsible for the safety of your assets since there is no entity to oversee and keep your assets safe from third parties.

Here are the reasons why it's wise to invest in a hardware wallet beyond just the convenience of having actual storage.

Private key protection

Having separate hardware to store your Bitcoin usually comes with the ability to set up your private key. Private keys are not generated by a third-party entity and can only be known to the user. Security aside, this goes a long way, especially for keeping the privacy of those who grew their wealth investing in cryptocurrency. Getting rich or richer in the form of a digital asset makes you an easy target for hackers.

Cost-effectiveness

Most people, especially beginners and casual investors, never actually get to the point of having a dedicated laptop for installing a hot wallet and keeping their digital assets and security information safe. Although a dedicated laptop is an added security layer that gives you the option of monitoring your assets offline, it is an expensive way of securing your assets and personal information, besides dealing with complex, error-free setup procedures.

Protection against phishing attacks

Not having your private key stored in the cloud is undoubtedly safe, and there's no way that hackers can trick you into giving away your username and password (they can, however, try to trick you into sending money to their address if you're not careful).

Conclusion

While hardware wallets provide you with maximum security for your digital assets, it's not 100% foolproof and safe from attacks. You need to understand the benefits and drawbacks of a hardware wallet platform also become aware of the risks involved.

The recovery seed, for instance, is a necessary step in setting up your hardware wallet. This works as a backup file for your cryptocurrency if you wipe out, lose, or accidentally break your device. The recovery seed still has to be stored somewhere offline; otherwise, it will be vulnerable, defeating the purpose of having a hardware wallet.

Having a hardware wallet for cryptocurrency also means that you have to be extra careful about every transaction. Some malware can modify the address that you copy into your clipboard, and you'll end up sending your assets to a hacker instead.

A cryptocurrency hardware wallet may be a good investment, but you can only optimize it with proper use.

Remember, too, that your choices are not limited to hot and cold wallets. You may avail of third-party cryptocurrency services to safeguard your digital assets and security information.