What is a hardware wallet?
A hardware wallet is a small device that stores the private keys to a Bitcoin wallet. These private keys allow a user to transfer funds from their wallets and must be hidden from others, especially from those on the internet. A hardware wallet adds an extra layer of protection for the user because it prevents bad actors from remotely accessing the private keys. Without physically being present to access the device, Bitcoin cannot be moved. These devices are categorized as “cold storage” because the private keys never connect to the internet while a software wallet on a phone or desktop will fall under the definition of being a hot wallet. Hot wallets (including web-based) are more vulnerable to malicious malware on a computer because they are multipurpose machines. A hardware wallet has only one practical use. Devoted devices are much less likely to have glaring vulnerabilities and bugs while a computer may have several.
Prior to hardware wallets, early Bitcoin adopters were only able to store their Bitcoin in Bitcoin-Qt or what is now known as Bitcoin Core. A large issue that came up with having a Bitcoin wallet’s secret keys stored on a person’s computer during the 2009-2013 era, was that most computer hard drives were hard disk drives (HDD) instead of today’s more commonly used solid state drives (SSD). HDDs are more prone to breaking because it requires the drive (a disk) to spin in order to function while an SSD requires flash storage (no moving parts). Once the disk in the HDD is damaged or is unable to spin, the data on the drive will have to go through a series of recovery steps to be retrieved. This is one of the many reasons why there are so many lost Bitcoin.
There is also the risk of having malicious malware infect a person’s computer. Hardware wallets began as a hobby for Pavel Rusnák and Marak Palatinus in order to ensure a more secure way to store their Bitcoin. After creating a small single-use computer for the sole purpose of Bitcoin storage, they were able to start Trezor and offer a range of products for individuals. Soon after, a slew of companies like Ledger, and Keepkey developed their own storage solutions.
Step 1. Which hardware wallet should I order?
All of the listed manufacturers above are constantly tested and approved by many in the community. Trezor is still the most trusted because the company has graciously provided all of its software and firmware to be open source for the community to review and update. The choice is up to the user and it is definitely recommended to do a fair amount of research before purchasing.
Tip: If you are concerned about your privacy, you have the option to buy a hardware wallet at a Bitcoin convention rather than provide personal details online to a company.
Step 2. Unboxing
When your hardware wallet arrives, make sure that the package is not tampered with.
Tip: It is best practice to always purchase directly from the manufacturer rather than a third-party seller in order to lower the chance of receiving a tampered device.
What is included:
- Hardware wallet device.
- Connection cable.
- Recovery seed book. At least two are provided but you may want to write your seed phrase a third time to then store in a third location.
- Stickers, small manual, keychain ring.
Step 3. Using the hardware wallet web interface or software
Check the official website of the manufacturer to see if a desktop app or a web interface is required for accessing your new hardware wallet. If a desktop app is needed, make sure you are downloading the app directly from the verified manufacturer website. Same type of precautions may be implemented when becoming familiar with the web interface. You can avoid accidentally going to phony websites by bookmarking the legitimate site when using your hardware wallet.
Step 4. Connect and configure your hardware wallet
The steps for this process may vary depending on what wallet you choose but they are generally the same. Once connected, the web or software interface will recognize if your device is plugged into your computer. You will then be notified if any required updates for the firmware of your hardware wallet need to be implemented.
Step 5. Setting up your pin and backing up your 24 word seed phrase
Both steps are done during the set up of a hardware wallet. This process requires one’s full attention when initializing. It is not a hard task to accomplish but the pin and seed phrase must be checked (several times) in order to ensure that recovery for your funds is possible.
A pin is used for accessing your hardware wallet. Make sure that your pin is a randomized number. Avoid using randomized number generators online because they are not truly random but pseudo-random. They provide the illusion of randomness and technically produce a number in a sequence. The best way to generate random numbers is with dice. Using dice also takes away the chance that you select a set of numbers that you may have sentimental value for.
24 word seed phrase:
A 24 word seed phrase is a list of 24 words that are used in order to restore a Bitcoin wallet. They may be words like ghost, satoshi, and tree. Here is the full list of words that your hardware wallet may randomly generate for your recovery seed. BIP39 is an accepted proposal to use mnemonic phrases that make it easier for humans to remember their seed phrases.
A hardware wallet will provide you two opportunities to copy your 24 words. The physical device will display each word on its small screen. The seed phrase should be copied down on the two papers provided so that you may store them in two separate locations in case one is lost or damaged. It is highly recommended to write the seed phrase more than twice and to never store photos of the words or a text copy on a computer.
Storing your cold storage device and seed phrase
This portion of storage is often overlooked. There are many creative solutions to this last step but the most straightforward would be to store your seed phrase in a safe that is out of sight. Some will even go through great lengths to purchase plots of land, have a portion of that land excavated for a shipping crate, and then bury it with valuables stored inside. Some of those valuables may be their seed phrases or devices. For most, costly storage options may not be necessary but something to consider if your funds are substantial. Also consider splitting up your seed phrase to be kept in separate locations. A safe or safety deposit box will be the first methods to think about when storing your seed phrase.
Sending and receiving funds
If you are set on using a hardware wallet, it is mandatory to know how to send and receive funds. Without knowing how to do so, the hardware wallet loses its usefulness for the user. All wallets have a public and private address just like all bank accounts have a number attached to them. Only the public address should be shared because it can only receive funds while the private address allows the owner to send funds.
Each hardware wallet will have a different interface but the process for sending and receiving are similar to one another. To send funds to your device:
- You must first generate a wallet.
- Verify the wallet on your computer and hardware device.
- Copy the public address.
- On the exchange site or from another wallet, set the amount you want to send.
- Paste the public address you copied into the exchange or wallet interface.
- And finally, verify you want to send those funds.
You will then have to wait a certain amount of time for the transaction to execute. This depends on what fees were paid to the miners who included your transaction on the block they mined. The best way to become comfortable with transferring funds to and from public addresses is to consistently practice.
Tip: Before sending large sums from one wallet to another, it may be safer for a beginner to send a small amount of their initial funds first before sending the total. $5-$10 dollars is an acceptable amount to lose for most people. Once the small transaction is confirmed on the blockchain, it will verify whether or not you sent your funds to the correct address. If that small transaction is confirmed, it is safe to then send the remaining amount to that verified wallet. However, there are schools of thought who use one wallet per transaction in order to maintain a higher level of privacy and security. Whichever option you choose, it is important to consider how comfortable you are with transactions and how much you value your privacy.
Have a backup hardware wallet available
Like any piece of hardware, they eventually fail for various reasons. As long as you have the seed phrase to your hardware wallet, you will be able to recover your funds. On the day that your hardware wallet does fail to operate, it is always less stressful to have an unopened backup wallet on hand to quickly restore your funds. This isn’t necessary for everyone, but once your device fails, you will have to recover the funds on another device. You could recover them on a phone or desktop wallet app and leave the funds on there until your new hardware wallet arrives, but having a second hardware wallet will save more time.
Bonus: Why would I want a 25th word for my backup?
This is mainly based on preference but it does provide an extra layer of security for the user’s seed phrase within their hardware wallet. In the advanced settings for most wallets, you should be given the option to create a passphrase. This is known as the 25th word for your device.
The most important thing to remember is to continue learning and staying up to date on the developments with hardware storage. Not every option will work for everyone but there should be enough information here to get you started on taking back your sovereignty.