Hardware Wallets Explained, Reviewed and Compared

Summary

In this informative video, Nate Martin from 99Bitcoins.com explores the concept of hardware wallets, which are specialized devices designed to securely store the private keys for cryptocurrencies like Bitcoin. He explains that while Bitcoin wallets don't actually hold the currency, they do hold the keys to access it on the blockchain. Hardware wallets are particularly secure because they operate offline, minimizing the risk of hacking. They are simple devices that sign transactions and are immune to malware, thus protecting users' private keys even if their computers are compromised. The video also addresses common concerns, such as what happens if a hardware wallet is lost or if the manufacturer goes out of business, and provides tips on how to mitigate these risks. Martin emphasizes the importance of the seed phrase, which is essential for recovering funds in various scenarios. The video concludes by encouraging viewers to ask questions and subscribe for more cryptocurrency insights.

Takeaways

• 💡 A Bitcoin wallet doesn't hold Bitcoin; it's software that holds the keys to access Bitcoins on the blockchain.
• 🔑 The two important terms in a Bitcoin wallet are the Bitcoin address (for receiving payments) and the private key (to access and control your Bitcoins).
• 🛡️ Hardware wallets are designed to be immune to malware and keep your private key safe by storing it offline, known as cold storage.
• 🖥️ Hardware wallets are simple devices that only sign transactions, requiring a more sophisticated computer (a bridge program) for other functions.
• 🔄 The process of sending Bitcoins involves proving ownership to the network, signing the transaction, and broadcasting it to the Bitcoin network.
• 🔒 Your private key never leaves the hardware wallet; only unsigned and signed transactions are transferred between your computer and the wallet.
• 📦 Hardware wallets come in various models from companies like Ledger, TREZOR, and KeepKey, each with different features and support for different coins.
• ✍️ When setting up a hardware wallet, it's crucial to write down the seed phrase provided, which is essential for restoring your private keys.
• 🛍️ To minimize risks, purchase hardware wallets directly from the manufacturer or from an authorized, trustworthy reseller.
• 🔓 Hardware wallets often include PIN protection to prevent unauthorized access, even if the device is stolen.
• 🧐 The seed phrase is powerful and can be used to recover your Bitcoins in various scenarios, including if your wallet is lost, stolen, or damaged.
• ❓ If a hardware wallet manufacturer goes out of business, you can still recover your Bitcoins using the seed phrase with another compatible wallet.

Q & A

What is a hardware wallet?

A hardware wallet is a physical device that securely stores private keys for cryptocurrencies offline. It signs transactions on the device itself, ensuring the private key never leaves the wallet.

Why are hardware wallets considered a safe way to store cryptocurrencies?

Hardware wallets are considered safe because they keep private keys offline, reducing the risk of exposure to online threats like malware and hacking attempts.

Can hardware wallets be hacked?

While hardware wallets are designed to be secure, they are not entirely immune to hacking. However, they are significantly more resistant to attacks compared to software wallets due to their offline storage of private keys.

What happens if I lose my hardware wallet?

If you lose your hardware wallet but have the recovery seed phrase, you can recover your cryptocurrencies using another compatible wallet. Without the seed phrase, your funds may be lost.

What is a seed phrase or mnemonic phrase?

A seed phrase or mnemonic phrase is a series of words used to regenerate a wallet's private keys. It is a crucial backup mechanism for hardware wallets.

How do hardware wallets work when sending a Bitcoin transaction?

To send a Bitcoin transaction, a hardware wallet is connected to a computer running a bridge program. The program prepares the transaction, which is then signed by the hardware wallet and broadcasted to the network.

Why can't I just use my computer to store my Bitcoin wallet?

Using a computer to store a Bitcoin wallet can expose your private keys to malware and hacking risks. Hardware wallets mitigate this risk by keeping keys offline and secure.

What is the difference between a hot wallet and a cold wallet?

A hot wallet is an online wallet connected to the internet, while a cold wallet, like a hardware wallet, is offline and not connected to the internet, offering better security.

How do I protect my hardware wallet from physical threats like theft?

You can protect your hardware wallet by setting up PIN protection and using a seed phrase to recover your funds in case of theft. Some wallets also offer a passphrase feature for additional security.

What should I do if I suspect my hardware wallet has been tampered with?

If you suspect your hardware wallet has been tampered with, do not use it. Instead, use the recovery seed phrase to restore your funds to a new wallet.

What happens to my cryptocurrencies if the hardware wallet manufacturer goes out of business?

If the manufacturer goes out of business, you can still access your cryptocurrencies using the seed phrase with another compatible wallet, as the seed phrase is not tied to a specific company.

Outlines

00:00

🔐 Introduction to Hardware Wallets and Bitcoin Wallet Basics

The video script introduces the concept of hardware wallets and raises questions about their safety, potential for hacking, and what happens if the wallet is lost. Nate Martin from 99Bitcoins.com welcomes viewers to the Crypto Whiteboard Tuesday series, which aims to simplify complex cryptocurrency topics. The script explains that a Bitcoin wallet is essentially software that holds cryptographic keys, not the Bitcoins themselves. It details the role of a Bitcoin address for receiving payments and a private key for accessing and controlling Bitcoins. The process of signing transactions with a private key and broadcasting them to the Bitcoin network is also outlined, highlighting the importance of cryptography in ensuring transaction authenticity.

05:01

🛡️ Understanding Hardware Wallets: Security and Functionality

The script delves into why hardware wallets are considered secure for storing private keys. It contrasts software wallets, which are vulnerable to malware and hacking if used on an infected computer. Hardware wallets are described as simple, stripped-down computers that store keys and sign transactions, resembling small USB devices. Their minimalist design makes them less susceptible to hacking due to fewer points of infiltration. These devices operate offline, a method known as cold storage, as opposed to hot wallets that connect to the internet. The process of using a hardware wallet involves connecting it to a computer, using a bridge program to prepare and broadcast transactions. The private key remains secure within the hardware wallet, with only transaction data being transferred. The script also discusses various hardware wallet models from leading companies like Ledger, TREZOR, and KeepKey, and emphasizes the importance of the seed phrase for restoring access to the wallet's private keys.

Keywords

💡Hardware Wallets

Hardware wallets are physical devices that securely store the private keys to your cryptocurrencies offline, providing a high level of security against digital theft. They are designed to be resistant to malware and hacking attempts, as they do not connect to the internet or run complex software. In the video, they are discussed as a primary method for safely storing Bitcoin and other cryptocurrencies, emphasizing their role in protecting users' assets from cyber threats.

💡Bitcoin Wallet

A Bitcoin wallet is a software application that holds the cryptographic keys used to send and receive Bitcoin. Contrary to the term, it does not store actual Bitcoins but rather the keys that control access to the Bitcoins on the blockchain. The video explains that the wallet holds two important components: a Bitcoin address, which is used to receive payments, and a private key, which is akin to a password that controls the access to the Bitcoins.

💡Blockchain

The blockchain is a decentralized, public ledger that records all Bitcoin transactions. It ensures the integrity and history of transactions across the network. In the context of the video, the blockchain is where the record of Bitcoin ownership is maintained, and it is crucial for the process of sending and receiving Bitcoins. The video mentions that transactions are broadcasted to the Bitcoin network and then added to the blockchain by miners once validated.

💡Private Key

A private key in the context of Bitcoin wallets is a secret number that allows the owner to access and spend the Bitcoins associated with a specific Bitcoin address. The video likens it to the password of an email account, emphasizing its importance in maintaining control over the cryptocurrency. The private key is kept secure within the hardware wallet, never leaving the device, which is critical for preventing unauthorized access.

💡Digital Signature

A digital signature is a mathematical technique used to validate the authenticity and integrity of a message or financial transaction. In the video, it is used to prove ownership of the private key without revealing it, ensuring that the transaction is authorized by the rightful owner. This is a fundamental part of the process when sending Bitcoins, as it confirms to the network that the transaction is legitimate.

💡Cold Storage

Cold storage refers to the practice of keeping cryptocurrencies offline to enhance security. Hardware wallets are a form of cold storage, as they store private keys offline and do not connect to the internet. The video explains that this method reduces the risk of hacking, as there is no digital connection that could be exploited by cybercriminals.

💡Seed Phrase

A seed phrase, also known as a mnemonic phrase, is a list of words used to regenerate a Bitcoin wallet's private key. It is a crucial backup mechanism that allows users to recover their wallets in case the hardware device is lost, stolen, or damaged. The video stresses the importance of securely storing this phrase offline and keeping it secret, as anyone with access to the seed phrase can control the associated Bitcoins.

💡PIN Protection

PIN protection is a security feature that requires users to enter a personal identification number to access their hardware wallet. This adds an extra layer of security, making it more difficult for unauthorized individuals to access the wallet, even if they physically possess the device. The video mentions that most hardware wallets include this feature to protect against theft and unauthorized access.

💡Passphrase

A passphrase is an additional layer of security that can be set up with certain hardware wallets like TREZOR. It allows users to create a secondary, dummy account that appears to hold only a small amount of coins, thus concealing the majority of their holdings. This is useful in situations where someone might force you to unlock your wallet, as you can enter the dummy passphrase to reveal only a portion of your assets.

💡Evil Maid Attack

An evil maid attack is a type of physical attack where an unauthorized person gains physical access to a hardware wallet, potentially to steal the PIN or install malicious software. The video discusses this as a risk and mentions that PIN protection is a common defense mechanism against such attacks. It also suggests using a seed phrase to move funds to a new wallet if a device is suspected to have been compromised.

💡Miner

In the context of Bitcoin, a miner is a participant in the network who contributes computational power to validate transactions and add them to the blockchain. Miners are rewarded with Bitcoins for their efforts. The video explains that once a transaction is signed and broadcasted to the network, it is validated by miners before being entered onto the blockchain, marking the completion of the transaction.

Highlights

Hardware wallets are small devices that securely store your private keys and sign Bitcoin transactions offline

A Bitcoin wallet doesn't hold actual Bitcoins, but rather passwords or keys to access them on the blockchain

Hardware wallets are immune to malware and can't connect to the internet, providing a high level of security

When sending Bitcoins, your wallet signs the transaction with your private key and broadcasts it to the network

Hardware wallets use a bridge program on your computer to prepare and broadcast transactions

The private key never leaves the hardware wallet - only the signed transaction is transferred to the computer

Reputable hardware wallet manufacturers use a holographic sticker to verify the device hasn't been tampered with

If your hardware wallet is lost or stolen, you can recover your Bitcoins using the seed phrase

The seed phrase is a random set of words that can regenerate your private keys and should be stored safely offline

Most hardware wallets offer PIN protection to prevent unauthorized access if the device is stolen

Some wallets like TREZOR have a passphrase feature to add an extra layer of protection against physical attacks

Even if a hardware wallet company goes out of business, you can still recover your Bitcoins using the seed phrase with another wallet

Ledger, TREZOR and KeepKey are the three market leaders in hardware wallets, each with different models and features

Hardware wallets support multiple cryptocurrencies and can often be controlled from both computers and mobile devices

When setting up a hardware wallet, it's important to write down and securely store the seed phrase provided

To minimize risks, always buy hardware wallets directly from the manufacturer or an authorized, reputable reseller

The simple, minimalist design of hardware wallets makes them highly secure and resistant to hacking attempts

Transcripts

What are hardware wallets?

Are they really the safest way to store Bitcoins and other cryptocurrencies?

Can they be hacked?

And what happens if I lose my hardware wallet?

Are my coins lost?

Well, stick around.

Here on Bitcoin Whiteboard Tuesday, we’ll tackle these questions and more.

Hi, I’m Nate Martin from 99Bitcoins.com

and welcome to Crypto Whiteboard Tuesday

where we take complex cryptocurrency topics,

break them down and translate them into plain English.

Before we begin, don't forget to subscribe to the channel

and click the bell so you’ll immediately get notified

when a new video comes out.

Today’s topic is hardware wallets.

But before we dive deep into hardware wallets

we need to understand how any Bitcoin wallet works in general.

The term Bitcoin wallet is a bit misleading,

as a Bitcoin wallet doesn’t really hold any Bitcoin.

Technically speaking,

a Bitcoin wallet is a software that holds passwords,

sometimes referred to in cryptographic terms as keys.

These keys give your wallet access to the Bitcoins allocated to it

on the Bitcoin transaction ledger called the blockchain.

So when you use any Bitcoin wallet,

you’ll encounter two important terms.

The first is a Bitcoin address,

this is what you send to people who want to pay you in Bitcoin,

kind of like an email address.

The second is a private key.

The private key allows you to access and control the Bitcoins you own.

For our email account analogy,

you might think of your private key as the password to your email account.

Aside from holding your private key,

the wallet also signs Bitcoin transactions on your behalf

using your private key,

and broadcasts them to the Bitcoin network.

Let me explain:

When you want to send Bitcoins to someone else,

you need to prove ownership of those Bitcoins to the whole network

so it will agree to change the ledger of transactions.

To achieve this,

your Bitcoin wallet takes your requested transaction,

signs it on your behalf using your private key

and broadcasts this digital signature to the network.

In a nutshell,

a digital signature is a way to prove you own a certain private key

without needing to expose it.

It’s done through the use of complex mathematical rules

known as cryptography.

This whole process is kind of similar to you signing a check

authorizing the transfer of money from your account.

Once a transaction is signed,

the wallet then broadcasts it to the whole network

which validates its authenticity.

Eventually,

this transaction will be entered by Bitcoin miners on to the blockchain,

and the transaction will be considered complete.

So, what does this all have to do with hardware wallets?

If my wallet is just a piece of software,

why can’t I just have it on my computer, like any other software I use?

Well, as you probably know,

stealing a piece of information from a computer

isn’t that hard these days.

And if the computer running your Bitcoin wallet

is infected with malware

it may expose your private key to bad actors.

Hackers may be able to take control over your computer

or see what’s displayed on your screen.

And once your private key is exposed,

your Bitcoins are no longer under your control.

They could be easily transferred to anywhere the hacker chooses.

In order to avoid this situation you have two options:

First -

You could make sure your computer is completely malware free.

While this may sound easy,

most viruses are either disguised as legitimate software

or have a way to avoid detection by Antivirus software.

The other option would be to use a wallet that is “immune” to malware,

so to speak, keeping your private key safe.

This is exactly what hardware wallets are designed to do.

Simply put,

hardware wallets are computers

that have been stripped down of all logic

except for a small screen, a button or two

and the simple action of storing keys and signing transactions.

Hardware wallets look like small USB devices,

and they offer a minimalist approach to security.

This is based on the logic that the more complex a device is,

the more opportunities hackers have to infiltrate it.

In the case of hardware wallets, the device is so “dumb”

it’s practically impossible to hack or infect it with anything.

Due to that simple design,

hardware wallets can’t connect to the Internet

or run complicated apps.

They are just a form of storing your private key offline.

This approach is known as cold storage,

unlike devices that connect to the Internet, which are called ‘hot wallets’.

So how do hardware wallets work exactly?

Well, let’s say you want to send a Bitcoin transaction

using a hardware wallet.

The first thing to know is that

because a hardware wallet is such a simple device

that can only sign transactions,

it needs to use a more sophisticated computer

for all other functions,

such as preparing the transaction and broadcasting it to the network.

So in order to use a hardware wallet

you’ll need to connect it to your personal computer

and download a program that can communicate with it.

We’ll call this program a bridge.

The bridge will allow you to prepare your transaction for signing.

The hardware wallet allows only very specific types of data

to pass through to it, such as cryptocurrency transactions.

Once it receives a transaction from the bridge program,

it signs it on the hardware wallet itself

and then sends it back to the bridge program.

Your private key never leaves the hardware wallet.

The only thing that gets transferred

between your computer and the hardware wallet

is the unsigned and signed transaction.

Because of its minimalistic and simple design,

a hardware wallet can be used with any computer

without fear of being hacked or infected -

even a public library computer or your mom’s laptop :)

The only thing you’ll need to do to make sure your Bitcoins are safe

is to make sure the transaction you’re approving

on the hardware wallet’s screen

matches the transaction your bridge program is showing

on your personal computer.

Today there are over a dozen companies that offer hardware wallets on the market,

with the three market leaders being Ledger, TREZOR and KeepKey.

Each company offers different models with different features.

If you’d like to read all about the different models on our site,

there’s a link in the description below.

There are many features to compare between the different hardware wallets.

Some things to consider, aside from company reputation,

include how many different coins the device can support,

and whether you can control it from your mobile phone

as well as from your computer.

Setting up a hardware wallet is fairly easy.

The main thing to do is write down the set of words you’ll be given

when initializing the device.

These words,

also known as a seed phrase or mnemonic phrase

are a way to restore any private key your hardware wallet generates.

This also means that whoever might get a hold of these words

would also control your Bitcoin,

so it's important to keep your seed phrase written offline

and in a safe place.

Before we conclude today’s episode,

I want to go over some common hardware wallet risks

you should be aware of,

and how to avoid them when possible.

The first risk is that someone may tamper with your device

when its onroute to your home for the first time.

To avoid this,

all reputable hardware wallet manufacturers

use a special holographic sticker to prove the wallet was never opened.

If you receive a wallet and this sticker isn’t in tact,

don’t use that wallet.

While some wallets also run a self tampering test when initializing,

it’s better to stay on the safe side.

In order to minimize this risk even more,

always buy a hardware wallet straight from the manufacturer’s website.

If you want to buy from a reseller,

make sure that he’s an authorised trustworthy reseller

by contacting the manufacturer first.

Closely related to this issue is the fact that your seed phrase

should be generated at random by your wallet upon setup

and is not sent to you with the device.

There’s a good reason for taking all these safety measures seriously.

For example, one unfortunate user bought a hardware wallet

from a bad actor on Amazon

and received a wallet with a card containing a preconfigured seed phrase.

He was instructed to initiate the device using this existing seed phrase.

The user wasn’t very tech savvy and did what he was instructed,

only to find out that once he deposited coins

into that hardware wallet

they were quickly removed by the hacker that had knowledge

of the preconfigured seed.

Another risk to be aware of is that

your hardware wallet device may be stolen

or physically accessed by unwanted individuals,

also known as the evil maid attack.

Most, if not all hardware wallets today, include a PIN protection.

So even if your device is stolen

it may take the thief a while before he can access your coins.

Once you notice your device is stolen

you should immediately use your seed phrase

to recover your Bitcoins

and send them to a new wallet with a different seed phrase.

This will basically drain your stolen wallet from all of its funds

and allow you to keep safe control over your Bitcoins.

Another very unusual but possible attack is the “$5 wrench attack”.

This refers to when someone physically threatens to hurt you,

with a $5 wrench,

if you don’t hand over your hardware wallet

and unlock it with your PIN code.

In order to protect from these kinds of physical attacks

certain wallets, such as TREZOR,

allow you to add another layer of protection called a passphrase.

This means you’ll be requested to add an additional passphrase

after the PIN code.

However, you can set it up

so that different passphrases will show only certain accounts

on your wallet.

So imagine having a dummy account on your wallet

with only a small amount of coins

and a real account with the majority of your funds.

When someone forces you to unlock your wallet

you can use the dummy passphrase

and it will seem that the wallet only holds a small amount of coins,

not revealing your complete holdings.

A very common fear people usually express

regarding hardware wallets is

what happens if the wallet manufacturer goes out of business?

Well, the seed phrase technology used in most hardware wallets today

is compatible with multiple wallets:

it’s not unique to any specific company.

Therefore, if a certain company goes out of business

you can recover your Bitcoins directly to another company’s wallet

using your seed phrase.

As you probably understand by now,

your seed phrase has a lot of power

and it can be used in many cases to recover your Bitcoins,

including if your hardware wallet breaks or gets damaged.

Well, that’s it for today’s episode of Crypto Whiteboard Tuesday.

Hopefully by now you understand what a hardware wallet is -

A small device that holds your private keys

and signs transactions offline keeping your Bitcoins safe.

You may still have some questions.

If so, just leave them in the comment section below.

And if you’re watching this video on YouTube,

and enjoy what you’ve seen, don’t forget to hit the like button.

Then make sure to subscribe to the channel

and click that bell

so that you’ll be notified as soon as we post new episodes.

Thanks for joining me here at the Whiteboard.

For 99bitcoins.com, I’m Nate Martin, and I’ll see you…in a bit.