What Is A Bitcoin Hardware Wallet?

Bitcoin decentralized money and took expensive intermediaries out of the money transfer equation. But where are you going to store your money if banks are out of the equation? Simple: Bitcoin hardware wallets

A world without intermediaries – and hopefully without custodians – demands more responsibility from the users. In this space people find out quickly that they are their own banks, which has incredible advantages but also a few drawbacks regarding the safety of funds.

Since each user is responsible for their own funds and not everyone is a cypherpunk, there was security gap which Bitcoin hardware wallets filled. But what exactly are these hardware wallets, how do they work and why are they so important?

Your Own Personal Money Vault

Banks store valuables in vaults. Bitcoin is a valuable digital resource, but there were no physical vaults for it. Keeping Bitcoin wallets offline – cold storage – or encrypting them to reduce the likelihood of theft was a challenge.

This is a Trezor 1 Bitcoin hardware wallet. Who would have thought that a money vault would ever fit in the palm of your hand?

Paper wallets – ironically – became the first digital vault in the space. Despite their versatility and the fact that they spawned valuable works of art and Bitcoin collectibles, they were not resilient enough.

Therefore, innovators took the next step, creating a device that could store digital assets safely: The Bitcoin hardware Wallet.

Advantages of Bitcoin Hardware Wallets

These wallets are highly versatile as well, but they offer way more features than the paper wallets did. Bitcoin hardware wallets offer the following advantages:

  • They store Bitcoin as well as other cryptocurrencies and digital assets – even passwords
  • They are more user-friendly than paper wallets
  • Physical resilience
  • Depending on the kind of wallet, additional layers of protection via encryption
  • On-device operations – physical access to the device is required to make changes and transactions unless you use the seed
  • A back up seed in case the device fails or is stolen – keeping the seed safe is the most challenging part of using a hardware wallet
  • Periodic firmware updates and communities dedicated to improving their functionality and security
  • Portability – Bitcoin hardware wallets are usually small, about the same size as a standard USB key
  • Inconspicuous properties – in some cases their design makes it hard to tell the difference between them and a standard USB key

List of Leading Bitcoin Hardware Wallets

Here are some of the leading Bitcoin hardware wallets in the market. All of them comply with the features above to varying degrees. Nevertheless, they are all high-quality devices that provide the kind of safety and versatility that Bitcoin and cryptocurrency users need:

  • Trezor – Both the Trezor 1 and the Model T are excellent wallets
  • Ledger – The Nano S is the most popular of them all and probably the less conspicuous hardware wallet out there
  • CoinKite – Including the Opendime device and their Coldcard hardware wallet

How do Bitcoin Hardware Wallets Work?

So, how can all these advantages fit into a small device? How can that device secure its contents? How can it house so many different assets and be so user-friendly?

There is no doubt that creating Bitcoin hardware wallets was a challenging task. Backup issues, fail-safe mechanisms and the ability to hold different types of coins safely, were some of the problems that innovators had to solve.

Some of these solutions required BIPs – Bitcoin Improvement Proposals. A BIP requires consensus and the process to get them approved and adopted is rigorous.

Bitcoin hardware wallets as we know them today are the result of innovation and changes to Bitcoin itself through BIPs. The main 4 proposals needed to create hardware wallets dealt with: 

  • The generation of multiple public keys and corresponding private keys – BIP32
  • Generation of private keys sourced from a 12 or 24-word seed – BIP39
  • Clear hierarchies to make BIP32 compliant wallets interoperable and allow them to handle various different coins without resulting in any mix up – BIP43/BIP44

Thanks to these changes, we now have Bitcoin hardware wallets that:

  • Have user-friendly interfaces that can handle other types of coins with passphrase protection 
  • Can handle the funds without sending them to a similar address on a different blockchain
  • Can generate new addresses automatically and separate funds into different accounts
  • Provide a fail-safe mechanism in the form of a seed from which users can operate should something happen to the device

Bitcoin Hardware Wallet Security Also Depends on Users

All these features are, of course, as effective as the users of the hardware wallet want them to be. Careful and responsible use maximizes the effectiveness of Bitcoin Hardware wallet security features: 

  • Users should never disable the pin requirement on their Bitcoin hardware wallets 
  • Users should keep these wallets in a safe place always. There are hardware vulnerabilities that a knowledgeable malicious actor can exploit if the device is in their hands 
  • The seed must also be in a safe and properly backed up.

There are even devices that allow users to keep their seeds safe and serve as a complement to Bitcoin hardware wallets like Cryptosteel. But these are only additional safety mechanisms. There is no replacement for responsible usage.

Fire and Water Hazard Resistance

Responsible users should also be aware of the potential for calamity. Although manufacturers work hard to make Bitcoin hardware wallets as resilient as possible, they are not entirely resistant to water or fire hazards. 

Wallet Combination

Another critical aspect of responsible Bitcoin hardware wallet usage is deployment. Combining different types of wallets allows users to maximize the safety of the funds they store in their digital vaults.

Bitcoin hardware wallets are great for keeping larger sums of money offline, so make sure you transfer some funds to desktop, web-based and cellphone wallets for daily use.

Apart from being cumbersome, it is not prudent to take your hardware wallet with you everywhere and spend from it.  

The Relevance of Bitcoin Hardware Wallets

There is no doubt that Bitcoin hardware wallets are extremely useful, innovative devices. They allow us to have a private digital vault in a world in which people want to be their own bank, but their versatility goes beyond Bitcoin and cryptocurrencies.

In a world in which data is so valuable and privacy is waning, these wallets also allow their users to store passwords and even encrypted files in them.

This makes Bitcoin hardware wallets more versatile than what their name suggests, and therefore, much more important than one might think.