- >Ask CryptoVantage: Do I Really Need a Hardware Wallet to Store Bitcoin?
Ask CryptoVantage: Do I Really Need a Hardware Wallet to Store Bitcoin?
You do not need to own a hardware wallet in order to buy, store, or send bitcoin. But hardware wallets can significantly improve security by reducing the risk of your bitcoin being stolen. This article will provide you with a basic technical understanding of how hardware wallets protect your coins. We also list some of the trade-offs between hardware and software wallets to help you decide whether owning a hardware wallet is the right choice for you.
Billy Garrison | Jun 4, 2021
What is a Hardware Wallet?
Unlike software wallets, which are vulnerable to security holes and hackers, offline hardware wallets were developed so that you no longer have to trust software on your computer to hold your private keys. Hardware wallets store your private keys on a physical device with specialized firmware that prevents your private keys from being accessed.
Your computer communicates with the hardware wallet, sending bitcoin transactions to the device to be signed and then returned to your computer as signed transactions. In this way, your private keys never exist on your computer and are immune to many types of viruses.
Hardware Wallet Pros
The following list provides a summary of the pros of hardware wallets in comparison to software wallets:
- Security: To date, hardware wallets are the most secure way to store your private keys because they are not susceptible to viruses.
- Self Reliance: Owning a hardware wallet allows you to be more self-reliant when it comes to protecting your bitcoin.
- Physical Size: Because a hardware wallet is smaller than a computer, storing your private keys on a hardware wallet makes it easier to transport your bitcoin when needed.
Hardware Wallet Cons:
On the other hand here are some of the cons to hardware wallets compared to software wallets:
- User Experience: The user experience of hardware wallets is typically worse than software wallets. It may take some time to figure out how your hardware wallet works, and you will always need the extra step of retrieving and connecting your hardware wallet.
- Upfront Cost: Hardware wallets are more expensive than software wallets, and this upfront cost may not seem worthwhile if you are planning to buy and sell your bitcoin quickly.
- Location: You need to be in the same location as your hardware wallet in order to access your bitcoin, which means you might not be able to use your bitcoin when you want (or need) to.
How a Hardware Wallet Protects Your Bitcoin
There are viruses that target bitcoin private keys by recognizing the keys and sending them to hackers. These viruses have been around for many years and they are getting more sophisticated through time. By design, hardware Bitcoin wallets prevent your private keys from ever leaving the device, making them a great defense against this type of attack.
Using a hardware wallet can also provide peace of mind to the user. It can be stressful trying to manage private keys, software wallets, and other bitcoin-related programs, all while trying to ensure your computer stays very secure. With a hardware wallet, you can be more assured that your bitcoin won’t unintentionally move. It can be hard to trust your ability to secure an intangible, internet-connected software wallet, but securing a physical offline hardware wallet provides another level of confidence in your method of crypto storage.
Planning for the Long Term
Even if you don’t own a lot of bitcoin, it can be a good idea to store it on a hardware wallet. It might seem too expensive to buy a $150 hardware wallet to protect $500 worth of bitcoin, but you need to factor in the possibility that the value of the bitcoin can increase very quickly.
In the past, $500 worth of bitcoin has turned into $5000 in a matter of months. Check out why we recommend holding bitcoin for the long term here. Another added benefit of using a Bitcoin wallet is that it teaches the user to be self-reliant when it comes to crypto storage. Bitcoin was invented as a peer-to-peer currency that didn’t require third-party middlemen like governments, banks or other institutions. When you use a hardware wallet you are effectively becoming your own bank. It’s not necessarily for everyone but it can be comforting to know you have complete control over your crypto assets.
Where Can I Buy a Hardware Wallet?
There are many places where you can buy a hardware wallet, including common online shops such as Amazon. However, we recommend buying directly from the manufacturer to prevent middlemen from interfering with the device after it has been produced.
If you plan to buy a hardware wallet that will only be used for storing bitcoin, we like the ColdCard hardware wallet made by Coinkite. Otherwise, if you expect to be storing multiple cryptocurrencies then the Ledger Nano X is a good option. There are several reputable brands when it comes to crypto wallets including Trezor, KeepKey, Ellipal and the aforementioned Ledger.
We’re referring to BTC in this article but it’s also worth noting that hardware wallets work for all major altcoins including Ethereum and Litecoin.
What if I Lose My Wallet or it Breaks?
Interestingly, all hope is not lost if you somehow misplace your hardware wallet or it gets accidentally destroyed.
All hardware wallets come with seed recovery phrases (sometimes referred to as “paper wallets”). The recovery seed will let you recover your private keys even if your physical device is MIA. That should provide users with plenty of peace of mind.
You should know, however, that it’s extremely important you keep your recovery phrase in a safe location. If someone manages to steal your recovery phrase they might be able to steal all your BTC. Many crypto users prefer to keep their cold wallets and recovery phrases in separate locations in case one of them is accidentally destroyed or otherwise compromised.
Can’t I Just Leave My Bitcoin on an Exchange?
You can just leave your crypto on an exchange and that’s absolutely what a large number of crypto users do. It’s especially common for crypto traders who need their crypto online so they can swap it quickly between different digital assets.
The issue is that when you leave your crypto on an exchange you don’t have access to your private keys, which means the exchange could technically get hacked or go bankrupt and you wouldn’t have a lot of recourse.
Of course there are some people who simply don’t have technical ability to keep their crypto on a physical hardware device and prefer to have exchanges take custody. If you do decide to take that approach it’s extremely important you use a reputable exchange such as Coinbase, Kraken or Binance.
While you are not required to store your bitcoin on a hardware wallet, we highly recommend it. Even for small amounts, hardware wallets are a good investment because they protect your private keys and give you peace of mind that is not possible when using software wallets. You certainly do not want to be caught in a situation where the price of bitcoin increases rapidly and you are left with a large amount of bitcoin stored insecurely.