It is no surprise that Bitcoin is always a hot topic and regularly trends on Twitter and other social media platforms. It is bringing about a global revolution unseen in modern times. Unfortunately, many people are unfamiliar with what it is or how it works, and an important question that should be addressed in the midst of all of these discussions is about how we should store our Bitcoin.
What is a Hardware Wallet?
Bitcoin wallets are used for storing bitcoin. They hold the password, referred to as “keys,” an essential piece of information needed to authenticate ongoing transactions on the blockchain network in a device. Bitcoin/Hardware wallets isolate your private keys from your easy-to-hack laptop/PC or mobile.
To fully understand Bitcoin wallets, we need to first understand two terms:
Bitcoin address: This is the address that you can share with others. When sending or receiving Bitcoin, you must send and receive to or from a Bitcoin address.
Private key: The private key gives you access to and control over the associated cryptocurrencies. Like you keep your bank safe, private, and inaccessible to anyone else, your private key should be kept the same.
If you think of Bitcoin addresses as email addresses, then private keys are the passwords to different email addresses.
What a Bitcoin wallet does is take your transaction and sign it on your behalf using the private key of that wallet. It then shares a digital signature of this transaction to the network. Once the transaction is completed, the wallet broadcasts it to the network to validate the authenticity of the transaction. Once the network validates it, the transaction is updated and is formally confirmed on the blockchain.
Why do you need a Hardware Wallet to store your crypto?
Given the transaction flow above, an obvious question is “What do I need a hardware wallet for, and why do I need one if a software wallet can execute transactions for me?”
The simple answer is that stealing information stored on your computer isn’t hard these days. If the system that runs your Bitcoin wallet is somehow compromised, for example if it becomes infected by malware, then your private key could potentially be exposed. Once your private key is exposed, your Bitcoins are no longer under your control. Anyone with access to the private key can send your Bitcoin balance to a new wallet or address of their own and you will lose your holdings. There is no way to reverse this.
One solution to this is to ensure that your system is malware- and vulnerability-free. Another option is to use a wallet that is immune to these kinds of attacks and keeps your private keys safe.
This is precisely what hardware wallets do. Hardware wallets are offline wallets designed to hold your private keys. Hardware wallets store your coins on a physical hardware device. To put it in layman’s terms, a hardware wallet is a computer that is designed to store keys and facilitate transactions.
Due to their design and their ability to store keys and initiate transactions, hardware wallets cannot be infected by any form of malware. Thanks to their simple design, hardware wallets cannot connect to the internet and they store your private keys in an offline/cold-storage environment.
How Does a Hardware Wallet Execute a Transaction?
Hardware wallets are designed to be simple and to sign transactions. We, therefore, need a more sophisticated system to perform other functions such as preparing transactions and broadcasting them to the network.
Hardware wallets allow only specific types of data to pass through them, such as cryptocurrency transactions. Once the hardware wallet receives a transaction, it signs the transaction on the hardware wallet itself. It then sends the transaction back to the bridge. Your private key never leaves the hardware wallet.
The only thing that leaves the hardware wallet is the signed transaction that came in as unsigned. Due to its simple design, you can connect the hardware wallet to any computer confidently without any fear of being hacked.
We can now list the pros of using a hardware wallet:
- Security: Simple design offers security from being hacked
- Physical size: Hardware wallets are small in size and are easy to transport.
There are, however, a few cons of using a hardware wallet, as outlined below:
- Hardware wallets cannot be connected to the internet, so you always need the wallet device on hand for transacting.
- Hardware wallets are more expensive than software wallets.
- If you are planning to buy and sell your coins quickly, buying, connecting, and then interfacing with a hardware wallet for transactions can be time-consuming.
What If I Lose My Hardware Wallet?
All hardware wallets come with a recovery phrase. You can recover your private keys with the recovery phrase if your hardware wallet is lost or damaged.
Is having a Hardware Wallet important?
Though you do not need a hardware wallet to perform transactions, buying a hardware wallet is recommended, especially if you are planning to store your coins for a long time.
Asset Security on Wisebitcoin
For fast and frequent trading, it is safe to keep your crypto assets in Wisebitcoin’s exchange wallets. This is because for all crypto assets that are exchanged on the platform, Wisebitcoin stores these assets in cold wallets that are offline. This infrastructure prevents hackers from accessing funds because the private keys of these wallets are never stored online.
However, for long-term storage and for holding assets secure without the intention of trading, you should use a hardware wallet to store your Bitcoin or other crypto assets.
For more crypto updates and market insights, stay tuned to Wisebitcoin.