There are two main ways of crypto storage: hot and cold storage. Hot is online and connected to the Internet, while cold is offline and therefore better protected from hacks. The best-known method of cold storage is with a hardware wallet. In this article, we will take a closer look at what a hardware wallet is and its advantages and disadvantages.
What is a hardware wallet?
A hardware wallet is a device designed to store access keys to your crypto, also known as the private keys. These are stored physically and are offline: not connected to the Internet. Usually, it is some kind of USB stick or something similar-looking.
It is important to realize that these wallets do not store the crypto itself, only the keys that access it. You can only access crypto funds if you have both the public keys and private keys. These keys are not the type you use to open a door, but long rows of numbers that are mathematically connected. Because of this connection, data encrypted with a public key can only be decrypted with the corresponding private key. Together, these keys are used to encrypt and decrypt transactions.
The device itself, the hardware wallet, can be connected via USB or Bluetooth, allowing hardware wallets to be used in conjunction with computers and smartphones. In this way, crypto can be moved from an exchange or other online wallet to a hardware wallet.
Because the keys on a hardware wallet are offline, they are considered one of the most secure solutions for crypto storage. As long as the wallet is offline AND the device is not compromised, it cannot be hacked remotely. However, since phishing and malicious software are becoming more sophisticated, you can never 100% rule out anything. However, security is still of a considerably higher level than with software wallets and hot storage.
Advantages and disadvantages of hardware wallets
The first advantage of a hardware wallet is, of course, the aforementioned high level of security. An additional advantage is that the owner of the wallet keeps the keys and remains in full control over the funds. Something that cannot be said about cryptocurrencies held at a regular crypto exchange. In addition, a hardware wallet usually has a backup solution for when someone loses the wallet, in the form of a seed phrase. This seed phrase allows someone to restore private keys from another wallet.
All these benefits come with a price tag: hardware wallets are not cheap. Especially for investors who might own a few hundred euros worth of crypto, a hardware wallet is comparatively very expensive. For this price, a user often gets a rather complicated device for which some technical aptitude is needed. In contrast, most software wallets are free and relatively easy to use. For small investors, this is therefore often preferred.
The main disadvantage of a hardware wallet is that fast trading during interesting price movements is usually not possible. Often the crypto must first be moved to an exchange to trade. And this will only work if you just happen to have your hardware wallet at hand if you're not home.
There are also some in-between solutions on the market, where the hardware wallet comes with software that does allow (faster) trading. However, the downside of this is that security is less robust.
Alternatives to hardware wallets
Apart from hardware wallets, there are several other forms of cold storage, such as:
- Paper wallets: basically this is just writing down or printing the private keys on a piece of paper and storing them carefully, for example in a safe (at the bank).
- An encrypted data carrier such as a USB flash drive with the private keys stored on it.
- A piece of steel with the keys engraved in it. These are more likely to survive water damage or a fire than a piece of paper.
However, all of these forms are susceptible to theft or loss. As long as someone does not also have the public keys, there is little they can do with them. But the private keys are a lot easier to access than with a real hardware wallet. This is why many investors prefer the hardware wallet.
Besides cold storage, there is of course the possibility of storing crypto hot, for example at a crypto exchange or in a software wallet such as MetaMask. However, these are more susceptible to hacks, and in the case of storage at a crypto exchange, the owner loses control and does not hold the keys himself at all.
Blockrise has built a golden mean with a unique and advanced technical solution: something we call warm storage. Our clients always retain ownership of the crypto and hold the keys themselves. The crypto is safely stored offline, but can also be moved quickly and easily. This offers all the security advantages of a hardware wallet, without compromising on ease of use.
The information provided in our articles is intended solely for general informational purposes and does not constitute (financial) advice.