Written By
Stephen Hall
Hardware wallets enable you to generate and hold the keys to your bitcoin entirely offline, otherwise known as cold storage. This stands in contrast to hot wallets, which are more susceptible to remote attacks such as malware and SIM swap attacks.
At no point do the keys ever leave the device. Even if a hardware wallet is connected to a virus-infected computer (which is not recommended), the keys would still be protected due to the way the seed is isolated on the device, often in a secure element.
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If someone were to gain physical access to your hardware wallet, there are unique features hardware wallets offer that help you defend against attacks. Some of these security features include a secure element, firmware verification, and PINs for first-layer defense.
Secure elements store and protect sensitive data, firmware verification ensures the validity of your wallet's onboard software, access PINs ensure only you can get immediate access to the ability to sign, and duress PINs protect your bitcoin if you're attacked.
It’s possible to store your keys offline with a laptop or desktop and secure them from physical attacks. However, the general-purpose architectures of these devices present a larger attack surface for skilled attackers.
In contrast, hardware wallets are built with specialized hardware that simplifies their functionality to very specific tasks and limits their connectivity to the internet and other devices.
You may think you don’t own enough bitcoin for it to be worth the effort to buy a hardware wallet and learn how to securely hold your keys offline. One reason to get a hardware wallet now is to prepare for bitcoin’s upward price swings.
It’s common bitcoin wisdom to treat your holdings as if they’re worth 10x what they are today—historically, a move like this can come quickly and unexpectedly. If you get a hardware wallet now and figure out your self-custody setup, you’ll be ready for potentially higher bitcoin valuations in the future.
Because bitcoin transactions are irreversible, it’s important to be certain when you send bitcoin that it goes to the correct address. This is important for both sending bitcoin to someone else and sending bitcoin to a wallet controlled by the keys on the hardware wallet(s) you own.
Hardware wallets have a physical display to show addresses, allowing you to verify them prior to spending. As long as your device hasn’t been compromised, you can be confident that the address you’re shown is controlled by the keys stored offline on the device.
All bitcoin wallets depend on entropy—randomness—to generate seeds, and seeds are the master secret that generates your bitcoin private keys. Entropy can be generated in many ways, from basic on-device random number generators, to long strings of random text entry, to dice rolls or playing cards.
While you don’t need a hardware wallet to generate your own entropy (you could do so on a permanently offline laptop, for example), hardware wallets uniquely allow you to do so in a way that’s convenient, allowing you preserve the marginal security you may obtain by doing so.
Traveling with small amounts of bitcoin can be easily done with a mobile phone or another less secure device, but larger amounts of bitcoin require more forethought. Hardware wallets offer convenience and security if you need to keep one or more bitcoin keys on your person while traveling.
A hardware wallet makes it much easier to secure large amounts of bitcoin while traveling. You don’t have to worry about sketchy WiFi connections or USB ports, you can use duress features as described above if someone were to physically attack you, and you’re more protected if your device becomes lost, stolen, or confiscated
Multisig wallets are built by combining multiple keys (versus singlesig wallets that use just one). Requiring more than one key to spend bitcoin adds security and redundancy to your wallet, making them useful for securing larger amounts of bitcoin.
Using multiple hardware wallets is a natural fit for multisig because multisig is often used for maximizing security and redundancy for large amounts of cold storage bitcoin, a goal which physical devices and seed phrase backups also help you to achieve.
This article is provided for educational purposes only, and cannot be relied upon as tax or investment advice. Unchained makes no representations regarding the tax consequences or investment suitability of any structure described herein, and all such questions should be directed to a tax or financial advisor of your choice.