What is a hardware wallet? Which one should I buy? Hardware Wallet 101 (2021)

January 08, 2021

So you’ve been hearing about hardware wallets, software wallets, and other wallets. What’s the deal with hardware wallets and why would you need one?

What is a hardware wallet?

A hardware wallet is a physical device that can generate Bitcoin addresses. Addresses are identifiers used to send and receive and crypto. If Alice wants to send Bitcoin to Bob, she asks for Bob’s address and sends Bitcoin to that address.

Why do I need a hardware wallet?

The addresses used to send and receive Bitcoin are derived from a private key. This is a number that needs to be kept secret and is used to spend Bitcoin and send Bitcoin to other people.

The main benefit of a hardware wallet is that it stores the private key on the physical device, and the private key never leaves the device. This means attackers basically have no means of accessing your private key, other than stealing your hardware wallet. Even if they do that, the wallet is usually protected by a PIN or passpharse.

This is opposed to a software wallet which may have access to a private key. If the wallet is hacked then the attackers can use the private key to steal all the crypto in the wallet. Electrum is a software wallet that has been prone to many different attacks.

Okay that’s cool but do I actually need a hardware wallet? I don’t want to spend the money

This all comes down to how much you’re investing. If you’re just dipping your toes in and it wouldn’t bother you if your investment disappeared, then don’t buy one.

If you’re investing money that is significant to you, it’s worth the peace of mind to be able to have a secure place to keep your investment.

Can’t I keep my money on an exchange like Coinbase or on the Cash App?

You may have heard of the phrase “Not your keys, not your Bitcoin”.

Remember how a hardware wallet stores your private key? Well when you have your crypto on an exchange, the exchange actually owns the keys! So that private secret that could be used to spend all your crypto is owned by them!

So to really have full ownership, you need to transfer the crypto to an address for which you own the private key. Otherwise an exchange could just take your crypto at anytime. If they happened to go bankrupt, had a lawsuit, got hacked, this could happen.

Alright you convinced me, which one should I get?

The two choices for a basic but incredibly secure hardware wallet are the Ledger Nano S and Trezor One. Both are well supported and secure so take your pick. We generally recommend the Trezor

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