How does a hardware wallet keep crypto safe?

Hot and cold wallets

The SEC sorts wallets into two kinds. A hot wallet is connected to the internet, such as a phone, desktop or web app. It is convenient, but it exposes your crypto to online attacks.³

A cold wallet is not connected to the internet. It is usually a physical device, or even a piece of paper.³ It is less convenient, but generally safer from online attacks.³ Cold wallet devices usually cost money, while hot wallets may start out free.³

What a hardware wallet is

Bitcoin.org describes hardware wallets as little devices designed from the start to be a wallet and nothing else. No other software can be installed on them, which makes them very secure against computer weaknesses and online thieves.¹

The device stores your private keys offline. According to ethereum.org, the key never touches the internet and stays on the device.² Keeping keys offline greatly cuts the risk of being hacked, even if a hacker controls your computer.²

Approving a payment

Your computer or phone still does the online part. Bitcoin.org explains the idea: an offline device approves, or signs, a transaction, and an online device sends it to the network.¹ In that setup, a hacked online computer can't be used to take funds, because it can't sign.¹

There is a catch. A hacked computer could show a changed address on its screen. So one maker tells users to check the receiving address on the device's own screen.⁴ It also suggests confirming a payee's address another way, such as a phone call.⁴ Another maker says its device's screen is run by its secure chip, so it shows the real transaction details.⁵

Even with a hardware wallet, you decide what to sign. ethereum.org suggests reading a transaction message before signing it, and not giving apps unlimited spending limits.²

The PIN

One maker says a PIN stops someone who picks up your device from using it.⁶ That maker's devices reset themselves after 16 wrong PINs on most models, and after 10 on one model.⁶ Another maker's reset after 3.⁵

A reset erases the wallet from the device. Both makers say you can then restore it using your recovery phrase.^5,6

If the device is lost

The SEC warns that cold wallet devices can be lost, damaged or stolen, which may mean losing the crypto for good.³ Bitcoin.org notes that a backup lets you recover your funds if you lose the device.¹ Lesson 3 covers backups.

Buying one

Attackers also target devices before they reach you. In a trick called pre-seeding, a crook creates a recovery phrase, loads it onto a device or its backup card, and keeps a copy. Once you add funds, they can take them.⁷

What the makers' own guides say:^7,8

• Buy from the maker or one of its authorised resellers.^7,8
• Check that the packaging hasn't been opened, and that tamper-evident seals are in place.^8,4
• One maker says a genuine device never arrives with a recovery phrase or PIN already set.⁷
• You create the recovery phrase yourself, on the device, during setup.^8,7
• One maker ships devices with no firmware. If firmware is already installed, it says not to use the device.⁸