Explained | What is a bitcoin hardware wallet and how it works?

Hardware wallets like Trezor and Ledger have become a popular option for crypto asset owners owing to its security and convenience.

July 12, 2021 02:16 pm | Updated 02:18 pm IST

Hardware wallets store details of the user's private keys in secure format.

Hardware wallets store details of the user's private keys in secure format.

Last week, Twitter CEO Jack Dorsey announced his payments firm Square would soon build a hardware wallet to store bitcoin . The wallet will be a type of plug-in device, much like a USB pendrive that stores, manages and secures a user’s crypto assets.

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Each digital asset is linked to a cryptographic password called a ‘private key’ to allow users to access it. This key safeguards cryptocurrencies from theft and unauthorised access.

The asset owner, with the help of a secure hardware wallet, can access the private key to buy and sell crypto assets from anywhere. Most hardware wallets allows users to manage multiple accounts; some even allow users to connect to their Google or Facebook accounts. Popular hardware wallets include Trezor, Ledger, KeepKey and Prokey.

How is it different from a software wallet?

Cryptocurrency keys can be stored in two kinds of wallets - software and hardware.

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Software wallets are like smartphone apps that digitally store private keys. Most software wallets don’t charge users to store private keys, but may collect commission for trading via the app. These wallets can be vulnerable to malware.

Hardware wallets and physical devices act like cold storage for confidential keys. The passwords are protected by a PIN, making it difficult for hackers to extract private keys as the information is not exposed to the Internet.

The upsides of a hardware wallet

Hardware wallets are said to be convenient as they can be connected to trading exchanges to complete transactions.

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Hardware wallets are often stored in a protected microcontroller and cannot be transferred out of the device, making them secure. Their isolation from the Internet also mitigates the risk of the assets being compromised. Moreover, it does not rely on any third-party app.

The downsides

Since the wallet is in physical form, the device could be stolen or destroyed. A 2016 study by the University of Michigan also noted prominent hardware backdoors that could be used by malicious actors to steal confidential data.

The device can also be expensive as compared to software wallets. Some hardware wallets can also have complex features, making it difficult for first-timers to understand.

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