1. What is a hardware wallet?
A hardware wallet is a physical electronic device that stores the private keys to cryptocurrencies in a highly secure, malware proof unit. It can be used to store, transact and manage digital currencies. Open source software is used allowing the user to validate the entire operation with the device.
Whilst hardware wallets often look similar to a USB, a good hardware wallet cannot be hacked or attacked by viruses. Ledger, through their long standing 'Bug Bounty' programme, has proved that it is one of the safest hardware wallets in the global market.
Cryptocurrency protocols are confirmed by sending signed notes of payment across the internet. These messages, referred to as 'transactions', are signed using a special algorithm. In order to sign the transactions, a unique key is required. The hardware wallets hold these keys and help securely 'sign' the transactions. There are no 'coins' held in the wallet.
2. Why use a Hardware wallet?
Why not use a USB Flash Drive? With a standard USB device, software can read and copy the private addresses, and malware can manipulate the receiving addresses. Further, if the USB Flash Drive is lost, then the crypto assets are also lost with it.
What about a Paper Wallet? Whilst a paper wallet is a secure means of storing cryptocurrencies offline, if the piece of paper is lost or stolen, the the proof of ownership of the crypto assets are lost with it. Further, every time a transaction is performed, the private key (a long list of random letters and numbers) will need to be manually typed out. This is highly prone to error and is not recommended.
How does a Software Wallet compare? Software wallets are private online wallets where crypto assets can be stored. By nature of being online, they are vulnerable to being hacked in various ways. Software wallets store private keys either on the computer hard-drive or the internet. Hackers can potentially gain access by hacking the computer or the servers of the services used. Further, since the software wallet information is stored on the computer, there is the risk of losing access to the wallet with a computer software or hardware malfunction.
Hardware Wallets provide the following assurances,
- offline and secure storage of crypto assets
- malware proof secure element
- private key (Recovery Seed) restores crypto assets even if the original hardware device is lost (see below)
- allows secure transactions - send and receive crypto
- generates multiple addresses allowing a unique address to be used with every transaction, if so desired
Hardware wallets are the safest means of storing your crypto assets. However, not all hardware wallets are created the same. Many have been proven to have standard 'chips' or elements and non customised operating systems that can be easily hacked. Read about what sets Ledger hardware wallets apart from the rest: Why choose a Ledger Hardware Wallet?
3. Which hardware wallet?
Firstly, ensure the hardware wallet supports the coins that are to be transferred to it. Not all coins are supported by all wallets. Currently the Ledger Wallets support over a 1000 coins. Have a look at our Ledger Nano X or Ledger Nano S FAQ pages for a list of coins supported by Ledger hardware wallets.
Prior to setting up and using a hardware wallet, it is highly recommended that some research is undertaken on the configuration and use of the device. Step-by-step video tutorials and Ledger support instructions are available here.
Once you have decided on a hardware wallet, ensure you purchase one from an authorised retailer. Crypto Wallets Australia are Official Ledger Partners and Authorised Australian Ledger retailers specialising in Ledger Hardware Wallets.
4. What is a Recovery Seed and Pin?
A Recovery Seed is a 24 word unique recovery phrase (also known as a pass phrase), which is automatically generated during the initial configuration of the hardware wallet. These words can be used to restore your crypto assets in case of theft or loss of the wallet. A backup Ledger Wallet can also be created using these 24 words.
The user will also be asked to select a Pin Code during initial configuration. This can be 4 to 9 numbers. Even if the computer or mobile with which the hardware wallet is paired with is lost, no one can access the users crypto account without the Recovery Seed or Pin Code.
The 24 word Recovery Seed and Pin Code provides proof of ownership of the hardware wallet and account. Therefore it is essential that these two are recorded correctly and stored securely. Anyone who has access to these two can gain access to the associated crypto account even without the hardware wallet itself. Guard the Pin Code and Recovery Seed!
5. Loss or damage of the hardware wallet
In case the Ledger hardware wallet is lost or damaged, the 24 word passphrase and Pin Code can provide access to the associated account. The account can be restored on a new Ledger device with the Recovery Seed and Pin Code.
A word of warning — we highly recommend that the owner of the hardware wallet does the initial set up and configuration and not rely on another person to carry out these tasks for them. If the Recovery Seed and Pin Code is shared with another, they will have access to the crypto account and assets contained within the account. We recommend investing the time to understand how to set up and use wallet.
Related reading: What is Ledger Live?
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