Hardware wallets are advertised and often recommended as the ultimate solution when it comes to safekeeping your coins. There are many cases where you will benefit from using such a device but there is also a surprisingly large number of situations where it will not bring too significant additional safety.
I have written this article with the hope it will help you identify your own use causes and make it easier to determine whether you will benefit from getting a Trezor or a Nano Ledger S, or whether your money will be better spent elsewhere (like, buying more coins that may yield income down the line). It reflects my constantly growing understanding of the capabilities and limits of Bitcoin, and while most things I state will be true for all altcoins, there may be fringe use cases that I don’t know about.
The 50-Pound Bicycle Parable
There is the old joke that goes as follows:
All bicycles weigh 50 pounds:
A 30-pound bicycle needs a 20-pound lock and chain.
A 40-pound bicycle needs a 10-pound lock and chain.
A 50-pound bicycle needs no lock or chain.
We can use it to derive the first case which does not require you to purchase a hardware wallet: when you play with amounts so small that the loss of the coins is less than the cost of the wallet. So if you are dabbling with Bitcoin just for fun and do not hold large amounts of coins, you can spare yourself the cost of a hardware wallet. Your money would be much better spent on books about Bitcoin such as Bitcoin for the Befuddled or The Bitcoin Tutorial.
HODLing for Fun or Profit
Another popular use case is when you buy some coins without intention to spend them anytime soon, or you are using your computer and GPU to mine small amounts of Bitcoin. You are just a face in the crowd in the cryptocoin world, and nobody is out to get your coins. The things that are most likely to cause you grief are loss/theft of a mobile device, or damage to a laptop/desktop PC that leads to loss of data.
A software wallet with a paper backup, or even paper wallet fits such use pattern perfectly. So long as you receive coins regularly but spend them rarely, a hard copy of your private keys (or recovery seed) stored in a safe place (e.g. a bank vault) and copied at another (e.g. in your parents’ house) gives you good protection from loss or theft. A hardware wallet still seems like an unnecessary expense.
Small-Scale Mining or Trading + Some Spending
Now we’re beginning to move into a more dynamic territory, where the potential losses from theft or user errors could be costlier. At this point, you are very likely using a couple of different wallets on desktop and mobile, and you probably registered on a cryptocoin exchange or several. The attack surface grows larger, and you stand to lose more if hacked. Maybe it is time to buy a hardware wallet already?
Probably not. At such point you will benefit much more from diversifying your coin holdings. Dividing your hoard into long-term wallets and keeping smaller stacks of coins in separate wallets on desktop and mobile devices will put some strain on you, because you need to improve your usage strategy (determine which addresses are used for savings only and which ones are used more frequently, then keep cold-storage backup of several keys or recovery seeds). A hardware wallet will help you with the safekeeping part, but will not assist you with making up a usage strategy: that is still your own job.
We are now fast approaching ‘buy hardware wallet station’. You want to know everything about Bitcoin and many altcoins besides it, and you want to know how things work. You may think of yourself as an organized person and you can probably work out a system where you keep all of your private keys and recovery seeds private as separate notes in an offline password manager like Keepass. But why put all of this strain onto yourself when there is a better way? Every altcoin uses different wallet software; multiple wallet apps can conflict with one another; or you can simply forget a seed for a particular coin. A Trezor or a Ledger Nano S will keep your back — the device will likely pay for itself the first time some altcoin wallet crashes or you make a silly mistake.
A hardware wallet kept in cold storage can increase the manner you collect Bitcoin payments for your business(es). You can generate multiple wallet addresses and extract their XPUB keys which you can then use to generate unique addresses for each payment you accept. Hierarchically Deterministic (HD) wallets have awesome features that can benefit businesses and prevent theft/loss of coins, and you should look into that if you’re planning to implement Bitcoin payments. If you store particularly large amounts of money however, you should also consider using multi-signature addresses (hardware wallets can do multisig).
Human Rights Activist
Yes, a hardware wallet will definitely help you keep safe the funds donated for your cause! You may be struggling to keep reliable local or offsite backups as you may be under surveillance. The equipment you’re using (cellphone, laptop, router…) could be compromised. You will find little safety in paper backups, as the authorities can confiscate them when raiding your home or office.
If a hardware wallet is found during a search, it will imply possession of crypto coins, but unless you live in a really vile country, authorities can’t physically force you to share your PIN, and may not be competent enough to hack the device itself, even if this is theoretically possible. But even then you can fake cooperation and reveal a ‘red herring’ wallet that either doesn’t use a passphrase, or uses a different passphrase than your main wallet.
Here is how you can hide your coins using the two most popular hardware wallets:
The additional amount of safety and secrecy hardware wallets offer is often misunderstood. Although manufacturers claim their devices are fully secure, there are different potential and demonstrable vulnerabilities. Repeat after me:
A hardware wallet is not a vault or a stronghold. It does not keep your bitcoins unconditionally safe.
You still need to treat the devices carefully and protect them against theft and damage. If you exercise the same amount of caution with a hardware wallet that you do with a paper wallet, you should generally be OK. But you should also remember that a hardware wallet is a single point of failure. It has the potential to separate you from all of your coins!
Discussing good practices is beyond the scope of this article but the important thing is to understand and accept that such device is not unbreakable and 100% secure onto itself. It is your responsibility to always keep it safe and out of reach.
Still, hardware wallets have unique capabilities that greatly reduce attack surfaces. Using a HW wallet as a secure keychain for different cryptocoins will save you from losing coins due to a dumb mistake. Multiple passphrases functionality will allow you to easily divide your savings into multiple accounts.
Vires in Numeris
The greatest security feature of Bitcoin and its offspring is strength in numbers. The Ledger Nano S even has this phrase in Latin engraved onto the device itself: Vires in numeris. The brilliance of a hardware wallet is that it allows you to leverage this strength and make these large numbers work much harder to keep your money safe. As long as you understand this, you will be able to use your hardware wallet to the fullest extent made possible by the product designers and the creator(s) of Bitcoin.