Hardware Wallet: beginners guide

/Hardware Wallet: beginners guide

Hardware Wallet: beginners guide 2018-02-04T10:36:26+00:00

Hardware Wallet-Securing Your Bitcoins

Cryptocurrencies such as Bitcoins are digital currencies that are used to pay for various goods and services. Bitcoins work in the very same way as paper money with a few key differences. Unlike the use of paper money, Bitcoins eliminate the need for a third party during transactions.

Everywhere I go, Bitcoins among other cryptocurrencies have become the talk of the town. It is commonly assumed that cryptocurrencies are the future of money as they offer more transparency in a transaction process. Additionally, they eliminate the need for third parties who make transactions expensive.

If you are walking with a few dollars in your pocket, you must be probably having them in your wallet. The wallet helps you to easily account for the money while at the same time offering protection against wear and tear as well as displacement.

In a similar manner that I need a physical wallet to protect my dollars from various risks; I also need a hardware wallet to protect my Bitcoins against various security threats. Hardware wallets are physical devices created to keep my cryptocurrencies such as Bitcoins safe.

All you need to know about hardware wallets

What is a hardware wallet and what hardware wallet means?

Hardware is the physical component of a computer system; it is the physical aspect of computers, telecommunications, and other devices. A hardware wallet is a USB device detailed with a closed security system that contains a user’s private keys.

If I am a Bitcoin user or investor, purchasing a Physical Bitcoin Wallet allows me to keep my Bitcoins investments as safe as possible while still being able to access them.

How do hardware wallets work?

  • If I carry out a transaction in Bitcoin, it will be in the form of a message stating that ‘I transferred A bitcoins from address X (my address) to address Y (my colleague’s address).’
  • If any other person can be able to create a similar message, they can spend my Bitcoins.
  • That is why my message is only accepted if it is accompanied by a digital signature. The digital signature must be created by a private key associated with my address (X).
  • To create this transaction, I will have to use a software called a Bitcoin Wallet.
  • My Bitcoin Wallet keeps track of all my addresses and their associated private keys.
  • Every time I want to spend my Bitcoins, my wallet creates a message instructing the transfer of Bitcoins. It then uses the private keys it has to create digital signatures.
  • If I store the private keys to my Bitcoin Wallet on my computer’s hard drive and use a software on my computer to create digital signatures, the security of my computer might be compromised thereby making my Bitcoins vulnerable to manipulations by malicious parties.
  • Even if my private keys are encrypted, a malware can be installed on my computer by malicious parties and go undetected; this they can use to steal my password and gain access to my Bitcoins hence stealing them.
  • A Bitcoin Physical Wallet (Hardware Wallet), protects against this particular threat. It enables me not to keep my private keys on my computer but instead offloads them to a dedicated device.

This minimizes the chances of malware getting hold of my private keys.

  • Despite having a Bitcoin Physical Wallet, the software on my computer will still perform most administrative tasks during my various transactions.

Nonetheless, whenever a digital signature needs to be created, the unsigned message is sent to my Hardware Wallet.

I can then view the transaction on the display of my hardware wallet to verify if all the details are correct.

If all is well, my physical hardware wallet will create a digital signature and send it to the software on my computer, which will further process the transaction and submit it to the Bitcoin network.

What is the difference between hardware wallets and other kinds of wallets (private or paper wallets)?

A private wallet can be linked to PayPal or Payoneer. It is a digital wallet for storing, transmitting, and protecting cryptocurrencies such as Bitcoins. A private wallet stores the private keys to all addresses making up a Bitcoin Wallet.

Since private wallets are more of applications, they are subject to the security of the operating system that runs them. This means that any malware attacks can compromise the integrity of the private wallets; which gives attackers an easy platform for sending your Bitcoins to their own addresses.

Paper and Hardware wallets remedy the security threats faced by private wallets. They achieve it by eliminating the private keys from the computers since malware can only access the computers.

Paper Wallets simply have the private keys printed on paper. One disadvantage of paper wallets is that spending your Bitcoins will involve inputting the private keys back into your computer, where they might be vulnerable.

Hardware wallets for Bitcoin and other cryptocurrencies improve paper wallets to a whole new security level. They are very small computers (USB like devices), designed to store the private keys. The software on the hardware wallets does not allow any additional software to be installed in them except those storing the private keys. Additionally, the private keys never leave the devices whenever any transactions are made.

Examples of hardware wallets for Bitcoins and other cryptocurrencies

What is the difference between hardware wallets and hot wallets?

If you are familiar with Bitcoins, you must have come across the terms cold wallets and hot wallets. Hardware wallets are what are referred to as cold wallets in other terms. On a different note, hot wallets are commonly referred to as private wallets.

The key difference between these two kinds of wallets is the internet. If a wallet directly connects to the internet, then it’s hot. Consequently, if a wallet is free of the internet, then it’s cold. Hot wallets are useful for placing Bitcoins that you want to spend or trade, whereas cold wallets are reliable for placing Bitcoins that you do not want to spend often.

Are there other kinds of storage wallets?

Apart from private and hardware cryptocurrencies wallets, we also have a desktop and mobile wallets. These are a great option for anyone frequently sending cryptocurrencies such as Bitcoins from their computers or different mobile devices. In case you do not need a super secure storage for your cryptocurrencies, you can always opt for desktop and mobile wallets.

Examples of desktop wallets include Electrum, Bitcoin Armory, and Bitcoin Core. As for mobile devices, they include Bitcoin Checker, Bitcoin Ticker Widget, and Bitcoin Wallet by Coinbase.

Advantages of desktop and mobile wallets

  • They are easy to acquire and maintain since they are software applications that only need to be downloaded and installed.
  • They do not arouse suspicion, unlike hardware wallets which are physically unique.
  • Desktop and mobile wallets cannot be lost since they are not physical in nature. In case a user forgets their passwords, they can mostly be retrieved.
  • They are convenient to use, especially since desktop computers and mobile phones are readily available to most users.

Disadvantages of desktop and mobile wallets

  • Desktop and mobile wallets face the greatest security threats, especially hacking since they store their private keys. Users can, therefore, lose their currencies in case a successful breach is carried out by hackers.

How to use hardware wallets

Since Trezor is the oldest hardware wallet and one of the most popular, I will use it in my demonstration on how to use hardware wallets.

Setting up

  • First I will have to connect my device to my computer via a USB cable.
  • I will then go to my Trezor and download a browser plugin.
  • Once the plugin is activated, my Trezor will prompt me to choose a PIN.
  • After choosing my pin, I will have to write down a randomly generated sequence of 24 words know as seed.
    • The seed allows me to reconstruct my Trazor Wallet if I happen to lose my device. Additionally, it is the only backup that I can use to recover my wallet in case of loss or theft.

Adding Bitcoins to hardware wallets

  • First, I will have to select the ‘Receive’ tab to get my Bitcoin Address.
  • When someone makes a payment to me, I will see an incoming transaction appear in the transaction pane.
  • The transaction will be marked ‘unconfirmed at first’ and thereafter replaced by date and time upon completion.

Making payments with hardware wallets

  • I will have to look for the ‘send’ tab to be taken to the payment page.
  • I will then enter the destination Bitcoin address followed by the amount I am sending.
  • I then have to press ‘send’ and enter my pin.
  • This is finally followed by confirming the transaction on my hardware wallet. I can watch outgoing transaction progress by switching over to the transaction window.

To sum it up

Bitcoins being the future of money means that they will increasingly be vulnerable to various threats, especially matters pertaining to theft. To securely manage your Bitcoins transactions, it is important that you guard your private keys in a device that cannot be accessed by malware; the hardware wallets have proved to be the safest platforms for managing cryptocurrencies transactions since they are the only ones so far capable of keeping the private keys separate from the vulnerable software.

Apart from hardware wallets, there are other forms of wallets which you can learn about on our site. We are glad that you are now well versed with hardware wallets, you are welcomed to learn more about other topics that pertain to cryptocurrencies. Thank you.

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