How does a hardware wallet actually work?
Find out how a hardware wallet really works, how it protects your private keys and secures your cryptocurrencies during transactions.
FINTECHCYBERSECURITY
Lucas GRANDIER
8/24/20265 min read
Hardware wallets have become a must-have for people who want to hold their cryptocurrencies for the long term. These small devices, often comparable to a USB stick, promise to protect the keys to access our bitcoins, ethers, and other digital assets.
But how do they actually work?
Are cryptocurrencies stored directly in the device? What happens when you send bitcoins? And why is a hardware wallet considered more secure than just an app?
To understand how it works, you need to remember one idea: a hardware wallet does not store your cryptocurrencies. It protects the keys that allow them to be used.
Why not just use an app?
A software wallet can be installed directly on a smartphone or computer.
This is convenient, but these devices are constantly exposed to different risks:
Malware
Compromised applications
Phishing
Data theft
Security vulnerabilities
If someone manages to retrieve the private key to your wallet, they can potentially access your cryptocurrency.
A hardware wallet therefore adds a physical barrier between your private keys and your usual computer environment.
The device is designed to store this sensitive information and perform certain operations directly internally.
It is this principle of isolation that constitutes a large part of its interest in terms of security.
Your cryptocurrencies are not in the hardware wallet
This is probably the first misconception to be corrected.
When you own Bitcoin, it is not physically present in your hardware wallet.
Your bitcoins are recorded on the Bitcoin blockchain. Instead, the hardware wallet contains the secret information that proves that you are authorized to perform certain operations.
This is known as a private key.
It is a digital key used to sign a transaction, so whoever has this key can potentially move the cryptocurrencies associated with your wallet.
It is therefore this key that must be protected.
The main role of the hardware wallet is to ensure that this private key remains isolated from your computer or smartphone.
Secure your cryptocurrencies with the right hardware wallet
A hardware wallet helps protect the private keys that give access to your cryptocurrencies, while allowing you to verify your transactions before signing them.
But between the different models available, the features, comfort level, and prices can vary.
Ledger, Trezor: discover our selection of the best hardware wallets on the market to find the model best suited to your use.
The famous recovery phrase
When you first set up your hardware wallet, it usually asks you to write down a recovery sentence, often consisting of 12 or 24 words.
This sentence is extremely important.
It allows you to recover your wallet if your device is lost, broken or stolen.
For example, if your hardware wallet fails, you can use your recovery phrase with a compatible device to regain access to your wallet.
But this security implies a quid pro quo:
Whoever owns your recovery phrase can potentially get your wallet back.
It must therefore be kept preciously and offline.
In particular, you must not:
photograph it
save it to a cloud
send it by message
communicate it to someone
enter it on a website
Bitcoin.org particular recommends carefully protecting a wallet's backups and avoiding exposing them to the internet.
How does a transaction with a hardware wallet work?
This is where the hardware wallet works gets really interesting.
Let's say you want to send 0.01 BTC to someone. Your computer or smartphone will prepare the transaction, but the private key remains protected in the hardware wallet.
The essential idea is therefore simple: the computer prepares and transmits the transaction, while the hardware wallet takes care of authorizing and signing it.
Even if the computer is compromised, an attacker can't simply retrieve the private key from it. On the other hand, it is still essential to check the information displayed on the hardware wallet before each validation.
Why is the hardware wallet screen important?
Imagine that your computer is infected with malware.
You think you're sending your crypto to your friend, but the malware replaces the recipient's address.
If you rely solely on your computer screen, you may not realize it.
The hardware wallet allows you to check certain information directly on the device before confirming.
That's why it's important to take a few seconds to check the address and amount displayed on the hardware wallet before validating a transaction.
The device therefore doesn't just "store" a key, it also serves as a validation point that is independent of your computer.
What happens if someone steals my hardware wallet?
A hardware wallet is not just a USB stick containing your cryptocurrencies.
If someone recovers your device, they shouldn't be able to access your wallet right away.
Devices typically use a PIN or similar mechanism to limit access.
But there are two main situations:
Your device is stolen
Your wallet can usually be recovered through your recovery phrase on a new compatible device.
Your recovery phrase is stolen
It's much more problematic.
The recovery phrase is a backup to find the wallet. It must therefore be protected as seriously as the hardware wallet itself.
In fact, you could almost say that:
Your hardware wallet protects your wallet on a daily basis, but your recovery phrase protects your wallet in case the device is lost.
Hardware wallet: is it really necessary?
It depends mainly on how much cryptocurrency you hold and how long you want to hold it.
For a few tens of euros of cryptocurrencies used regularly, an application may be sufficient.
On the other hand, for a large sum intended to be kept for several years, a hardware wallet can provide a particularly interesting additional layer of security.
This is one of the reasons why hardware wallets are often associated with cold storage: the keys are kept in a much more isolated environment than on a conventional computer or smartphone.
Bitcoin.org recommends hardware wallets as one of the solutions to improve the security of a Bitcoin wallet.
What you need to remember
Behind its appearance as a small USB key, a hardware wallet does not store your bitcoins: they remain registered on the blockchain. Instead, it protects the private keys that allow them to be used.
During a transaction, your computer prepares the operation, while the hardware wallet verifies and signs it without revealing your private key.
In short: the hardware wallet isolates your private key from your computer and the Internet.
To remain secure, however, you must carefully protect your recovery phrase and verify each transaction before confirming it.
Sources
Bitcoin.org — Securing your wallet
Read the Bitcoin.org guideNIST — National Institute of Standards and Technology
International reference on cryptographic key management and protection.
View NIST SP 800-57Ledger — How Ledger Hardware Wallets Work
An overview of how hardware wallets work and how to separate the connected device from the secure environment.
Read Ledger's explanationTrezor — Public & Private Keys
Explanation of public keys, private keys, and the principle of signing.
View Trezor documentation
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