Even though cryptocurrency hardware wallets are secure, theft is still possible. The dangers their owners face that must be mitigated need to be discussed.
When it comes to storing cryptocurrency, hardware wallets are widely regarded as the safest option. Compared to cloud storage or software, a device that signs its owner’s blockchain transactions offline seems like the most secure option. For instance, online cryptocurrency trading sites are regularly targeted by hackers and subject to bankruptcy rumors, and apps are obviously susceptible to common computer dangers like malware.
While these are valid concerns, investors should know that even with hardware crypto wallets, their assets are not completely safe from theft. Therefore, these must be protected against…
Both hot and cold wallets, hardware, and software, exist.
Let’s quickly review the distinctions between the various wallet types before diving into the hazards involved. To begin with, no wallet ever sees the actual crypto assets. The blockchain stores all the asset data, while a cryptocurrency wallet just protects the owner’s private (secret) key. To make a Bitcoin transfer, the owner requires the key in order to add a new transaction to the blockchain. Most cryptocurrency wallets also keep a public receiving key that isn’t private.
A private key can be kept in a number of different places:
- It is server-side encrypted. Common examples of such wallets are Binance and Coinbase, two of the most well-known cryptocurrency exchanges.
- On a computer or mobile device using a dedicated app.
- Offline location.
- As a string of letters and numbers printed out on paper.
Keys can be used to sign transactions on the blockchain at any time in the first two cases since the key store is up at all times. A “hot” wallet is one of these.
The third and fourth choices, which include connecting your device to a computer or phone, or entering information from paper, require additional steps in order to transmit money. In crypto-speak, these are known as “cold” wallets.
Hardware wallets are specific hardware devices for storing keys, while software wallets are apps meant to store keys on standard PCs and cell phones.
Hardware Wallets: Their Varieties
Most hardware wallets resemble either thick car keys or USB memory sticks. A screen to review purchases is a common feature. To authenticate a transaction, you link the wallet to a computer or smartphone, start the transfer on the computer or smartphone, check the details on the wallet screen, then either enter a PIN number or press a button to validate the action. In order to prevent simple theft tactics, hardware wallets sign transactions without revealing your private key to the computer.
Most modern wallets also serve as hardware keys for two-factor authentication, adding yet another layer of security.
Wallets that look like credit cards and wallets that have features similar to a “offline phone” are also available, but they are less prevalent. The latter option has a fully functional screen and may be used to sign contracts by scanning QR codes. The only thing connecting many of these models to the outside world beyond the screen and camera is the charging port.
The primary danger is ruin.
The most obvious threat to the hardware wallet owner is losing the device. A PIN code or biometrics can be activated in your wallet to prevent unauthorized use in the event that your wallet is stolen or misplaced. PINs can be up to 50 digits long, unlike phone numbers and bank card numbers; remember, the larger the PIN, the better.
If your wallet is lost or stolen, the information contained within will be lost or stolen as well. When a cryptocurrency wallet is created, a backup is automatically generated in the form of a 12- or 24-word English phrase called a “seed phrase.” You can re-generate your public and private keys by entering them in the correct order. Most blockchain solutions (using the BIP39 algorithm) have standardized the production of seed phrases, so if you lose your Ledger wallet, for example, you can restore your funds to a Trezor hardware wallet or any of the “hot” software wallets.
Avoid storing the seed phrase in a format that could be easily accessed by others, such as a snapshot on your phone or a text file. It’s best to put it on paper and keep it in a secure location, such as a safe deposit box or a strong box. The seed phrase is the only means by which a lost cryptocurrency wallet can be restored, making it all the more crucial that it remains secret at all times.
Second potential danger: phishing and other frauds
When it comes to social engineering, a hardware wallet is completely useless. No amount of hardware security will prevent the loss of funds if the victim knowingly and willingly sends funds or provides their seed phrase to an imposter posing as a “crypto wallet technical support specialist.” Humans are creative when it comes to con games, therefore decoys are always evolving. Some prime examples include emails warning hardware crypto-wallet owners of a security issue and phony websites made to seem exactly like popular cryptocurrency exchanges or wallet providers.
Preventing the worst from happening calls for alertness, and even paranoia (in the positive sense) and mistrustfulness towards everything unexpected. The chance of visiting a phishing site is also much-reduced thanks to the integrated cybersecurity solution for desktops and cellphones.
Number three: malicious software
The loss of cryptocurrencies due to a computer or mobile device infected with a virus is all too typical. If the victim utilizes a hot wallet, which is stored online, the crooks can acquire the private key and use it to empty the wallet on their own. A hardware wallet will render the method useless, although alternative attack routes are available. For instance, malware can replace the recipient’s wallet address with the criminal’s when the victim makes a valid transfer. Malware watches the clipboard for crypto wallet addresses and replaces them with the scammers’ addresses as soon as they are copied.
Carefully comparing the addresses shown on the hot wallet screen to those shown on the cold wallet screen will help reduce the risk, but there may be further complications depending on the device: The screen size of many hardware wallets is insufficient for reading lengthy blockchain addresses. The address shown on the computer screen can be forged as well, given that the hardware wallet is integrated with a computer application, which itself is susceptible to assaults.
The best defense against malware is a well-protected computer or mobile device.
Threat number four: forged or altered wallets
It’s also important to exercise caution when considering the purchase of a hardware wallet, as these gadgets are a prime target for thieves the moment they leave the factory. USB memory sticks containing Trojan payloads, counterfeit devices running tampered software, and “free replacements for defective devices under warranty” are all examples of scams targeting crypto wallet purchasers.
Never purchase a hardware crypto wallet from an online classified ad or auction to prevent potential security risks. Always go through the manufacturer’s official web store first. The official website will typically highlight the main authenticity aspects and give tips on how to recognize a fake, so after the shipment arrives, inspect the gadget for damage (streaks of glue, scratches, evidence of manipulation).
Memory analysis combined with physical hacking
This is the most unusual danger, yet it is not the least likely. Many attacks on widely used wallet models (one, two, three, four) rely on the fact that the hardware can be disassembled and its circuits connected to specialized equipment to alter the firmware, read from the memory, or disrupt data transit between the components. Therefore, the private key or a minimally encrypted variant of it can be extracted in a matter of minutes.
The safeguards against this danger are double-layered. To begin, you should take extra precautions to prevent the loss or theft of your wallet by keeping it safe and never leaving it unattended. Second, don’t dismiss additional layers of security, such as a passphrase in a Trezor wallet.