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How do cryptocurrency wallets work?

How do hardware wallets protect your private key?

Private keys are the most important thing to protect in the world of cryptocurrency. Find out how hardware wallets can help protect them in this guide.

Privacy is essential in the modern world, particularly in the cryptocurrency space. Without it, your entire stash of funds could be at risk from potential hackers.

To remedy this, hardware wallets are pivotal in ensuring that your cryptocurrency holdings aren’t accessible to outsiders. Hardware wallets enable your private key to never touch the internet. This is essential in securing your funds since a hacker will not be able to reach your private key without getting their hands on the physical device you have stored it on.

Hardware wallets work by signing a transaction offline and then broadcasting it online when required. They achieve this by holding onto your private keys but with a very limited capacity to communicate. For example, they are unable to send information bigger than the size of a signed transaction, meaning you cannot add data that would ultimately compromise the device.

Many hardware wallets protect your funds through a PIN system layered with other security measures such as passphrases. A passphrase is a sequence of words used to monitor access on the hardware wallet. They are in effect a password, but synthesised with PINs to add extra security to supplement the safety of your device.


Whilst hardware wallets are amongst the strongest types of storage in terms of security, they are by no means perfect. Many hardware wallets make use of Random Number Generators (RNGs) to generate a wallet’s private key. There have been doubts about the validity of RNGs as it’s hard to prove one way or the other whether they truly are random. This is problematic if they are not truly random, because this suggests a sequence has led to generating the number. Naturally, this could lead to a hacker being able to figure out the sequence and ultimately break into your hardware wallet.

Imperfect implementation

Another possible security breach for hardware wallets is known as ‘imperfect implementation.’ An instance of this is a bug in the hardware, firmware, or software. Bugs like this provide an access point for hackers to break into the hardware and gain access to your private key. It is also typically hard to verify whether or not the hardware/software is bugged. Whilst this is certainly concerning for any beginners wishing to hold their cryptocurrencies safely on a hardware wallet, it is still a safer option over the likes of a software or electronic wallet, which are not difficult at all for a skilled hacker to break into.

Examples of hardware wallets

Trezor One: The Trezor One hardware wallet is a secure Bitcoin storage device that also allows for transaction signings. The device generates the private keys and as a result they never leave the device, ensuring they cannot be accessed by malware. The Trezor One also employs a deterministic structure enabling it to hold an unlimited number of private keys. When initialising the device, it also generates a recovery seed which allows users to recover any lost storage onto a new device.

Ledger Nano S: Similarly to the Trezor One, the Nano S functions with a backup seed for recovery. It makes use of an easy-to-use OLED interface and only incorporates two buttons. All actions you make on the Nano S have to be verified on the screen and the product is supplemented with the Ledger Live companion app, which grants you easy management of your transactions.

KeepKey: The KeepKey hardware wallet impressively is more than twice the size of many other wallets. Though, in comparison to those other wallets, it doesn’t bring much more to the table. As with the Trezor One and Nano S, it features a PIN and a backup seed. Without the incorporation of an operating system, it cannot be infected with viruses and malware.

BitBox: The motto for this hardware wallet is ‘Minimalist design. Maximum security.’ It is a compact, plug-and-play wallet that features two-factor authentication, touch buttons, and an LED light. Users are able to store, send, and receive cryptocurrency using this wallet.


There are other hardware wallets on the market, and this list just highlights some of the more popular ones around. However, do not purchase one without fully investigating a product and assessing whether it is suitable for your needs. Different wallets support different cryptocurrency, and while the more well-known brands support the major cryptocurrencies, there may be some that do not support the ones you are looking to acquire.

The most important thing to remember is that while hardware wallets do provide good security, they are not perfect. They are certainly amongst the best options for storage, but there are other ways in which you can prevent the loss of your funds. Cold wallets are also brilliant for long-term storage if you do not have the intention of using your cryptocurrency for an extended period of time.

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