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Chapter 4 · What a hardware wallet does

What a Hardware Wallet Actually Does (It's Not Where Your Bitcoin Is)

Prefer to watch? This chapter is also a short video (about 4½ minutes). The full text is below.

In one minute: A hardware wallet is a small device that makes your key and keeps it locked inside. When you send bitcoin, your phone or computer asks the device to approve it, you check the details on the device's own screen, and the device signs inside itself. The key never comes out, so malware on your computer can't steal it. But the device isn't the money: the recovery words are. Lose the device and the words bring everything back. Buy one new, directly from the maker, and never use one that arrives already set up.

Picture the device in the drawer from Chapter 1. Small, plastic, a little screen, a button or two.

Most people think of it as the place their bitcoin lives. After Chapter 3, you know it isn't. The bitcoin lives on the shared list, and the key to it is your recovery words.

So what is the device for?

A sealed signing room

A hardware wallet is a tiny computer that does one job: it makes your key, keeps it, and uses it, without ever letting it out.

Think of a sealed room with a slot in the door. Inside sits a clerk with your signature stamp. Paperwork slides in through the slot. The clerk shows you what it says, you nod, the clerk stamps it, and the signed paper slides back out. The stamp never leaves the room.

That's what happens every time you send bitcoin:

1. Your phone or computer prepares the request: how much, and to which address.
2. The device shows it on its own screen.
3. You check it and press the button on the device to approve.
4. The device signs inside itself and hands back only the signed approval. The key stays in.

Your phone or computer never sees the key. It only ever sees the signed result.

Why the device's screen matters

Phones and computers are exposed to the whole internet, and some of what's out there is built to steal bitcoin.

One kind of malware watches what you copy. In 2022, security researchers at Symantec described one called Clipminer that had taken at least $1.7 million. When a victim copied a bitcoin address to paste somewhere, it silently swapped in a thief's address instead, chosen to start with the same characters so the change was hard to spot. ¹

A hardware wallet can't stop your computer from being fooled. What it gives you is a second screen your computer can't touch. The device shows the address the payment is really going to. Check the address on the device's screen, not the computer's, against where you got it, and check more than the first few characters, because thieves pick lookalikes.

If they don't match, don't press the button. Nothing leaves until you do.

The PIN protects the device, the words protect the money

You'll set a PIN on the device. That stops someone who picks it up from using it. Many devices erase themselves after too many wrong guesses.

That sounds frightening, but it isn't, because of Chapter 3: the device isn't the money. If the device is lost, stolen, broken, or erased, you buy a new one, type in your recovery words, and your bitcoin is back.

This is why the words matter more than the device, and why the next chapters spend so much time on them.

Buying one safely

Because the device makes your key, you need to trust where it came from.

In January 2018, a man who had bought a hardware wallet second-hand on eBay lost more than $34,000. The device came with a recovery sheet already filled in. The seller had set the device up with words he kept a copy of, and once the buyer moved his savings onto it, the seller simply took them. ²

A real device creates its own recovery words, fresh, the first time you set it up, on its own screen, in front of you. So:

• Buy new, directly from the company that makes it or its official store. Not a marketplace, not a reseller, not second-hand, not a gift from someone you met online.
• If recovery words come in the box, printed, on a scratch-off card, or anywhere else, stop. Don't use it.
• If it's already set up when you turn it on, stop. Don't use it.

Talk about it

1. Do we have a hardware wallet? Where did we buy it, and was it new?
2. When we've sent bitcoin, have we checked the address on the device's screen, or just clicked through?
3. If the device disappeared tonight, do we both know that the recovery words would bring everything back, and where they are?

If the answer to the first one is "we don't have one yet," that's fine. The Beginner level walks you through buying and setting one up.

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