Do you need a crypto hardware wallet?

Most people will go a lot further, in terms of securing their home, than just shutting the door. Deciding how far to go with security comes down to whether the benefits an additional security measures brings, outweighs the cost and any inconvenience. So balancing security, against convenience and cost, is how NGRAVE recommends answering the question of whether you need a crypto hardware wallet?

The benefits of a crypto hardware wallet

So what are the benefits of storing your crypto on a hardware wallet? To answer that question, we should assume that if you own crypto, you definitely need some sort of wallet to store and manage it, and can compare all the options.

Technically speaking, you could store your crypto in your head, if you're willing and able to memorise unique 64 character strings of text and numbers that represent something called a Private Key, as that is what ultimate control of your crypto boils down to.

Unless you are a Memory World Champion, that suggestion is clearly absurd, but by stripping the subject right down, it can help you understand what fundamentally differentiates the available wallet options, and why this makes a case for choosing a crypto hardware wallet.

Though cryptocurrencies work in slightly different ways - Bitcoin uses UTXO & Ethereum is account based - they are all just digital records on a distributed ledger, referenced by two signatures - one private that only you know (Private Key) and one that anyone can see (Public Key) that acts as an address - a destination for funds.

Whatever wallet you use contains no money, it is an interface to that ledger, a way of signing those two signatures and controlling the associated funds. The way that crypto describes control over funds is custody. Here are the wallet options, based on the concept of custody, which we’ll expand on below.

Custody - do you want to be in control?

If you control your funds, you hold custody. If a third party has control, they hold custody - but grant you access. Crypto wallets can work both ways.

• Custodial - where the service provider controls the keys.
• Non-custodial - where you control the keys

So to decide if you need a crypto hardware wallet - which as the table shows is a non-custodial device - you first have to decide if you value the benefit of being in control of your funds?

The Pros of Custody

The biggest advantage of self-custody is kind of self-evident; you don’t have to trust anyone with your wealth. If you don’t recognise the value of this, then you are missing the whole point of cryptocurrency - we suggest reading this article from the NGRAVE Academy on why crypto exists.

The default form of money is centrally controlled and managed. We have to trust authorities to act responsibly, and in our best interests, and trust banks with our personal information and savings, in order to get access via custodial services (digital bank accounts and Apps).

Crypto is trustless money. There is no central authority. But by allowing someone else - a custodial service like an exchange - to store your funds, you relinquish that core feature.

The Cons of Custody

On the flipside of the coin, having custody means taking full responsibility for the security of your wealth.

This is probably the biggest concern that crypto newbies have about the whole ‘custody’ argument. We’re all so used to a world where we outsource responsibility, which isn’t just limited to money, but our own personal data, across every online service we rely on, but in particular Social Media.

The Facebook/Cambridge Analytica Scandal was a wake up call to some, but taking control of our digital lives is still a bit scary. It needn’t be, it just requires a bit of adjustment if you are willing to try.

If you are convinced enough by the custody argument to be in control, then the necessity of choosing a wallet to manage your crypto, comes down to what kind of non-custodial wallet?

As our table shows, there are a few different types of non-custodial wallet, but we can add a crucial differentiator that will help narrow it down, which is whether the wallet is online by default (Hot) or offline by default (Cold).

Again let’s look at the pros and cons of this key characteristic.

Non-custodial wallets - Hot or Cold?

Choosing between a hot or cold non-custodial wallet revisits the trade-off between convenience and security.

Hot Wallets are convenient because you don’t have to connect every time you want to transact or trade.

The most popular form of Hot Wallet is as a Mobile App, simply because smartphones have become - given their convenience - the default way to manage our digital lives.

Browser-based wallets, like Meta Mask, are especially popular for DEFI, which has exploded over the last 18 months, as they connect seamlessly and provide browser-based notifications, but at the moment don’t support Bitcoin natively

Desktop Hot Wallets are a throw-back to the early days of crypto, and provide a non-custodial alternative to Browser-based options, as you can manage Bitcoin, and enjoy wider functionality.

The major downside of all Hot Wallets is that being online permanently exposes you to threats of viruses, malware and scams. Mobile Wallets have the additional danger of effectively carrying all of your funds around with you wherever you go. The same is true, to a lesser extent, if you use a laptop on the go - perhaps for work.

Though this doesn’t directly expose your Hot Wallet, it increases the threat risk from unsecure wifi networks, along with the danger of simply losing your device (let’s hope you kept your Seed somewhere safe).

NGRAVE would argue - and yes we are a little biased - that security should always win out over convenience, especially when it comes down to something as important as your (magic internet) money. Reading our separate article on crypto security threats might convince you why.

If you follow our logic so far, favouring Non-Custodial options over Custodial, and Cold Storage Options over Hot, you're down to two choices - a Paper Wallet or a Hardware Wallet. So let’s look at those:

Though we’ve arrived at these final two contenders on the basis of security, the vulnerabilities of a Paper Wallet are simply too great to ignore. It is essentially a Bearer Bond, a piece of paper that confers value on whoever holds it, but in the case of a Paper Bitcoin Wallet, is only as secure as the material it is written on.

Paper is not something that anyone would associate with security or durability. Even if you laminate it, the idea that your wealth is protected by a plastic sheet is a very hard sell.

The weaknesses of Paper Wallets don’t end with their perishability. Despite being analogue and offline, they begin life online, as the default way to create one is to use a free online service. This has proven to be fraught with danger, as this Coindesk headline from February, 2021, illustrates: “BitcoinPaperWallet ‘Back Door’ Responsible for Millions in Missing Funds”.

So even though we acknowledge that cryptocurrency hardware wallets come with a price tag, and require a bit of adjustment in terms of set-up and general usability, they win hands down compared to the Paper option.

Making the argument for needing a hardware wallet based on price alone is a false economy. There is no specific size of crypto portfolio that should trigger you buying a hardware wallet, though a ratio of price tag to holdings of 10% is sensible.

In the same way price shouldn’t be the dominant factor when choosing between hardware wallets, but security. If you're prepared to risk the future value of your stack to save a few Euros today, then maybe crypto isn’t for you.

Convenience doesn’t have to be sacrificed

So by a process of elimination our quest to answer the question, ‘do you need a crypto hard wallet?’ ends up with a yes….you do. We’ve arrived here by focusing on security, ahead of convenience, but the good news is that with a crypto hardware wallet. like the NGRAVE ZERO you can have your crypto cake and eat it. The ZERO provides weapons-grade offline security, with much of the convenience that hot wallet options offer.

Hot vs Cold Storage doesn’t have to be a binary choice

Though we stand by the logical reasoning that got us here, we’re also aware that the reality of managing your money isn’t quite as simple as choosing between security and convenience. And the way most people manage fiat money (spits on floor) illustrates a mixed strategy for managing money - which accommodates security and convenience - that is already being mirrored in the world of crypto.

No sensible person would walk around carrying their entire fiat wealth wherever they go. Most people ensure they have easy access to money they need for day-to-day activities, where speed/convenience is key.

It is sometimes in physical form - notes and coins - but more commonly also via a Checking/Current Bank Account, which is linked to a host of other services - bank cards, eWallets, Apple/Google Pay - which enable it to be spent on the go.

What is left over - if you are lucky enough to have any - is kept in a savings account, which you rarely touch. There are good reasons for this. It gains a better rate of interest, but to get this you often have to agree not to touch it. It essentially forces discipline onto you.

Often people will have their salary paid into their current account, where expenses are deducted, and then move a portion to their Savings Account, where they avoid the temptation of buying that really expensive pair of trainers or a huge round of shots in a club.

This logic can be applied to crypto; just substitute Hot Wallet for Current Account and Cold Wallet for Savings account. You allocate a certain amount of crypto for spending or trading, but leave the bulk - your savings - in cold storage, on a hardware wallet, which makes hodling, so much easier and safer. This distinction will become even more common as the Lightning Network grows - enabling fast and instant bitcoin purchases.

Crypto forums and social media are full of ‘if only I had just held my crypto’ stories. It sounds so simple, but the temptation to trade whatever is pumping on any given day can be hard to resist. The truth is, crypto rewards patience, so one of the additional benefits of choosing a cryptocurrency hardware wallet, beyond security and convenience, is that it protects you from the impulse to dip into your savings.

So do you need a crypto hardware wallet? The answer is yes, if you want to protect your crypto from online threats, and yes, if you want to get into good savings habits, the evidence, so far, suggests is the most sensible way to store, secure as well as grow, your crypto wealth.