Since it has been a topic in the last few days and to distract from the price action, I decided to write an article about the risks associated with a hardware wallet.
But before I go into the risks, I'd first like to take a brief look at the basics so that beginners can get to grips with them:
The basics
If you own Bitcoin, it's not physically lying around somewhere, but exists as a record on the blockchain - the decentralized ledger that stores all transactions since the beginning in January 2009. Your access to this Bitcoin depends on a so-called private keythe "password for your Bitcoin account", so to speak. You should protect this key well, because anyone who knows it has access to your coins.
So if you have already received Bitcoin on a Bitcoin address for which you have the private key, you are the only one allowed to spend the coins again. The coins are virtually public on the blockchain, but only you have the power to move the coins with the private key. To do this, the Bitcoin transaction is signed with your private key signed. You "sign" the transaction cryptographically with your private key and thus give the "go" to send it.
The role of hardware wallets
These devices are like small digital safes: the private key is securely stored offline and only used to sign a transaction when required. However, in most cases, a hardware wallet requires additional software - the so-called companion appwhich shows you your account balance, reports incoming payments and initiates transactions. The wallet only takes on the task of signing the transactions, while the companion app controls the interaction with the Bitcoin network.
The risk: the connection between wallet and app
However, and here comes the first caution: the wallet and companion app must communicate with each other cleanly and securely for everything to work properly. There are some potential risks lurking in this interaction that you should be aware of. That's why we'll take a look at a few attack scenarios in the next section and see how you can protect yourself.
Attack scenarios for hardware wallets
Even with hardware wallets, it is unfortunately not impossible to become the target of an attack. Here are some scenarios that show you how nasty surprises could occur - and why you should always keep a watchful eye on your transactions. 👀
(1) The companion app as a weak point
Imagine that the companion app you are using is not quite as "friendly" as it claims to be. A compromised developer (on the part of the manufacturer) or hacker could manipulate the app so that it shows you the wrong address for a transaction. It could also happen that you accidentally download a manipulated fake version of the manufacturer's companion app from the Internet.
This means that You think you're sending bitcoin to your friend, for example, but it actually ends up in the attacker's account! Worse still, a well-made app can hide the fraud in such a way that you only notice it when it's already too late.
(2) The hardware wallet itself is playing tricks
The hardware wallet itself could also potentially be compromised - sounds scary, but it is technically conceivable. A manipulated wallet could be programmed in such a way that it redirects transactions unnoticed😱
(3) Attack on the change address
This is where it gets a little more technical: Bitcoin transactions often use a so-called "change address" to send the remaining amount back to your wallet.
This is because of how Bitcoin transactions work. For example, if you have received 0.1 BTC in a transaction in the past and now want to send 0.01 BTC, technically the entire 0.1 BTC goes into the transaction and 0.09 BTC goes back to you as "change" to a "change address" in your wallet, while 0.01 goes to the recipient.
An attacker could intervene here and send the return amount to another address. This attack could theoretically affect both the companion app and the hardware wallet itself.
These scenarios show that even hardware wallets are not 100% secure. In the following, I will explain how you can minimize these risks and what you should look out for.
Security measures to minimize the risks
Although a hardware wallet already provides you with a solid security foundation, there are other measures you can take to reduce the risks even further. Here are some tips and strategies to best protect your Bitcoin:
(1) Always buy the wallet from the original manufacturer
To prevent you from buying a tampered device, for example, it is highly recommended that you only ever buy directly from the manufacturer. Amazon, eBay and the like are absolutely not recommended. The wallet manufacturers usually also send the wallets shrink-wrapped and sealed so that you can see directly whether the wallet has been tampered with.
(2) Use of open source software
Prefer hardware wallets whose code is open source, preferably in its entirety. This means that the entire source code is publicly available for all to see. This significantly reduces the risk of any backdoors being hidden in the code.
(3) Multi-vendor setup: Wallet and companion app from different providers
By using the companion app and the hardware wallet from different manufacturers, you can reduce the risk of the wallet manufacturer itself being "harmful", for example. I consider this to be extremely unlikely, but I wanted to mention the possibility anyway, as many people are not even aware that they don't usually have to use the wallet manufacturer's companion app.
For example, I really like using the BitBox02 in combination with the Sparrow Desktop Wallet as a companion app. Both BitBox02 and Sparrow are completely open source.
(4) Multi-signature setup (Multisig)
With a multi-signature setup - multisig for short - you can only carry out a transaction if several devices agree. Even if one device is compromised, the Bitcoin cannot be moved without the consent of the other wallets. Multisig therefore significantly increases security and is often used by users with larger Bitcoin holdings who want to secure their coins to the maximum. You can find out more about multisig here: https://getqu.in/2fcwSs/
(5) The role of the display
The display of your hardware wallet is a powerful tool to protect you from fraud - regardless of the companion app. As long as your hardware wallet itself is not compromised, the display will always show the correct transaction information. No matter what the companion app wants you to believe, you will see the real, signature-ready transaction on the wallet display.
Example: Detecting manipulation with the display
Imagine you want to send Bitcoin to an exchange. The companion app shows you that the transaction is going to the exchange, but in reality the address has been manipulated by an attacker so that your Bitcoin would end up on someone else's wallet. This is where the display comes into play: before you sign/release the transaction on the hardware wallet, you can compare the recipient address on the display with the real receiving address of the exchange. If the addresses do not match, you know immediately that something is wrong - and can cancel the transaction. 🚫
What you should look out for on the display
Check the recipient address and the amount exactly. Your wallet display will reliably show you the actual transaction details that are to be signed - regardless of any manipulation by the companion app.
Some wallets also show you the so-called "change address", i.e. the address to which any remaining amount will be returned. Make sure that this address is actually one of your own and does not end up in the hands of a potential attacker. However, many hardware wallets ensure that the change address must be part of the wallet's address range. So unless the hardware wallet itself is compromised, an attack on the change address is very unlikely - but still possible.
The display of your hardware wallet is therefore an essential security anchor that allows you to keep control of your Bitcoin and detect manipulation at an early stage. Wallets without a display, on the other hand, leave you "groping in the dark" to a certain extent, as you have to trust the companion app alone. However, if you don't check the information on the display, the display won't help you.
Conclusion
At the end of the day, keeping your Bitcoin safe is mostly a matter of vigilance and preparation. Hardware wallets are a great way to secure your coins offline, but they are not completely immune to attacks. However, with the right measures - such as buying directly from the manufacturer, checking transaction details on the display, using different manufacturers for the wallet and companion app or even a multi-signature setup - you can significantly reduce the risk and protect your Bitcoin as much as possible. 🔒
Bitcoin gives you the opportunity to take control of your own money - and with that responsibility comes the task of keeping your coins safe. With the right preparation and vigilance, you'll be well equipped to secure your Bitcoin for the long term. So stay vigilant and make sure your coins stay where they belong! 💪
Do you have any questions? Then feel free to write them in the comments👇
I hope I was able to explain the topic to you in a way that you can understand. If not, I'm always grateful for constructive criticism😊
Grüße✌️
