What’s covered: Purchasing and moving your coins to a secure, hardware wallet

Prerequisites: parts 1, 2, 4

Expected outcomes: You will learn the importance of keeping your coins secure. The knowledge of this part will be empowering and you will reduce your risk exposure and making a mistake.

Time to completion: 1hr, must wait for hardware device to be mailed out

Whether you have followed along each part in the series or you are just curious about storing your digital currency safely, we will cover the importance of and how to setup a cold storage based wallet.

What’s the risk?

I recommend reading Part 2 and going through the steps in Part 4 for creating a wallet as in Part 4 it helps conceptulize the difference between your private and public key and the interface you have for sending and receiving. There are three different types of wallets. Hot wallets, wallets that store your private key online outside of your computer or phone. Often this is done by services or sites that guard your wallet on your behalf. By contrast, there are Warm wallets which keep your private key on your computer or phone. While you technically never give anyone your private key, you run the risk of your computer/phone being compromised by a hacker or similarly, accidentally leaking your private key. Finally, there are Cold wallets. These wallets are dedicated hardware devices. Often a USB stick. The private key is stored on the devices internal storage and is never sent to the computer or phone that it is connected to. Instead, the cold device has a physical button that approves transactions. In other words, you make a transaction on your computer/phone, then approve it by clicking a button on your cold wallet that’s connected. The wallet then sends a signal to your computer/phone when the transaction has been signed by the private key internally. This makes it order of magnitudes harder for your private key to be compromised.

If you have heard of Bitcoins being lost, e.g. Mt. Gox, or people being hacked, this is from Hot and Warm wallets where the private key is leaked. To put in another way, Think of the design and integrity of cryptocurrency like a door locks. No one has successfully been able to pick anyone’s lock. But if someone gets the key to a lock, they have complete access just like the original owner. My advice is simple, keep your key in your control and never reveal it to anyone or trust anyone to keep it for you unless you are willing to lose whatever funds are behind its associated lock (wallet).

Setting up a cold storage wallet

First, you need to get a physical device. There are many vendors but I’ll cover the most popular one: Nano Ledger S.

Disclaimer: using the below link is a referral. If you have enjoyed this series or this post, I would appreciate you using it. Of course, feel free to order outside of this link.

Follow the link in the image below to order or visit here: https://www.ledgerwallet.com

 

Setup and basic usage

Once ordered and the device arrives, setting up the wallet is fairly easy. Ledger make great video tutorials, I would recommend watching all of them: https://www.ledgerwallet.com/videos/ledger-nano-s

I’ll highlight a few here in order they should be watched

Overview of the device

Configure the device and create a wallet

Use the wallet to send Ethereum or Bitcoin

To contrast the wallet setup we did in Part 4, the way this works is you create a wallet on the device. The device plugs into your computer or phone. Your computer or phone provide a friendly user interface for sending/receiving transactions. Your private and public key lives on the Ledger hardware wallet (Nano S device). Ledger provides a official Google Chrome app that you can install on your computer for an example user interface but many applications support the Nano S. Again, the private key is kept internally, never exposed outside the Nano S. The device has two physical buttons. To send funds, e.g. sending some Bitcoin or Ethereum to someone, you use the Ledger Chrome app interface to select how much and the address you want to send to, and then on the Ledger hardware wallet (Nano S device) that is connected to your computer, you to enter a 4-8 digit numerical pin via its physical buttons. This protects you from the event that someone steals your hardware wallet. Once you enter the pin, the hardware wallet sends back the completed transaction to your computer.

Resetting and Restoring

Resetting a device

Restoring using the 24 backup worded passphrase

A couple points that weren’t exactly clear to me from the video tutorials. In Part 4, we created a wallet from scratch and saved a backup copy of the wallet that included an encrypted version of your private key (the keystore json file). This was your backup. Similarly, the Ledger Nano S provides a 24 word passphrase that will allow you to do the same. In the event you forget your pin on the device, lose the device, or have it stolen, you can buy a new Ledger Nano S, enter the 24 unique worded passphrase into it and presto, your wallet is restored with all the funds you had. This works because your public and private key pair is derived from that 24 worded unique passphrase. Those 24 words are a secret version of your key pair. For this reason, you should keep the back up passphrase written down and in an even more safe place than your Ledger Nano S since unlike your Nano S, the passphrase is not protected by a pin.

Practice resetting your device

Once the device is set up, I encourage you to make sure you can restore from a backup in case something goes wrong in the future. First, send a small amount of coins to it from say Coinbase, Binance, or another wallet. The Nano S’s public wallet address can be found from the Chrome app interface when the Nano S is plugged in. Once you see the coins show up on the Nano S wallet, erase or reset the Nano S by choosing reset option (video linked above) or by putting the wrong pin in 3 times in a row. Entering the pin incorrectly 3 times will cause the Nano to self destruct and wipe all data (reset). Once it’s reset, rather than setting it up as new, use the 24 worded passphrase to restore your wallet. Once restored, you will see your wallet balance including the coins you sent to it, intact!

If you are confused how, just remember your private and public key just says who you are. Losing your wallet doesn’t mean the coins disappear, they live in the blockchain forever. But if you lose your Nano S and don’t have the backup 24 word passphrase, those coins on the blockchain can never be “claimed” or used by you ever again.

Where to go from here

Congratulations! In 7 concise steps you have gone from learning to practicing to owning your own digital currency. Regardless of the wallets you use in the future, the exchanges you trade on, or the new cryptocurrencies you hear about, you should have a solid foundation to go with. We are in the pioneer days of digital currency. Will it be a blip in human history or the start of a revolution? Who knows. Still, it’s exciting to be a part of it, even if you are just an explorer from the outside testing the motions.