What is a Hardware Wallet?
When you buy crypto through a brokerage, like Coinbase, it is stored in a wallet that they control, not you. It can be thought of like a bank. The bank holds your money and protects it, but it's only yours because the bank tells you it is, and because you trust them. Of course, it also helps that the Federal Government insures that money.
Crypto exchanges have been hacked in the past, and they will be in the future. Remember, that unlike the bank account, your crypto assets are not insured by the government. If they are lost in a hack, or even just to a bad actor at the brokerage, they are very likely gone for good, and you have no recourse.
Your crypto is not truly yours until you take it out of the brokerage and deposit it in your own wallet.
This concept is difficult to grasp because crypto is not physical. You don't get a pocket full of metal coins to jingle around. Crypto "money" only exists on the blockchain. What you own is just a string of numbers and letters that is your private key.
What is a Private Key?
When you own cryptocurrencies, what you really have is a private key. Your private key unlocks the right for you to spend the associated cryptocurrencies. This is the most important piece of the crypto puzzle. With that key, anyone can spend your crypto. Therefore, your private key must remain... PRIVATE!
In addition to the private key there is a public key. The association is often compared to e-mail. You can create an e-mail address (public key), give it to anyone you want, and they can send you a message. But to see that message you need a password (private key). Of course, e-mail passwords are generally ridiculously easy for hackers to figure out because users create them, and in general, they aren't all that worried about someone reading their e-mail.
But a cryptocurrency private key has to be hack-proof. You don't create the key (password), cryptography creates it. When dealing with a broker, you don't have a private key, they do. If you are logged into your account you can send somebody else Bitcoin as long as they have given you their public key. And when you want to receive Bitcoin, Coinbase will create a public key for you that others can then use to send you the Bitcoin.
But you see, by not actually having a private key, you don't actually have any crypto. You have Coinbase's word that they have the Bitcoin and are storing it safely for you, but in reality you have no idea. And if they were hacked one day, or their site just disappeared from the face of the earth, you'd have absolutely no way of regaining the crypto that you thought was yours. Without a private key you have nothing but assurances. Again, just like with a bank, but minus the insurance.
What is a Hardware Wallet?
So, how do you take control of your crypto? How do you "take it out of the bank?"
You need a wallet. A wallet is a place to keep your crypto. There are a bunch of different options out there, but today we're going to focus on a hardware wallet called Ledger Nano X. At this point you might want to hop on google and read a bunch of reviews about Ledger wallets. When you feel good about them, come on back and I'll walk you through it a bit more.
A Ledger Nano wallet is a "cold storage" wallet, which means that it stores your private key offline. This eliminates the possibility of being hacked and having your crypto disappear.
What happens if I lose my Ledger? Do I lose all my crypto?
No. That's the beauty of a cold storage hardware wallet like this. You can lose the wallet, it can be stolen, it can fall in the toilet, and you haven't lost anything other than a hundred dollar piece of plastic. Without your password a thief would only have three attempts to guess an eight number password login after which point it would be locked and useless. You, on the other hand, can replace the Ledger with another, or with a wallet from any other company, as long as you still have your 24-word seed phrase (which we'll discuss further down).
Getting Started With the Ledger Nano X
First thing first, make sure you order your Ledger Nano directly from Ledger's website. NEVER order any crypto wallet from Amazon or any other third party. Ledger is a French company, and your package will arrive with a postmark from France. The box will come shrink-wrapped as well. Those would be two obvious things to watch for first. Later, Ledger's software is going to ask you to be sure of some other things. For instance, did your new Ledger come with a 24-word seed phrase pre-filled? It shouldn't. If any of the red flags pop up for you do not go any further.
To get started you are going to download Ledger Live, which is their app which will act as a place for you to watch your crypto portfolio, send crypto, or receive crypto. It is not a trading platform (edit: apparently you can buy/sell via Coinify through the app). If you wanted to buy some Ethereum with your Bitcoin, you would first send Bitcoin to your Coinbase account then make the trade there. Remember, the Ledger Nano is a wallet. It's where you keep your money and pull it out to spend, or put money after you receive it.
Okay, you have your new Ledger Nano and you've got the Ledger Live app downloaded. Moving on.
They'll ask you to plug in your Nano. This will be sort of the final verification that the Nano you received in the mail was a legit Nano and you didn't somehow get a mail switch.
I'm not going to go through all the steps involved. The app does a great job of walking you through things. The Nano is going to create a private password for you. This consists of 24 random words. You're going to write these down, in order, and they are going to force you to go through and manually double and triple check these. You will need these 24 words, in the correct order, in order to recover your crypto if anything were to happen to your Nano. This 24-word seed phrase can be used by ANYONE to access your crypto, so it is imperative first of all that you don't screw up copying the phrase down, and second of all that nobody else knows your phrase.
It's called a seed phrase, but in actuality it isn't a phrase at all. They are random words. Right them down, and find a place to hide them. The hiding is probably the trickiest part of this entire process.
It should be noted here that none of this is difficult. It may sound like it, and the cloak and dagger stuff may seem over the top, but at the end of the day you just have one set of 24 words that you have to secure in a way that you can recover them in the event that you ever need to again.
A couple more things that may seem obvious, but aren't. Don't ever enter these words anywhere on a computer. Don't send them to yourself in an e-mail. Don't take a picture of them and send it to yourself. Just... don't. Get a pen, write them on a piece of paper, and secure that piece of paper where you can find it, but nobody else can. Easy.
And remember, these won't be necessary if you don't lose or break your Nano. They aren't something you need over and over again.
Once you've completed the seed phrase setup stuff, you can move on to moving crypto from wherever it is on the internet, over to your new wallet.
You will create different accounts on your wallet for the different types of crypto. You'll have a Bitcoin account. You'll have an Ethereum account. You'll have a different account for each. What this does is creates a Public Key for each account that others (or you) can use to send crypto to.
Once your account is created you can begin moving crypto into it. Click receive and an address will pop up. Copy that and head over to your Coinbase account.
In Coinbase you'll click Send, and a very basic screen will pop up. How much Bitcoin do you want to send? What address are you sending to? The answer to that is to paste the address from your Ledger account.
Couple things to say here. First, make sure that the first few times you do this you just do a very small amount. You don't want to completely flub it and lose your crypto.
Lose it? Yeah, well, here's the thing. If you send crypto to the wrong address, it's probably gone for good. So, double check that long string of numbers and letters. You copy and pasted them, so it should be fine, but give it a once over anyway.
Second, double check that the crypto you are sending (in this case Bitcoin) is being sent to a matching (Bitcoin) address.
Take your time, double check everything, and click Continue. Very shortly you should see Bitcoin sitting in your Ledger Live app's portfolio. That's it. That Bitcoin is now out of Coinbase's hands, and in yours. Nobody else in the world has access to that Bitcoin. It exists on the Blockchain, and you are the only person who holds the key to unlock it.
Just to get a feel for how everything works you may want to then try sending money from your Ledger to your Coinbase account. Basically, everything works in reverse. Give it a try.
When receiving crypto you don't have to do anything. Anyone can send crypto to your account's address any time. When you log in to Ledger Live you'll see it there. When you are sending crypto out, however, you'll need to have the Nano connected and enter your pin.
The pin is different from the 24 word seed phrase. The pin is 8-digits that you set up when first setting up the Nano. This is the code that you'll need in order to access your crypto via the Nano. If someone found your Nano they'd only have three guesses before it was locked. Meanwhile, despite having lost your Nano, you could regain access to your crypto with your seed phrase. I hope this concept is becoming clearer to you now. I think that is the hurdle that most people need to get over in order to understand how this all works.
To Sum It Up
And that's really about it. Hopefully this article helps get you over the hump, and allows you to see how easy it really is to secure your own crypto.
Key takeaway:
Your 24 word seed phrase is the most important item in your crypto life. It's the key that unlocks the money. Keep it secure, and keep it offline. As long as you have that set of words you will always have your crypto. If you lose your Ledger Nano, no problem. If your house burns down with every electronic device you own in the world inside, you will still have your crypto. Well, so long as your phrase wasn't also in the house! Don't store your seed phrase in the same place you keep your Nano. If you keep that seed phrase to yourself, nobody else in the world can access your cypto, and because your crypto is in the blockchain, it will always be there waiting for you to claim it when you want it.