In this article I will, with simple logic, demonstrate why purchasng a hardware wallet is often a mistake. As a bonus you learn how to make an authentic hard wallet.
Follow these instructions physically or mentally.
1. Print out a paper wallet. Go to http://bitaddress.org to do this. Alternate http://walletgenerator.net
2. Lay the paper on a table along with a thumb drive.
3. Imagine the drive to be a hardware wallet.
4. Realize that both are empty.
5. Setup the hardware wallet. You will be writing down on paper a long string of random words.
6. Now put some money(imaginary) in both wallets.
7. Ask yourself: “How am I going to protect the string of words for the hardware wallet”.
8. Ask yourself: “How am I going to protect the paper wallet?
9. Whatever the answer is to the first question, it is also the same for the second.
10. The paper keys and the paper wallet are equally insecure.
11. Now pick up the drive and insert it into your computer.
12. Find the image that you used to create the paper wallet and copy it to the thumb drive.
13. Congratulations! You have an authentic hardware wallet.
14. Make a second hardware wallet for backup.
15. Optional. In step 1 you will have the option of entering a PIN or passphrase to double encrypt the image. Use this only if you fear that the drive might be stolen.
16. Test your hardware wallets by printing their content and comparing to the paper wallet.
17. Destroy the paper wallets.
I will now explain exactly what the commercial hardware wallet does.
The private key is encrypted using the string of words printed out on paper at the setup. The paper key is permanently offline. The thumb drive can remain in the computer, securely, for all transactions needing the public key (SELL). The amount of the transaction does not need security and it remains in the computer and is also stored on the drive. The public key is also kept in the computer. A copy of the private key can also be held offline for (BUY) transactions.
If the drive is lost, damaged or stolen, the paper key re-creates the private key and retrieves the public key from the computer. Once again, it is clear that an ordinary thumb drive, kept offline, is all that you need.
But if you really feel better with the string of words there is a wallet app called engin, available both on both iOS and Android, that does the same thing.
When you purchase crypto the exchange charges a fee. My exchange, Coinbase, charges about 4%. The money comes from a bank account and no “mining” fee is involved. However, the bank does charge a $5 “non ATM withdrawal fee. As an example let’s work with $100.
Buying $100 of crypto immediately costs $9. BUT when you move your crypto to a hard or paper wallet an entry is made in the blockchain. This results in a mining fee. Recently these fees have been around $40! Now my $100 is down to $51. And if I put it back into the exchange, the fees repeat. I am left with $7.
So it makes little sense to put small amounts of money into an offline cold storage wallet. Eventually this situation will improve. Coins such as Bitcoin Cash, Litecoin and Ethereum do make improvements. Further improvement will be made later in 2018 when the Lightning Network is implemented. But, for now, the fees are significant.