Hardware Wallets: How They Work and What to Protect

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A hardware wallet is a small device that stores the private keys to your crypto offline. The crypto itself stays on the blockchain. Moneysmart says keeping keys offline can make things harder for hackers, but if you lose the keys you usually lose the crypto. The recovery words that back up the device matter as much as the device itself.

The short answer

Start with the difference between the crypto and the key. Moneysmart describes a private key as a secret code that lets you access your tokens. A hardware wallet stores that key on a secure device that isn't connected to the internet.

Trezor says the coins remain on the blockchain and the device gives you access to them. So losing the device doesn't have to mean losing your crypto: Trezor says the wallet backup lets you restore access.

A hardware wallet does nothing about price risk. In its crypto assets guidance, updated on 15 October 2026, Moneysmart says most crypto are high-risk investments with very volatile values. You can lose everything you put in.

How a hardware wallet works

When you send crypto, Trezor says its device signs the transaction inside the device using your private key, and the key never leaves the device. So the computer or phone you use never sees the key.

Moneysmart calls a hardware wallet a cold wallet, and a digital or software wallet a hot wallet. Our guide to hot and cold wallets compares the two.

Moneysmart says offline storage can make things harder for hackers. It can't stop you approving a payment you've been tricked into making.

The recovery phrase

A recovery phrase, also called a seed phrase or wallet backup, is a list of words used to restore access. Trezor says its wallet backup gives the same access to your coins as the device itself. Anyone who has the words can take the crypto, with or without the device.

Trezor says the backup lets you restore access if the device is lost or damaged. It also says it cannot access your backup. If the keys are lost or compromised, Trezor says there is no way to recover the funds.

Never share your recovery phrase. Ledger states: "Ledger will never ask for the 24 words of your recovery phrase. Never share them." (Ledger uses 24 words; other wallets may use a different number.)

Trezor says it will never ask you to enter your wallet backup digitally, except on the device. Its guidance says never to enter the backup on a computer or phone, or share it. So anyone asking for your recovery words, including someone claiming to be support, is a scammer.

PINs, wipes and firmware updates

Trezor describes PIN protection for its devices, with the device wiped after repeated incorrect attempts. The PIN protects the device; the backup is how you get back in after a wipe, loss or damage.

Trezor also says firmware updates can sometimes wipe the device, so its guidance is to keep the backup available. These are Trezor's statements about its own devices. Check your maker's instructions for how its device handles PINs and updates.

What a hardware wallet doesn't protect you from

Keeping a key offline doesn't prevent a scam in which you send crypto yourself. Moneysmart's crypto scams guidance, updated on 1 October 2026, describes scammers seeking payment through romance scams, fake job recruitment and impersonation of officials, among other approaches.

Moneysmart lists unexpected contact, pressure to act fast, guaranteed returns and free crypto as warning signs. Fake support is another: both Trezor and Ledger say they will never ask for your recovery words.

A hardware wallet also doesn't remove the risk of sending crypto to the wrong address. Moneysmart identifies wrong-address transactions as a risk for crypto users.

Read our crypto scams guide. If you've lost money, Moneysmart says to stop sending money, contact your bank or crypto platform immediately, report to Scamwatch and tell friends and family.

If you lose the device or the words

Trezor says you can use the wallet backup to restore access if the device is lost or damaged. If you lose the private key and can't restore access, Moneysmart says you usually lose the crypto. Trezor says it cannot access backups, so the maker can't get them back for you.

There may also be a tax question after a loss. In guidance updated on 22 June 2026, the ATO says you can claim a capital loss for lost or stolen crypto if you can provide evidence of ownership. It also says you can't recover a lost private key.

The ATO's evidence examples include the public key, wallet address, relevant dates, cost, value when lost, hardware storing the wallet in your possession, and exchange transactions linked to your identity. Compensation reduces the capital loss.

Keeping the device and your records helps here. See crypto tax in Australia. Speak to a registered tax agent about how the rules apply to your circumstances.

Hardware wallet or leaving crypto on a platform

Moneysmart says a software wallet can be held by you or by a trading platform on your behalf. A hardware wallet stores private keys on a secure offline device. The real question is who holds the keys.

With a hardware wallet, the recovery words carry the same access as the device, according to Trezor. Leaving crypto on a platform brings platform risks: Moneysmart says many crypto-asset providers are not licensed at this time, and you may not be protected if a platform fails or is hacked.

Moneysmart also says there is currently no public register for checking the legitimacy of crypto exchanges. Our guide to how to check a crypto exchange explains what you can check. Neither option removes crypto's investment risks.

Frequently asked questions

What is a hardware wallet?

Moneysmart describes it as a secure device that stores private keys offline. Trezor says the coins stay on the blockchain, while the device gives access to them.

Are the coins stored inside the device?

No. According to Trezor, the coins are held on the blockchain. Its device signs transactions internally using a private key that never leaves the device.

Is a recovery phrase as powerful as the wallet?

Trezor says its wallet backup gives the same access to your coins as the device. Its guidance says never to share the words or enter them on a computer or phone.

Can you restore access after losing the device?

Trezor says a wallet backup lets you restore access if the device is lost or damaged. If you lose the private key and can't restore access, Moneysmart says you usually lose the crypto.

Can a firmware update wipe a hardware wallet?

Trezor says firmware updates can sometimes wipe its device, so keep the backup available. Other makers' devices may behave differently.

Does a hardware wallet prevent crypto scams?

It doesn't prevent you from sending crypto to a scammer or a wrong address. Moneysmart warns about scams involving crypto payments and impersonation, and the makers warn never to share your recovery words.