Are Hardware Wallets (i.e, Ledger Nano X) Safer than Software-Based Cold Storage Wallets?

Question

I'm looking into purchasing Ledger Nano X as a cold storage hardware solution.

What benefits does Nano X (or other hardware wallets) provide over software based cold storage solutions? Why not install a wallet such as Electrum on a device that is not connected to the internet and use it as a cold storage?

I looked at reviews of the Nano X and see people mention that it's sleek, sturdy, has improved display, Bluetooth connectivity and a "killer feel in the hand". All of this is nice but a cheap laptop with software that supports cold storage will have most of these features, and many others that Nano X is missing.

What kind of benefits does Nano X offer when it comes to the most important functionality - securing + storing your Bitcoin in cold storage?

I did see this answer which points to the fact that with hardware wallets the private key is embedded in the device itself and is therefore less prone to malware attacks.

What this means is that if your computer is compromised with malware, with a software wallet, that malware can steal your private keys. With a hardware wallet, because the private keys cannot be retrieved from the hardware wallet and because the keys are stored on the hardware wallet, the malware cannot steal your private keys. In this way, your funds will be safe.

However, doesn't this mean that:

1) If the hardware device is lost or stolen (don't forget it's "sleek and small") it would impossible to retrieve the wallet as the PK is only be stored on the device itself? (If it can be stored anywhere else you are no longer resistant to malware attacks)

2) Can't a malicious program siphon funds from the hardware wallet while the device is connected to a computer without ever stealing the PK? Similarly, since every hardware wallet runs some OS, why can't it be infected when it connects to a computer? Perhaps the PK can't be stolen but the funds can.

3) If a laptop is always in offline mode (not connected to the internet) won't this prevent it from being infected in the first place?

4) Also it seems that a device that is specifically designed to store cryptocurrency is the perfect candidate to be tampered with during manufacturing and/or delivery. After all, it's pretty clear what the device is going to be used for (unlike regular laptops which have other use cases)

Thanks

Answer 1

1. If the hardware device is lost or stolen (don't forget it's "sleek and small") it would impossible to retrieve the wallet as the PK is only be stored on the device itself? (If it can be stored anywhere else you are no longer resistant to malware attacks)

All current hardware wallets use BIP 39 mnemonics. This is a sequence of 12 or 24 words which you can memorize and/or write down on paper which can be used to re-generate all of the private keys in your wallet. This is allows for your private keys to be stored elsewhere while not exposing them to any malware.

2. Can't a malicious program siphon funds from the hardware wallet while the device is connected to a computer without ever stealing the PK? Similarly, since every hardware wallet runs some OS, why can't it be infected when it connects to a computer? Perhaps the PK can't be stolen but the funds can.

No. The hardware wallet has buttons and screens so that it can show the user what it is going to sign, and allow the user to accept or reject the transaction before signing. Hardware wallets are not just dumb storage devices, they have mini operating systems and will do their own checks of the transaction and ask for user input before private keys are retrieved and used for signing.

The mini OS that they run is not like an OS on your computer. They are highly specific to the device and, in general, can't be infected by malware on your computer. Hardware wallets have a limited communication protocol with the computer. While there could be a vulnerability in the firmware that does allow it to run malware, the attack surface is very small and far more easily auditable than the software that runs on a laptop.

3. If a laptop is always in offline mode (not connected to the internet) won't this prevent it from being infected in the first place?

Airgapped devices can still get malware through USB drives and other devices you plug into. Famously, the Stuxnet virus successfully jumped an airgap in this way. Furthermore a laptop could be accidentally connected to a network. You cannot assume there won't be any human error.

4. Also it seems that a device that is specifically designed to store cryptocurrency is the perfect candidate to be tampered with during manufacturing and/or delivery. After all, it's pretty clear what the device is going to be used for (unlike regular laptops which have other use cases)

That is possible, and different hardware wallet manufacturers address this in different ways. Trezors are shipped in boxes that have tamper evident seals. Coldcards are shipped in sealed, tamper evident bags. The Coldcard, Ledger Nano S and X can be visually inspected to see if any of the hardware is not what it should be. Coldcard and Ledger have high quality images of the device's circuit boards online and you can look at your devices circuit board and compare them to the pictures.

Additionally, most hardware wallets have open source firmware so you can compile the firmware yourself and run that on your device instead of trusting the firmware that it shipped with.

Of course there is still the element of trust. You still have to trust the hardware wallet manufacturer and their factories. But it is reduced with these methods.