Hardware wallets and software wallets are the two most common types of wallets for storing digital assets. But which one is better and what are the key differences between the two?
A hardware wallet is a physical device that stores your private information (recovery phrase, password, and PIN) offline. This significantly reduces the likelihood of being hacked. A software wallet can be a browser extension or app and stores wallet info online, making it more susceptible to hacks.
Both types of these crypto wallets have their own pros and cons, and understanding the difference between them will help you choose the best one.
What Is a Software Wallet (Hot Wallet)?
A software wallet is used to store and trade digital assets, and to access dApps. You can access a hot wallet from your computer via a browser extension or website or on your phone through an app. Software wallets are free, convenient, and user-friendly. But, they’re the least secure type of wallet.
There are three different kinds of hot wallets, and each has its own set of features.
1. Online wallet (custodial)
Most web-based wallets are custodial wallets. This type of web3 wallet is generally controlled by a third-party company (the wallet provider).
That means you don’t own your private keys and funds, rather, the wallet company does. Hence, you’re trusting a third party with the key to all of “your” assets.
The most popular examples of a custodial wallet include Binance, Coinbase, and Crypto.com. However, these companies also offer a non-custodial option for those of you who are more tech-savvy.
- You aren’t responsible for keeping track of your private keys
- Remains the most convenient type of crypto wallet
- You can easily recover your password and account
- The least secure type of wallet available
- You’re trusting a third party with your private keys and assets
- If the website goes down you have no way to access your wallet
2. Desktop wallet (non-custodial)
A desktop wallet is an app that runs on your computer via your browser’s extension. A majority of desktop web3 wallets are non-custodial—meaning it’s controlled by you.
So, you have complete control over your private keys and the assets within your wallet.
The most popular examples of a non-custodial desktop wallet include Metamask, Coinbase Wallet, and Rainbow Wallet.
- More secure than custodial wallets
- You remain in control of your private keys and assets
- Many non-custodial wallets are still very user-friendly
- If you lose your private key, there’s no way to access your wallet
- It’s less secure than a hardware wallet
- Prone to malware and other hacks
3. Wallet App (non-custodial)
A crypto wallet app is a software wallet that is stored on your mobile device. It offers the same functions as a desktop wallet, however, it’s more convenient considering you can carry your digital assets in your pocket.
Many wallet apps also come with an added layer of biometric security. Facial recognition and thumb scanners are the most common and are used in addition to your wallet’s recovery phrase and password.
Also, most wallet apps are non-custodial.
Some of the most popular wallet apps include Metamask, Coinbase Wallet, and Trust Wallet.
- Remains one of the most convenient types of crypto wallet available
- Extra security measures have been implemented for increased safety
- Same functionality as a desktop wallet
- Apps may contain malware
- Your mobile device is more likely to be lost or stolen compared to your computer
- A hardware wallet is more secure
Software Wallet Pros and Cons
In general, software wallets have an extensive list of pros and cons. Let’s review them all.
Software Wallet Pros
Software wallets are very convenient to use. Since you can use them anywhere with your phone (if using a mobile or web wallet) you can make transactions easily and access decentralized apps on the go.
Compared to carrying around another device as you would have to with a hardware wallet, having a software wallet makes your digital assets easily accessible.
There’s no need to find a USB connection and connect your wallet to access your crypto or NFTs.
Most software wallets allow you to store multiple currencies and assets in one app. This means you don’t need to use several apps to store your assets.
Software wallets also get regular updates and features. So you can expect to get a better user experience with time.
If you have complaints or want new features, you can always write to the software company and see if they have plans to implement those upgrades.
There are a lot of options to pick from when choosing a software wallet, and most of them are free to use.
Those that do require some kind of payment or maintenance fee are usually very affordable or even symbolic. On the other hand, hardware wallets are more expensive, costing over $59 on average.
For beginners who don’t want to invest a lot at first, software wallets are an inexpensive solution.
Software Wallet Cons
Hot wallets are often considered to be unsafe or less secure than a hardware or cold-storage wallet.
This is because the keys are stored in the wallet, and the wallet is always connected to the internet, thus making it more vulnerable to online attacks.
If someone can get a hold of your password, they can gain access to your account and the assets within. Web-based software wallets are thought to be the least safe of all crypto wallets.
Dependence on a third-party
In some cases, software wallets provided by an exchange platform will not actually give you access to your private keys.
You only get a password and login credentials to access your account, while the keys are owned by the wallet provider.
Even though this can also work as a pro since you have shared responsibility for asset safety, this also means that you never fully control your funds.
You will always need an intermediary to perform any transactions.
Lack of stability
Since you’re dependent on a third party for your accessing your assets, software wallets are less stable.
Relying solely on an app or software program means that a potential glitch or complete shutdown would lock you out of your account.
If the platform in charge of your wallet shuts down, you basically lose everything.
How to Choose a Software Wallet
If you are trying to figure out how to choose the best software wallet, you’re not alone. I’ve been there myself.
Here is everything you should consider before choosing the best software wallet for your needs.
The most important aspect of choosing a proper software wallet is to ensure it will support the blockchain you want to interact with.
For example, if you are buying ETH or Ethereum-based NFTs, you want to make sure you use a wallet that’s compatible with Ethereum.
That being said, some software wallets support multiple blockchains. Trust Wallet is a good example of a web3 wallet that currently supports numerous blockchain networks.
Ultimately, knowing which blockchain you will be using and what type of assets you will be trading is the first step to determining the type of software wallet you’ll need.
Ease of Use
Considering most software wallets operate in a similar manner, what truly sets them apart is the user experience. You can try out different apps to test the UI to see which one you like.
You can always switch to a different wallet app if you find that your current wallet is difficult to use. Just make sure you transfer your assets to your new wallet if you decide to do this.
Really, it comes down to preference. A good software wallet should be easy to use and have a smooth UI.
Each wallet will have slightly different features, so choose the one that has the most useful features for you.
Security is a top priority for any wallet, but especially with software wallets since they are the most prone to online threats. The overall security of hot wallets mainly depends on you as the user.
What do I mean? Well first, let me break down the different security aspects of a software wallet.
- Recovery phrase
Your recovery phrase is the key to accessing your web3 wallet. Most wallets utilize 12 to 24 random words that make up this phrase. When you create a wallet, this phrase is generated automatically.
To access your wallet, you need your recovery phrase. Although you might not need to use it every time you want to use your wallet (assuming you stay logged in), you will need it if you ever have to reset your password or if you get logged out of your wallet for some reason.
Secondary to your wallet’s secret phrase is your password. Your wallet’s password is used to login into your wallet.
Assuming you have already input your wallet’s secret phrase, all you need thereafter to gain access to your wallet is your password.
When you create a password, you should always utilize upper and lower case characters, numbers, and symbols where applicable.
Also, it’s not recommended to use any actual words in your password. Instead, a randomized approach is more secure.
In addition to your password, two-factor authentication (2FA) is always an added bonus. If your wallet offers this, make sure you enable it. Moreover, if your wallet provides biometric authentication such as facial recognition or a finger scan, use it.
Okay. Now, where were we? That’s right. Your wallet’s security ultimately depends on you. Meaning that you need to take all the proper steps to ensure your wallet’s security features remain secure.
How do you do this?
For starters, you need to store your wallet’s recovery phrase and password in a secure place.
Never store your wallet’s recovery phrase anywhere online or share it with anyone. That includes an image or file on your phone or your computer.
Always store your secret phrase in a secure physical location. Write it down on a piece of paper and stash it in a fireproof safe or lockbox.
Secondly, you should always be aware of the top scams, especially in the NFT space.
Ignorance is not bliss when it comes to keeping your wallet safe. Learn how to protect yourself, and remain vigilant at all times.
If you choose to use a software wallet, you have to accept a certain level of threat to your assets, as they simply aren’t the most secure option.
However, you can still look for extra security features when choosing an app. Check for two-factor authentication, malware scans, etc., within the app. A lot of these apps themselves can be malware.
Furthermore, be sure to read reviews and do your research before installing any app.
Choosing a reputable software wallet like Metamask or Coinbase Wallet is always a good place to start. You should always do your own research to figure out which wallet is best for you.
This might mean trying out new or less popular options. Of course, you’ll want to do your due diligence before using it to trade or store any valuable digital assets.
What Is A Hardware (Cold-Storage) Wallet?
A hardware wallet is a physical device used to trade and store digital assets. This type of wallet is the most secure since it stores your private keys offline. In addition to a private key, password, and PIN, these wallets utilize secure chips to protect against both physical and software attacks.
The main difference between hardware and software wallets is that cold-storge wallets remain offline, whereas hot wallets are constantly connected to the internet.
That is also why a hardware wallet is the safest option for storing your cryptocurrencies, NFTs, and other blockchain-based assets.
In addition to remaining offline, hardware wallets like Ledger utilize the best security technologies to safeguard your private keys.
In fact, Ledger uses the same type of secure chip that is found in passports and bank cards to keep your private keys private.
Furthermore, Ledger utilizes its own operating system that allows it to remain secure even if an app you download on your device happens to contain malicious code.
Hardware wallets are basically bulletproof (not really). Maybe hacker-proof is a better term. All jokes aside, they are the most secure wallet you can get your hands on.
If you are serious about trading and storing digital assets, especially if you plan on owning a lot of digital assets, you need to use a hardware wallet.
Hardware Wallets Pros and Cons of
There is no doubt that a hardware wallet is the best option to safely store your digital assets. However, there are still some pros and cons you should be aware of.
Hardware Wallet Pros
A cold storage wallet is the most secure solution for storing your blockchain assets. Not only are they disconnected from the internet, but they’re also juiced up with the latest security technologies.
Unless you give someone access to your hardware wallet, there is very little chance that someone can gain access to your private keys.
Since you are working with a physical device, you can expect the maximum possible stability when accessing your assets.
Even when hardware wallets use external software, they remain their own proprietary software and utilize their own operating system.
Compatible with multiple blockchains
Popular hardware wallets like Ledger and Trezor are compatible with multiple blockchains and various assets.
So, whether you are looking to secure your cryptocurrencies or NFTs, it’s likely that a hardware wallet will support them all.
Hardware Wallet Cons
Less convenient than software wallets
Keeping track of a physical wallet is more inconvenient than app stored on your phone. Unlike a software wallet, you have to safely store and maintain it in a physical location.
Although you might find that to be inconvenient, others actually feel better knowing that their belongings are safely tucked away.
Risk Of Being Lost, Stolen, or Damaged
Obviously, there’s a risk that you could lose or damage your hardware wallet. Or worse, someone could steal it.
But, if you choose a secure and designated place to store your wallet, you shouldn’t worry about it being lost or stolen.
That said, a hardware wallet could make you a target for potential thieves. Even then, It’s unlikely that even the most sophisticated thief would be able to access your wallet if they did manage to take it from you.
I think it’s more likely that your wallet would get damaged, deeming it inoperable.
Regardless of whether someone steals your wallet, you misplace it, or happen to spill a drink on it, there are ways to recover your assets.
Unlike software wallets, hardware wallets aren’t free. You will need to fork over $59 to $300+ to get yourself a reputable wallet device.
Luckily, the best hardware wallet, Ledger, is cheaper compared to Trezor.
How to Choose A Hardware Wallet?
There are several things that you should consider before choosing the best hardware wallet. Here are some of the main considerations.
Price is always a consideration when making a purchase. Hardware wallets are not cheap. Both Ledger and Trezor wallets cost over $50. However, it is an investment for your investments.
I always tell my friends; if they have more than $50 worth of digital assets, it’s worth buying a hardware wallet to ensure they remain safe.
Ease Of Use
The user experience should be one of your greatest considerations when choosing a hardware wallet.
Since there is an obvious learning curve to setting up a hardware wallet, you want to make sure you choose one that has a lot of helpful guides on the internet.
Generally, the more popular a product is, the more guides you can find. Ledger and Trezor remain the two most popular web3 hardware wallets on the market.
The reputation of your hardware wallet matters. Both Ledger and Trezor are the pioneers of the industry and have been around since 2014.
So, if you want a wallet you can trust, either one of these brands are a solid choice.
Avoid dodgy companies that have little to no reputation. They might not be as great as they claim or could even have malicious codes in their products to steal your assets.
Note: Only purchase Ledger and Trezor wallets from the manufacturer’s website. Buying a wallet from a retailer such as Amazon is a huge risk. You could end up with a malicious wallet. I will leave their official sites below.
Is a Hardware Or Software Wallet Better?
A hardware wallet is the best option if you want the most secure wallet for trading and storing your digital assets. However, you do have to spend $60 to $300 to buy one. A software wallet is the more convenient option and may be best for beginners who have no valuable assets. They’re also free.
Considering hardware wallets store your private keys offline and use the latest technology, they are the obvious choice when it comes to overall security.
However, if you’re just beginning to dip your toes in the world of web3 and you don’t necessarily own any valuable digital assets, a software wallet is a good option if you’re still learning how it all works.
Do I Need A Software Wallet If I’ve Got A Hardware Wallet?
If you plan on storing any valuable assets, a hardware wallet is a must. You can use your software wallet for everyday transactions as long as you aren’t storing anything valuable in it.
The moment you purchase an asset like an NFT, it’s best to transfer it to your hardware wallet for safe storage.
Hardware wallets are like a bank, while software wallets are like cash.
You don’t make many transactions with your bank account number, even though it’s much more secure, right?
On the other hand, cash is more convenient for day-to-day transactions. But, it can be easily stolen.
Similarly, you should use your hardware wallet like a savings account for your long-term assets. Then, use your software wallet for smaller transactions and refrain from storing large amounts on it.
This way, even if you face an attack, you won’t lose a lot of money at once.
The most secure option, however, is to use two hardware wallets.
You can store one away for larger, long-term assets. Since you won’t be using it a lot, there’s no need to connect it to the internet often and make it vulnerable to attacks.
You can use the second wallet for your transactions, which you can connect to the internet without having to worry about losing a lot in case of an attack. This will still give you the added security of a hardware wallet.
Both hardware wallets and software wallets will work for trading and storing digital assets and accessing dApps. However, a hardware wallet remains the best and most secure solution. But, a software wallet is more user-friendly and convenient.