If you want to buy, sell, or do just about anything else with cryptocurrency, a wallet is essential. Crypto wallets store the private keys for your digital assets, which are used to authorize transactions. But crypto wallets are not all one and the same. There are two main types of crypto wallets, known as hardware and software wallets.
So, what's the difference between these two wallet types, and which is best suited to you and your assets?
What Is a Software Crypto Wallet?
As the name suggests, a software crypto wallet is entirely digital. These come in the form of software programs or applications used on a desktop PC, laptop, smartphone, or other digital device. You may have already heard of some software wallets before, such as MetaMask, Trust Wallet, and Exodus. These are hugely popular wallets that offer users a range of useful security features.
For example, Trust Wallet is a widely used software wallet that supports a range of different cryptos, including Bitcoin and Ethereum. This software wallet is not only simple to use but has a clear focus on security. Trust Wallet incorporates PIN codes, biometric scanning, and recovery seed phrases into its infrastructure. The platform also never stores any user data on its servers to further protect your information.
Software wallet apps can also come with additional features, including staking. You can now stake a variety of different coins and tokens via certain software wallets, such as Atomic Wallet, Phantom, and Exodus. The kind of crypto you can stake will depend on the specific crypto wallet you're using.
Some software wallets also provide you with market statistics and allow you to buy or sell crypto directly through the application.
However, there is one glaring issue associated with software wallets, and that's their reliance on computers. Software wallets operate as applications on digital devices, wherein the given device's security features are heavily relied upon to provide protection. For example, if you had the Exodus desktop application running on your device and a hacker wanted to gain access to it, the process would become much easier if your device isn't protected by antivirus software, firewalls, etc.
Even if your data is encrypted when stored in your software wallet, there are still certain kinds of malware that can bypass this security measure. Keyloggers are often used to hack crypto wallets, wherein thousands or even millions of dollars can be lost. Thankfully, there are ways to protect against keyloggers!
This doesn't mean that software crypto wallets are totally unsafe but is certainly something to consider. Now, let's get into the specifics of hardware wallets.
What Is a Hardware Crypto Wallet?
A hardware crypto wallet is a physical device used to store your private keys. These come in the form of small, hand-held pieces of hardware that can be easily stored safely. But why would you need a physical device to store your private keys?
The main reason why people use hardware crypto wallets is their extremely high levels of security. As previously mentioned, software wallets are always at risk of remote hacks, whereas hardware wallets aren't exposed to this issue. This is because hardware wallets store your private keys offline. While they can be connected to your PC or desktop to perform certain functions, they are often left totally disconnected from a computer.
Because hardware wallets keep your private keys in cold storage without an online connection, they become pretty much isolated. It's this huge security perk that makes hardware wallets safer overall than software wallets.
However, hardware crypto wallets don't tend to be as popular as software wallets, and that's mainly due to their price. While most software wallets are entirely free to use, hardware wallets are physical devices that need to be purchased. You can grab yourself a reliable software wallet, like the Ledger Nano S or Trezor Model One, for $60-80, which isn't a huge investment but is an investment nonetheless. This is why most crypto holders prefer to opt for the free option instead.
The two main hardware wallet providers in the market today are Ledger and Trezor. Let's take a look at Ledger's Nano X to delve deeper into hardware wallet security features.
The Ledger Nano X is a widely popular hardware wallet that can offer your digital funds a lot of protection. This wallet uses something called BOLOS, or the Blockchain Open Ledger Operating System. This is an OS entirely unique to Ledger that allows the development of decentralized applications while keeping each app totally separate from the next. BOLOS also isolates your recovery seed phrase from all applications existing on your hardware wallet.
BOLOS also works with the Nano X's Secure Element chip, which allows for the storage of cryptographic data on applications within your wallet. It's this chip that stores your valuable private keys. Again, this further protects your data and makes it incredibly difficult to access and steal. The Nano X is also tamper-resistant and is protected by a PIN code. Of course, you should ensure that your PIN code is kept secret and stored very safely in an offline setting.
You can also stake certain cryptocurrencies via a hardware wallet, but this usually needs to be done using a desktop application, such as Ledger Live.
So, overall, there's no denying that hardware wallets are safer than software wallets, but software wallets are incredibly convenient and free to use. It's best to use software wallets for the short-term storage of private keys, whereas hardware wallets should be used to store all your private keys on a long-term basis.
Custodial and Non-Custodial Wallets
Crypto wallets can also be split into two further sub-categories: custodial and non-custodial. A custodial wallet is one that holds and protects your private keys for you. A non-custodial wallet, on the other hand, puts you in the driver's seat, giving you full control and access to your private keys.
Different people have different preferences when it comes to custodial and non-custodial wallets, but the latter is generally seen as the safer option. This is because you don't need to put your trust in a third party to store your private keys and protect your assets. However, if you're using a non-custodial wallet, you need to be very careful. In this case, you are solely responsible for your private keys, so you must ensure that your wallet password and recovery seed phrase are kept super secret and stored in a safe place.
Hardware wallets are always non-custodial, whereas software wallets can be either (though custodial software wallets are more common).
Should You Use a Hardware or a Software Wallet?
At the end of the day, no crypto wallet out there can 100% guarantee the safe storage of your private keys. Both software and hardware wallets can be hacked, though the latter is considerably more difficult to infiltrate. So, if you're looking for a new crypto wallet, make sure you consider the pros and cons of the different wallet types to ensure your private keys will be kept safe.