If you want to buy, sell, or do just about anything else with cryptocurrency, a wallet is essential. Crypto wallets store the private keys of your digital assets, which are used to authorize transactions. But crypto wallets are not all 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 one is best for you and your belongings?
What is a software encryption wallet?
As the name suggests, a software crypto wallet is completely digital. These come in the form of software 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 number of useful security features.
For example, Trust Wallet is a widely used software wallet that supports a number of different cryptos, including Bitcoin and Ethereum. This software wallet is not only easy to use, but has a clear focus on security. Trust Wallet incorporates PIN codes, biometric scanning and recovery phrases into its infrastructure. The platform also never stores any user data on its servers to further protect your information.
Wallet software apps may also come with additional features, including staking. You can now stake a variety of coins and tokens via certain software wallets, such as Atomic Wallet, Phantom and Exodus. What kind of crypto you can bet will depend on the specific crypto wallet you use.
Some software wallets also provide you with market statistics and allow you to buy or sell crypto directly through the application.
However, there is an obvious problem associated with software wallets and that is their dependence on computers. Software wallets act as applications on digital devices, where the given device’s security features rely heavily on providing protection. For example, if you had the Exodus desktop application running on your device and a hacker wanted to access it, the process would be much easier if your device is not protected by antivirus software, firewalls, etc.
Although your data is encrypted when stored in your software wallet, there are still certain types of malware that can bypass this security measure. Keyloggers are often used to hack crypto wallets, where thousands or even millions of dollars can be lost. Fortunately, there are ways to protect yourself from keyloggers!
This does not mean that software crypto wallets are completely insecure, but it is certainly something to consider. Now let’s get into the details 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, handheld pieces of hardware that can easily be stored safely. But why do you need a physical device to store your private keys?
The main reason people use hardware crypto wallets is their extremely high security levels. As previously mentioned, software wallets are always vulnerable to external hacks, while hardware wallets are not vulnerable to this problem. This is because hardware wallets store your private keys offline. Although they can be connected to the PC or desktop to perform certain functions, they are often completely disconnected from a computer.
Because hardware wallets keep your private keys in cold storage without a network connection, they become pretty much isolated. It is this huge security advantage that makes hardware wallets overall safer than software wallets.
However, hardware crypto wallets tend not to be as popular as software wallets, and that’s mainly because of the price. While most software wallets are completely free to use, hardware wallets are physical devices that must be purchased. You can get a reliable software wallet, like the Ledger Nano S or Trezor Model One, for $60-80, which isn’t a huge investment, but an investment nonetheless. This is why most crypto holders prefer to opt for the free option instead.
The two main hardware wallet providers on the market today are Ledger and Trezor. Let’s take a look at Ledger’s Nano X to dive deeper into hardware wallet security features.
Ledger Nano X is a very popular hardware wallet that can offer your digital assets a lot of protection. This wallet uses something called BOLOS, or the Blockchain Open Ledger operating system. This is an OS completely unique to Ledger that allows the development of decentralized applications while keeping each app completely separate from the next. BOLOS also isolates the recovery seed phrase from any application found on your hardware wallet.
BOLOS also works with the Nano X’s Secure Element chip, which enables the storage of cryptographic data on applications in your wallet. It is this chip that stores your valuable private keys. Again, this further protects your data and makes it incredibly difficult to access and steal. Nano X is also tamper-proof and is protected by a PIN code. Of course, you should make sure that your PIN is kept secret and kept very safe 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 is no doubt that hardware wallets are more secure than software wallets, but software wallets are incredibly convenient and free to use. Software wallets are best used for short-term storage of private keys, while hardware wallets should be used to store all your private keys on a long-term basis.
Custodial and non-custody wallets
Crypto wallets can also be divided 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 rely on a third party to store your private keys and protect your assets. However, if you are 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 phrase are kept super secret and stored in a safe place.
Hardware wallets are always non-custodial, while software wallets can be either (although custodial software wallets are more common).
Should you use a hardware or software wallet?
At the end of the day, no crypto wallet out there can 100% guarantee safe storage of your private keys. Both software and hardware wallets can be hacked, although the latter is significantly 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 are kept safe.
