Hardware vs Software Wallets – What You Must Know

A growing number of people are joining the crypto world as of late, especially after reading on the news about the explosion of bitcoin and understanding the benefits of investing in cryptocurrency. There is little doubt that this trend will continue to grow in 2021 and beyond, enticing regular people just like you and me to invest in crypto and use virtual coins to replace their transactions with real money.

When talking about cryptocurrency, it is vital to understand that you can store coins in one of two ways: software and hardware wallets. While software wallets are online wallets or desktop wallets, also known as programs or apps, hardware wallets are physical devices, similar to USB sticks, that you can carry around.

While there are several pros and cons of using each software wallet vs hardware wallet, it’s quite crucial to know which one suits your needs better. Whether you’re looking for enhanced security or streamlined operations & accessibility, you need to understand the key differences between these two.

Below, we’re going to take a closer look at the hardware wallet vs software wallet battle, revealing both the pros and cons of each. However, before diving deeper into it, let’s briefly look at how does an eWallet actually works.

How does an Online Crypto Wallet Work?

While you can securely store part of your cryptocurrency right on the exchange platform, especially if you’re conducting regular transactions, it’s advisable to store most of your crypto holdings on an eWallet. What’s interesting is that your coins are not actually stored in the wallet. This device only keeps your private and public keys safe, keys you can use to access your cryptocurrencies.

The private key is a secure digital code that only you as the owner can know. The public key is the digital code linked to your amount of currency. In order to unlock your cryptocurrency funds, you need to use the correct private key that matches its public counterpart. This unique transaction will be recorded on the blockchain, adjusting your account balance accordingly.

Hardware vs Software Wallet – A Comparison

Now that you are well aware of how online crypto wallets work, it is time to dive into a straight head-on comparison between hardware and software wallets. First off, let’s detail the main differences between hardware and software.

1. Software Wallets

As the name suggests, a software cryptocurrency wallet is based on a computer program or mobile app. Software wallets are normally available in three formats:

– Desktop wallets: a desktop wallet allows you to store your private keys on the desktop or computer. Many traders prefer this type of wallet nowadays because it gives them unrestricted access to their accounts and offers them slightly more security than a mobile wallet. Nevertheless, security can be quite an issue when compared to physical wallets, because a laptop can easily be hacked or stolen.

– Mobile wallets: the more “modern” alternative to desktop wallets, mobile wallets enable users to store their private keys in a convenient place, right at their fingertips. Usually, you need two apps on a mobile wallet, one for storing the private keys, and one for accessing the public keys. Experts advise people to store a limited amount of currency on these wallets because the risks associated with mobile wallets are quite high.

– Online wallets: these are web-based wallets that come with the benefit of offering a higher level of security than desktop or mobile wallets. Another benefit of online wallets is that you can access your own from any location. All you need is reliable internet access. In terms of drawbacks, online wallets store your private keys online, so a third-party has access to your log in information. Thus, they are extremely vulnerable to hacking and fraud, probably more vulnerable than mobile or desktop wallets that store your private information on your own device.

2. Hardware Wallets

If software wallets represent computer or mobile programs or software in the cloud, hardware wallets are actually physical devices that you can keep in a safe or store in a secure location. This means you don’t need to store your private keys on a computer or tablet that can be hacked.

The huge benefit of hardware wallets is that they are totally hack-proof. No cyber criminal can access the data on a physical device without some alien-like technology. Probably only NASA or the FBI has the technology required to copy data from a physical device. Nonetheless, physical wallets come with a huge risk – they can be lost. If you’ve read the news recently, you’ve probably seen hundreds of people all across the globe trying to find their lost wallet devices. They used to have tens of bitcoins on them in the early 2010 when this currency was not worth much, but now a bitcoin is worth over $37k, so a wallet with 30 bitcoins is worth over $1 million.

Some people have forgotten their PIN, so they cannot open their hardware wallets. In case you know yourself to forget things easily, you should probably think twice before choosing a hardware wallet over a software one. However, remember that hardware wallets are compatible with numerous web interfaces and can support a wide range of cryptocurrencies, making them ideal for investors who have an extended portfolio and trade huge amounts of crypto on a regular basis.

So Which Wallet should I choose?

Now, this is a legit question. In order to answer it, we’ll have to dive deeper into the pros and cons of hardware vs software wallets.

The biggest issue with software wallets is that they are connected to the internet, and as we all know, the internet is a gold mine for cyber criminals. Whether it’s mobile, desktop or web based wallet, a software wallet is susceptible to viruses or malware lurking in the background. Any passphrase or recovery keyword that might be visible on the screen can be recorded by a hacker and then used to access your private information.

In terms of benefits, software wallets come in a plethora of sizes and options. While some can be used to store a multitude of coins, from Bitcoin and Ethereum to Ripple, NEO, Litecoin, Stellar and Cardano. Software wallets can also be used by beginners who have never used a wallet before, and need a good place to start.

You should choose a software wallet if:

– You are a beginner and you have just started your journey in the crypto world

– You are looking to work with numerous currencies

– You are working with currencies on a daily basis and you need quick access to your wallet, either on your mobile phone, desktop, or on the cloud

– You don’t want to run the risk of losing your password and losing the private keys stored on your physical eWallet device

Conversely, hardware wallets, also known as “cold storages”, can be connected to a computer, mobile phone, or any other external device, enabling you to access your private keys. Once your keys are accessed, you can gain control of your digital currency coins.

The biggest benefit of physical wallets is that they offer you the highest level of security. Cold storage wallets completely eliminate the need for firewalls or extra security measures, since they are hack-proof. However, you should keep your eyes open for scams here too. If you purchase a device from anywhere else rather than a reputable dealer, you might find out that the wallet’s own inner security might be compromised.

A drawback of hardware wallets is that they are quite expensive, compared to software wallets that are usually free of charge. Remember, once you place an order for a physical wallet, it might take weeks, even months, until it arrives. If you are a long-term investor, you should definitely think ahead before deciding to invest in a hardware wallet.

You should choose a hardware wallet if:

– You care about security above all else

– You don’t mind investing in a high-quality device

– You want to gain the peace of mind that your crypto assets are securely stored

– You fancy the thought of having your sleek-looking device with you anywhere you go

So What is the Best Hardware Wallet for me?

If you are part of the second category of people who think that they should invest in a cold wallet, then you should definitely look for the best hardware wallet out there. One of the best crypto hardware wallet I would recommend checking out is the Nano Ledger. You can read a full review of it here. This battery-less device features an OLED interface and countless features to interact with the user, offering next-level navigation and a gorgeous sleek aspect. If you want to find out more about this device that is considered the best hardware wallet 2021 and see how it compares with its younger brother, check out this Nano Ledger x vs s review (note: link to the review article).

What About the Best Software Wallet for me?

If you don’t want to risk losing your private keys or forgetting your PIN or you simply feel more comfortable with a software wallet that you hold on your mobile phone or laptop, then you should probably go with BlockFi. You can read my full review of BlockFi here.

This modern digital tool offers a wide range of products, including interest for your crypto, trading capabilities, and crypto-backed loans. Furthermore, the team behind BlockFi has just unveiled their next-level innovation: the world’s first credit card that offers a cashback program.

This software wallet offers next-level security, great customer support service, and a plethora of features to make your life easier.

Are Hardware Wallets Safe?

As a rule of thumb, hardware wallets are much safer than software ones. These modern devices have their own operating system, storing the keys in a “tamper-proof element”. A good wallet such as Nano Ledger S or X comes with an advanced security chip (in this case an ST33 chip). In the case of data transfer via USB or via Bluetooth, the device is also secured. These connections are end-to-end encrypted, so you won’t run the risk of being targeted by malware attacks during data transfer.

In order to keep your hardware safe against threats, it falls into your responsibility to keep it in a secure location and never reveal your PIN to anyone. If the device gets stolen, the thief won’t be able to access your data unless he or she has your PIN. You should also keep the software up to date and also try to leverage the concept of multi-signature, which involves using two or three private keys on the blockchain to sign a transaction or access an account.

What Happens if you Lose your Hardware Wallet?

One of the biggest risks associated with a physical crypto wallet is that it may get lost. This happened to numerous people so far, so it’s worth knowing exactly what to do if this happens to you. First of all, you need to ensure that your recovery phrase is safe. This includes 24 words that you have to write somewhere, preferably on a sheet of paper, and store it in a secure location. In case the device gets lost, you can use this recovery phrase on a new device to gain full access to your crypto assets.

Now, you can also use the same 24-words phrase to clone your current physical wallet, so you’ll be able to use two devices simultaneously. While this phrase is the most important one, you should also use a PIN when accessing your hardware wallet. This should be different than the phrase and should be unique to you. For example, try not to use the same PIN that you use on your debit or credit cards, because if those are compromised, your physical device might also get compromised should it gets stolen.

The Bottom Line

There is no doubt that the hardware vs software wallet battle can spark a lot of interest nowadays, especially as cryptocurrencies are growing like never before. Whatever device you choose to use, make sure you focus on security and do not disclose any private information, such as PINs, recovery phrase, or other sensitive data.