What is Hardware and Software Wallet and Differences Between Them
In this article, we will be covering the definitions and use cases of Hardware and Software Wallet and Differences Between Them.
To be able to grasp the differences between a Hardware and Software Wallet, first we have to understand what a Crypto Wallet is as well as the different types of Cryptocurrency Wallets and their use cases.
What is a Crypto Wallet? A Beginner’s Guide
A cryptocurrency wallet is a wallet that functions to keep your cryptocurrency in it. It is called a wallet because it holds your money in it, but not your FIAT money. Cryptocurrency wallet works with private keys, which are long strings of letters and numbers. These numbers represent the cryptocurrency that you own, as well as that particular token’s network.
Instead of holding these physical items; which are actually stored on public blockchain networks; it stores the passkeys you use to sign for your cryptocurrency transactions and provides the interface that lets you access your crypto.
Your Crypto wallet is secured with a seed phrase, which generally consists of 12 to 24 random words. You can (and must) write down your seed phrase and keep it in a safe place and never share it with anyone, even the customer support individuals. Never forget that, none of the customer support representatives or companies will ever ask you to share your seed phrase with them. It is always safe to use a password generator program, such as 1Password which will help you keep your password safe. Especially when you have more than one wallet or many passwords to remember, these password generators are a life-saver!
Although Cryptocurrency wallets come in many forms, at their core they all provide a way to protect secret information that gives you control over your digital assets.
You can technically store your crypto directly on the exchange, but it is not advisable to do so unless in small amounts or if you trade them frequently.
Custodial vs. Non-custodial Wallets
Crypto wallets will have a few different types and definitions. Custodial and non-custodial are two of these.The difference between custodial and non-custodial wallets comes down to who controls the tokens stored in the wallet: the user or the wallet service.
With Non-custodial wallets, you have complete control over your assets as well as the private keys that identify with those tokens. However, a custodial wallet has a service that hosts your wallet and the private keys for you and this means that this service/host has the custody of your wallet
With non-custodial wallets, the user will be the one who has the responsibility to keep their assets safe. By all means, it requires more work on your part to ensure that you are connecting your wallet to an exchange or dApp for trading. After trading, the user will have to make sure to sign out or disconnect their wallet from the related page.
Custodial wallets on the other hand, are a popular choice because they require less responsibility and maintenance from the user. However, you have to find a reputable and trusted wallet in order to safely store your keys; as you trust a third party for the security of your assets and funds. If you choose the wrong wallet or platform, your crypto could be at risk of theft or malicious action.
Cold Storage vs. Hot Storage Wallets
Worth to mention that Hot and Cold storage Wallets will have different options too. But the main difference between Hot and Cold Storage Wallets is whether or not the wallet is connected to the Internet.
With hot wallets, the wallet stays connected to the Internet because in the case of wanting to trade your assets, you need to log in to the exchange platform to display or trade the funds.
Hot storage wallets are easy to set up and most of them are accessible with your phone, and are suitable for the ones who need to frequently access their crypto assets. Hot wallets also provide support for a wider range of cryptocurrencies than cold wallets.
However, their primary drawback is that as a web-based storage system, hot storage wallets require the internet, so they are not completely resistant to hacks.
In addition, wallets and exchanges are starting to be regulated, so accountability is increasing as are customer protections, but there is also uncertainty with regard to taxation and governmental interference. Popular examples of Hot Storage Wallets are; MetaMask, Coinbase Wallet.
In cold wallets, which is considered as the safest and more secure, the wallet is not connected to the internet, but instead the user has to plug in a USB device or similar device to access their assets. Hardware wallets use cold storage and are generally non-custodial — so they are considered as a safer form of crypto wallets.
This makes it an attractive option for long term investors who is hnolding a bigger amount of crypto assets or simply for the investors who want to HODL their assets over a period of months or years.
Although it promises more safety, Cold Storage wallets are more expensive than the Hot Storage Wallets. An internet based, hot wallet is free to set up and use the cold storage wallets cost, in the range of $100 to purchase the device itself.
Popular examples of Cold Storage Wallets are; Trezor and Ledger.
After examining different types of Crypto Wallets and their use cases, let's dive deeper into the definition and differences between Hardware and Software Wallets.
Hardware wallets, like Trezor and Ledger; are physical devices that are used as a drive and they utilize cold storage holding your cryptocurrency with their private keys. They're non-custodial wallets, and are best for experienced crypto investors.
They may look like USB flash drives, but are secured with a PIN code needed to access the information, as well as an optional passphrase. But the PIN code and passphrase aren’t the only safety measures for these wallets. For a sophisticated hacker to be able to access a hardware wallet, they would also need the seed phrase to get access to your cryptocurrency. If you have kept your seed phrase inside your password generator or on a piece of paper in your drawer, it would be very unlikely that the hacker could find it out or hack it.
Hardware wallets can be used to make multiple and various online transactions, however their main are of use is to keep your assets offline and to provide privacy and safety. Many hardware wallets include features that are compatible with various interfaces, making them easy to handle.
- Hardware wallets are more secure than exchange wallets.
- The hardware wallet can be connected to the software wallet to make it more secure, but you also get access to the software wallet's features.
- Higher purchase costs.
- Need to safely store your seed phase!
Software wallets are similar to exchange wallets as they mostly use hot storage. On the other hand, software wallets are non-custodial, by all means they are not hosted by any web page or exchange. You can use these wallets via connecting on the platform which you will choose.
All digital/exchange wallets are software wallets but not all software wallets are exchange wallets. You can also keep your software wallet on a desktop or mobile app, while not being connected to the internet.
Examples include MetaMask, Electrum and Exodus. Some of them even offer crypto trading.
- Software wallets are non-custodial, meaning you have complete access, control, and responsibility for your keys and tokens.
- Most software wallets are easily accessible from a desktop or mobile device — with or without access to the internet.
- Software wallets that use hot storage are susceptible to security breaches.
- Most software wallets charge fees for their services.
Before choosing just any software wallet, we must understand what they offer and what are our needs and expectations from the wallet. Depending on the cryptocurrencies we are holding or the exchange intensity we have, even the amount of the assets we have, might affect our decision.