Crypto hacks are nothing new, and the largest of them have resulted in billions of dollars being stolen.
As a cryptocurrency investor, one of the most important things you need to do is protect your assets. For beginners, this can be quite complicated, though it doesn’t need to be.
How you store your crypto will play a huge part in how safe it is. Following the best practices will ensure criminals can’t get their hands on your funds.
In this hardware wallet vs software wallet guide, we’ll look at these two storage options so you can decide which you should be using. Let’s get started.
What Is a Software Wallet?
A software wallet is also sometimes called a hot wallet or a digital wallet. It’s a program that you can install on a computer or another device to store digital currencies.
There’s a huge selection available, and each one has different benefits and drawbacks. The most popular options are typically available as web browser extensions, and many also have Apple/Android apps.
It’s worth noting that these wallets don’t technically store your crypto. Instead, they store your private keys which give you access to your crypto on the blockchain. You can have multiple wallets to store different cryptocurrencies — just bear in mind that the more wallets you have, the trickier it will be to stay organized.
When you purchase crypto on an exchange like Coinbase or eToro, it will sit in your custodial wallet on that exchange. A common phrase in the crypto space is “not your keys, not your coins”. This essentially means that while your crypto is on an exchange, it still belongs to that platform, and you could end up losing it because of this.
Benefits of Software Wallets
The main benefit of soft wallets is that they’re secure. Crypto exchanges are liable to hacks, and some have even collapsed due to internal issues, which may lead to you losing all of your funds. As such, it’s best to transfer your crypto to a wallet of your own.
Most software wallets are easy to use — you simply need to install the extension and set up your account. Once you’ve transferred your funds, you’ll have quick, easy access to your crypto.
If you install an app on your smartphone, you can even manage your crypto on the go.
Additionally, software wallets are free to use. This is ideal for people who aren’t making huge investments and don’t want to spend extra money to make sure their funds are safe.
Drawbacks of Software Wallets
While software wallets are far more secure than custodial wallets, it’s still possible to lose your funds. Scams are all too common in the crypto space, and if you fall for one, you could end up having your entire wallet drained. If this happens, the chances of you getting your funds back will be close to zero.
When you set up a soft wallet, it will give you a 12-24 word seed phrase. This will help you get your crypto back if you lose access to your wallet for any reason. If anyone gets ahold of your seed phrase, however, they’ll be able to steal your crypto. It’s vital that you record your seed phrase somewhere that no one will be able to get their hands on it.
Make sure you don’t record it digitally (such as on a computer or phone) as someone could gain access to it. You should have at least one physical copy (though ideally more) and keep it somewhere safe.
Popular Software Wallets
There are several you can choose from. You should look into the different options and choose which one(s) to use based on the cryptos you want to invest in, the reputation of the wallet, and your own preference. Some popular examples include:
- Metamask
- Phantom
- Trust Wallet
- Exodus
- Guarda Wallet
What Is a Hardware Wallet?
A hardware wallet (sometimes called a cold wallet) is a physical device that serves the same purpose as a software wallet, but they’re regarded as being more secure. Again, there are several options available here so you can choose based on your wants and needs.
Like software wallets, these don’t actually store your crypto, but hold your private keys. One of the main differences is that you need to connect a hard wallet to a computer or another device any time you want to make a transfer.
Benefits of Hardware Wallets
Most crypto investors use hardware wallets for one key benefit; they’re the most secure crypto storage solution available. Because they’re not constantly connected to the internet, it’s significantly more difficult for bad actors to steal your crypto. Your private keys are secure and highly encrypted, and you never have to enter your password on a computer or other device so it won’t be exposed to potential hackers.
A software wallet could be compromised if your computer gets a virus, malware, or ransomware. These won’t affect a hardware wallet, so you won’t be at risk of losing your funds this way.
Any time you make a transfer using your hard wallet, you need to verify it on the device itself. This means that it’s impossible to transfer money without direct access to the wallet.
Drawbacks of Hardware Wallets
The main drawback of hardware wallets is that they’re not free. You don’t have to pay to store crypto in a custodial or soft wallet, but if you want a hardware wallet you’ll need to invest in the actual device. The price can vary depending on the model you go for, and you can get a reasonable hard wallet for around $50, though more expensive models are available for those who want them.
If you lose or break your hardware wallet, you can use your seed phrase to get your funds back, but you’ll need to invest in a new device as a replacement. Hard wallets are therefore best for investors with larger portfolios who really don’t want to risk losing their crypto.
Accessing your crypto takes longer with a hard wallet as you need to connect the device to a computer. This means that they’re not the best solution for day traders.
Popular Hardware Wallets
Various companies have released hardware wallets, and some offer multiple models. Some of the most popular brands include:
- Ledger
- Trezor
- ELLIPAL
- SafePal
- Tangem
- Coldcard
Before you make your choice, it’s worth taking the time to look at some different models so you can compare them and see which one meets your needs the best.
Hardware Wallet vs Software Wallet: Which Should You Use?
As you can see, when comparing a hardware wallet vs software wallet, both can be good solutions. Software wallets are generally better for those who want some added security without needing to spend any extra cash. If you want to make your crypto as secure as possible, it could be worth investing in a hardware wallet.
Doing suitable research before making any big decisions is crucial in the crypto space. Ensure you always know what you’re investing in so you can avoid making costly mistakes. Take a look at our guide on developing your cryptocurrency portfolio to learn more about smart investing.