Software Wallet Vs Hardware Wallet: Major Differences

A crypto wallet is one of the most necessary things you need while investing in cryptocurrencies. It stores the passkeys of your crypto assets and provides you with the interface to access your digital currency. 

If you are a crypto investor or interested in cryptocurrencies and crypto trading, you may have heard of the terms software wallet and hardware wallet. In this article, you will find a detailed comparison between the two. So, without further delay, let's dive in. 

Software wallet vs hardware wallet aspects

You can differentiate between hardware and software wallets by the following parameters:

Definition and types

Software wallets are basically software applications that help you access and manage your crypto assets. They are mainly of three types:

1. Mobile wallets

A mobile software wallet is a crypto wallet you can download on your smartphone. They bring a higher level of convenience compared to their other counterparts. Apart from being able to transact using your crypto assets on the go, they enable you to send and receive crypto using QR codes. Trust Wallet, Electrum and MetaMask are some of the reliable ones in this section. 

One disadvantage of mobile wallets is that smartphones are always vulnerable to malware attacks and malicious applications. 

Note: Keep a backup of your private key. If you lose your smartphone, you can regain access to your mobile wallet using this seed phrase. 

2. Desktop wallets

Desktop wallets are software applications you can download on your computer. When you install a desktop wallet, you will find a ‘wallet.dat’ file in your local storage. This file contains information about the private keys of your crypto assets that you need to access your cryptocurrency address. 

Thus, you must secure the ‘wallet.dat’ file with a strong password. After you encrypt the desktop wallet, you must provide the password whenever you want to use it. 

Note: Remember to have a backup option, as in case you lose the password, you will also lose access to your crypto assets. You can also consider exporting your seed phrase or private key as a safety measure.  

Similar to mobile wallets, desktop wallets also suffer from malware vulnerabilities. Additionally, desktop wallets also have the setback of physical damage. If your system is damaged and inoperable, you must access it via a different system.

Trezor, Ledger and Atomic Wallet are some reputable names in this section. 

3. Web wallets

You can install a web wallet as a simple browser extension. There is no need for additional downloads or add-ons. The common types in this regard are browser-based wallets and exchange wallets.  

There are some wallet service providers that hold and manage the private keys of their users. If you are a beginner, this may prove beneficial to you. However, remember that letting a wallet service provider act as a custodian for your cryptocurrency is a highly risky practice. 

Some new crypto wallets have come up with ingenious solutions for such problems. They have implemented facilities that let you handle the private keys of your cryptocurrency all on your own or leverage a multi-signature approach for shared control. 

Coinbase Wallet, Ledger Nano S and Electrum are some names you can trust.

Hardware wallets are special types of crypto wallets that store the private keys of your cryptocurrency offline in a physical device. Some hardware wallets are Bluetooth-enabled, allowing you to connect them to a mobile device on the go. However, exercise caution while using Bluetooth-based hardware wallets, as they can be accessed by unwanted parties when turned on. 

There are also hardware wallets available that have biometric security features available in them. These measures add to the additional security of your wallet. 

When you install a hardware wallet, you need to set up a PIN and an optional passphrase. If you lose your hardware wallet, you can transfer your private keys with the help of the seed or recovery phrase. 

A physical wallet can come in various forms like a USB drive, credit card, etc. 

The only disadvantage of hardware wallets is that they can be pretty expensive. 

Ledger Nano S, Trezor Model One, and SafePal S1 are some of the best examples. 

Advantages of software and hardware wallets

Software wallets have the following advantages:

• A significant advantage of software crypto wallets is that they are very quick to set up and can work with multiple cryptocurrencies. Your private keys are generally stored on a remote server or as an encrypted file when you download them on your computer.  
• Moreover, software wallets allow you to carry out cryptocurrency conversions, trade on crypto exchanges, store your NFTs, calculate commissions with the help of in-built calculators and much more. 
• Anonymity is another major advantage of using software wallets. Most wallets even do not ask for a KYC while you sign up. This feature helps you protect your identity when you are transacting online. 

Hardware wallets offer the following advantages: 

• The major advantage of hardware wallets is that they do not stay connected to the internet 24/7 and are at the least risk of getting hacked. 
• These wallets are immune to computer viruses that can steal from software wallets. They often store the private keys in a protected area of their microcontroller, and one cannot transfer them out from the device easily.
• You can sign and confirm transactions on the blockchain using a hardware wallet. Your signature proves ownership of your private key. It is impossible to forge your signature without the private key; thus, no one else can transact on your behalf. 
• On top of that, your private keys are never stored on your computer. Thus, even if a hacker tries to detect your keys, it is impossible for them to steal them. Moreover, a hardware wallet needs you to confirm the transaction on your device before you can spend any coins.
• You can also trade directly from your hardware wallet. This method saves you time by skipping deposit delays and fees from withdrawal limits. 

The kind of wallet you choose solely depends on your use case and how securely you want to store your digital assets. Whatever option you choose, focus on crucial factors such as wallet security and functionality.