The Difference Between Hardware and Software Wallets

The Difference Between Hardware and Software Wallets

The question of how to properly secure your personal digital assets is probably one of the most important subjects to understand when you start your journey with cryptocurrency. While virtual currencies were treated far less seriously just over a decade ago, the surge of value they have mustered up to this point makes the subject of crypto security vitally important to holders and traders, alike.

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The fact that cryptocurrency is decentralised means that there is no central bank available to store your funds. The safekeeping of your currency relies solely on you. Fortunately, the market has grown in leaps and bounds and there are now some tremendous wallets at your disposal to help you store, access, and use your digital assets conveniently.

Join us, as we objectively explore and compare three of the most popular types of crypto-wallets available right now.

Custodial Wallets or Online Software?

Most Bitcoin buyers have used custodial wallets before without even realising it. That’s because most crypto exchanges provide this sort of service. Hence, your very first crypto purchases were most likely made using a custodial service platform.

A crypto exchange provides you with an online account, much like your mainstream online banking app, secured by a username and password. The exchange owns and manages all private keys, so you need only remember your login details to manage your crypto.

The advantages of custodial wallets include:

  • Buying and selling currency is far quicker and simpler, as you don’t have to worry about verifying your keys.

  • If you forget your password, you can usually recover your account quite easily.

  • You can access your wallet from your desktop browser or via a mobile app.

The drawbacks of custodial wallets include:

  • If the exchange/custodian goes out of business, you may lose your cryptocurrency.

  • If hackers breach the exchange, then your account information and cryptocurrency could be in jeopardy.

Custodial software wallets are a brilliant starting point for most crypto users and provide the most user-friendly experience. However, we advise that you stick to well-known exchanges with high-quality security measures in place if this is how you want to manage your coins.

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Hardware Wallets

Hardware wallets are the answer to those looking to trade and store cryptocurrency and NFTs long term. This device is essentially a portable hard drive with a smart interface.

Store the wallet in a lockable safe and bring it out when you want to transact. It will then conveniently connect to your computer via USB or Bluetooth. Both the private and public keys are managed on the device and authentication completes offline via the drive. It is then communicated to your computer software which then completes the necessary transfer online.

The advantages of hardware wallets include:
• Isolation from the internet means that your keys are more secure against cybercrime.
• No one can conclude transactions without the physical wallet, giving you exclusive access to your funds.
• You can connect the hardware wallet directly to trading exchanges to complete transactions like Exodus.io

The risks involved with hardware wallets include:
• Your holdings are directly linked to the private key of your device, so if you lose the private key, you could lose your assets for good. Losing the hardware wallet itself is a simple matter of purchasing a new one and linking it to the current private key you have.

It is certainly possible to curtail the risks involved above by writing down your recovery seed for the wallet on paper or storing it in a Cryptosteel and locking it up in a safe place that only you know about. Your private keys in the wrong hands could result in an unrecoverable loss.

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Non-Custodial Software Wallets

Some software companies provide digital software to manage your crypto assets without direct third-party involvement. Here, you maintain full control over your public and private keys from your mobile app or online browser. It, therefore, remains imperative that you keep your account details and keys safe to avoid losing your assets forever.

The obvious advantage of a non-custodial wallet includes heightened safety. Even if a hacker manages to break into the software, they will need to know your private key to steal your crypto assets. In fact, you will need to maintain your key in a safe place in case you ever forget it. No private and public key means no access to your currency.

Like all software, this form of wallet is prone to malware attacks and data breaches if your firewalls are not strong and secure. However, software wallets are user-friendly and provide quick access to your funds when you need them.

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A Summary for Your Convenience

Custodial Software Wallet Non-Custodial Software Wallet Hardware Wallet
Primary quality Provides ease of use and requires less responsibility in the safekeeping of your funds Full control of the public and the private keys from software on PC or mobile Full control of the public or the private key from un-hackable hardware device.
Usage Great for beginners or those who make and receive frequent payments Long term use for serious traders and investors Long term use for serious traders and investors also called Hodlers
How keys are stored The custodian/exchange owns the private keys to your crypto Your keys are encrypted and stored in the software Your keys are stored on a hardware device which in turn can communicate with dedicated software on your PC
Coin storage Limited to coins covered by the exchange Can store most cryptocurrencies but it’s dependent on the software you use Top devices can store 1500+ different currencies at once
Possible risk The exchange going out of business or a mass server breach Malicious malware or hackers & negligence Risk of losing your private keys linked to the Hardware Wallet.
Cost Transaction fees are dependent on the amount being traded Once off or monthly cost for the software, in some cases the software is free but charges Swap or transaction fees. Once off purchase of hardware.

Here at Bitmart, we are dedicated to making sure that our customers not only receive the best goods their money can buy, but also all the information they need to make the right decisions to suit them best.
We hope that you have found our comparison of Hardware and Software wallets helpful and can now adequately weigh the pros and cons of each option to make a better-informed choice for your future in the crypto realm.