Choosing from cryptocurrency wallets can be a dizzying experience due to the many varieties out there, but they all have the same basic functionality.
What Are Cryptocurrency Wallets?
Just like the normal wallet you carry around daily, a cryptocurrency wallet is for storing digital currencies and tokens. Forget any extra features that might be included, all cryptocurrency wallets have the same job—to store one’s public and private key pair to enable storage of a user’s cryptocurrency. These two keys are mathematically related to one another through modern cryptography, and allow one to access cryptocurrency on the blockchain.
All cryptocurrency wallets provide you with a public key and a private key. The public key is published on the blockchain and shows other participants what address belongs to you, and this is also how they’ll send you cryptocurrency. The private key is used to send cryptocurrency to other addresses from the coins available in your wallet, signing the blockchain in the process.
One of the most important distinctions between different cryptocurrency wallets is how they’re accessed by users. This concept is split largely along a single line, with software wallets on one side and hardware wallets on the other. Neither is a poor option, but they are not the same, and so making the right decision about which to use will alter your experience.
What Are Software Wallets?
A software wallet is essentially a program that you download onto your computer or mobile device. It might be browser-based, an application that must be installed and updated periodically, or even a basic wallet hosted by your favorite exchange.
Referred to as “local wallets” also, software wallets typically prompt you to install an encrypted software, create an account with a username and password, and then pick a long-tail recovery phrase. You’ll need to write this down and keep it somewhere safe, because if you forget your password or lose your computer, the code will enable you to recover your wallet.
To use a software wallet one will need to input their username and password, and sometimes a PIN or 2FA authenticator code if they so choose. Accordingly, software wallets are very accessible and provide relatively quick, safe access to your funds.
There are some slight exceptions. An exchange wallet is an always-online local wallet with less protective capabilities, namely that you don’t control your wallet’s private key. In return for trusting the exchange operator with your money, you can instantly deposit and withdraw from the exchange without going through the processes required by a standard software wallet.
If the exchange is hacked, however, there is no chance for recovery. Also, a major flaw of software wallets is that they’re always connected to your computer, and therefore the internet. This makes them susceptible to malware and viruses that might install keylogging or screenshotting programs meant to steal your information and money.
Software Wallet Pros
- Relatively safe, encrypted storage
- Faster access to cryptocurrency
- Lightweight, simple applications
Software Wallet Cons
- Connection to the internet is a vulnerability
- Beware cryptocurrency wallets that don’t give you private key access
What Are Hardware Wallets?
Hardware wallets are aptly named, because each is a device separate from your computer. Accordingly, the private and public keys stored on a hardware wallet are more secure, because they never show up on your computer’s screen or hard drive, and remain on the device itself. This covers up the flaws in software wallets but reduces convenience accordingly.
For example, hardware wallets often require a PIN and recovery phrase to access, and need to be connected to the computer via USB to deposit or withdraw. This makes using them more involved, and increases the barriers to access that you must tolerate before being able to use your funds. Hardware wallets like the Trezor or Ledger Nano come with a custom wallet software, which requires that you sign in via your connected device.
Some caution must be taken with hardware wallets, because both the recovery phrase and the device itself are physical. In the event of catastrophe during which both are destroyed, you stand to lose your entire cryptocurrency net worth, whereas a software wallet can be logged into the blockchain from anywhere (though this is less safe).
Hardware Wallet Pros
- Safe cold storage for cryptocurrency
- Easy to use interface
- Support for many cryptocurrencies
Hardware Wallet Cons
- Risk of total loss if recovery paper and device are destroyed
- Slow to use if you access coins frequently
Picking a Cryptocurrency Wallet
If you do your research, keep a clean computer, and use wallets as they’re intended, you’ll likely have no troubles. Hardware and software wallets are both suitable for different types of investors and traders, with hardware wallets being preferred by long-term investors and software wallets by those who trade more frequently. At the end of the day, the most important thing is to find a wallet that you enjoy using and that keeps you safe, and both hard and soft wallets have multiple excellent options available.
To learn more about available wallet options, take a look at our crypto wallet reviews to uncover suitable storage options.