Hardware / Software Wallet
Types of crypto wallets
Crypto wallets fall under two general categories: software wallets and hardware wallets. Software wallets are simply desktop programs or browser extensions that make it easy for people to send, receive, and store crypto. Hardware wallets serve a similar purpose but are physical devices that can be plugged into a computer.
Software wallets are sometimes called 'hot' wallets because the funds are kept online. Hardware wallets keep private keys held offline, or in 'cold' storage.
Hardware wallets
A hardware wallet is a small device that can store crypto offline. 'A hardware wallet keeps your keys off of your phone or computer,' says Dietz. 'Usually, you plug in the hardware wallet from a USB port. This is much more secure because all of the signing happens off of your computer.'
The typical hardware wallet costs around $100, give or take. These tend to be slightly more complicated to use than software wallets.
Most hardware wallets interact with a computer in one of three ways:
A web-based interface
A company-created app
A separate software wallet
Software wallets
A software wallet is a computer program or mobile app that holds private keys online. Software wallets are unique to each cryptocurrency while hardware wallets often support multiple currencies (more on these differences later).
'[Software wallets] can either be used on the web, in which case they are custody wallets, which aren't completely secure. Or they [can come] in the form of apps that can be installed on a phone/laptop, in which case the private keys are stored on the local device,' says Dar. 'These may be connected to the internet, again making them less secure.'
When using software wallets, be sure to create backups on a regular basis. If a problem occurs with your web browser or hard drive, you could lose the private keys to your wallet, resulting in permanent loss of funds.
The three main types of software wallets are:
Web-based wallets, like MetaMask, which work as a browser extension and can send ETH transactions, making it easy for users to interact with things like decentralized applications and decentralized finance (DeFi) protocols.
Desktop wallets, such as the Electrum wallet, that can be used on a desktop or laptop computer.
Mobile wallets, such as the Blockchain.com wallet, that allow users to store crypto, send/receive transactions, and 'sweep' the private keys of an existing wallet into the app by scanning a QR code on their smartphones.
Each type of crypto wallet has its own use case depending on the goals of the user, although they all accomplish the same things.
Pros and cons of crypto wallets
Self-ownership
User responsibility
Quick & easy access
Learning curve
Censorship-resistant transactions
Chance of making irreversible mistake
Some pros of using non-custodial crypto wallets include:
Self-ownership of money. If you hold your own private keys, then that crypto belongs to you and only you. By comparison, money in a bank is technically property of the bank.
The ability to send transactions to whomever you like, whenever you like. Decentralized cryptocurrencies are censorship-resistant because no one controls the network, making it hard for anyone to stop transactions.
Some cons of using crypto wallets include:
User responsibility. Becoming your own bank means you have to assume 100% liability for anything that goes wrong.
Learning curve. Using a crypto wallet requires a basic level of computer knowledge in addition to getting familiar with a new kind of financial ecosystem.
The bottom line
A crypto wallet is like a crypto bank account that only you control. Software wallets are built for convenience while hardware wallets are built for security.
To get started, you should research what wallet types work best for you. Research the options available to you, including cost and security.
Those interested in going a step further can invest in a hardware wallet since doing so is one of the best ways to take ownership of your own private keys. Learning to use these might take a little longer for beginners, but doing so could be worth it for the added security, especially for those holding large sums of money.
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