Hardware vs Software Wallet – What’s the Difference?

By Julia Cook
Published Aug 15th, 2022
Hardware vs Software Wallet – What’s the Difference?

Crypto wallets are an essential element in the cryptocurrency space. They allow the user to securely store and trade their cryptocurrencies by storing them in a location that is only accessible by means of a private key. A wallet is something like a bank account or regular wallet, in that it allows the user to securely store their cryptocurrencies when they are not using them. There are two main types of crypto wallets, namely hardware wallets and software wallets. Software wallets are also known as ‘e-wallets,’ ‘digital wallets’ or ‘hot wallets.’ We’ll be comparing hardware vs software wallet.

Check out our article on the Top Bitcoin Wallets.

More about hardware wallets

Hardware wallets are external devices that enable the user to store their e-wallets’ private keys offline. They are one type of cold wallet, the other being a paper wallet. A cold wallet is an offline crypto wallet, while a paper wallet is a type of crypto wallet that encrypts both the wallet address and wallet private key as a QR code that is printed on a piece of paper. Although it is obviously impossible to hack a paper wallet, the drawbacks are that if it falls into the wrong hands, the contents can easily be transferred to another wallet. It is also easily destroyed, so the owner will need to be extremely careful about how they store it.

On the other hand, a hardware wallet is a password-encrypted device that is specifically designed for storing software wallet private keys, making it more secure than storing the private keys on a text document on a USB device. The three main strengths of a hardware wallet are that the private keys are stored offline, it is password protected and it is more durable than a paper wallet.

This means that it is only at risk when it is plugged in, and even then, hacker would need to be crack the password be for they could access the private keys. The downside to this approach is that if the password or device itself are lost, or the user fails to many password attempts, then all of that data will be lost forever. It is therefore best to keep a backup somewhere else. However, they are also more inconvenient than other wallets, as they require more steps to perform transactions, and the cryptocurrency stored on those private keys cannot be accessed without the device either.  

More about software wallets

Software wallets are also known as ‘digital wallets’, ‘e-wallets’ and ‘hot wallets.’ They require the internet to work. They are downloaded onto the hard drive of the digital device, thereby allowing the device access to a blockchain (or blockchains) and the cryptocurrencies associated with it.  Software wallets allow the user to tore and perform transactions off-chain which speeds up transaction time.

There are three main types of software wallets, namely mobile, desktop and online wallets. The first two types require the user to download the software onto their device while the latter is only accessible online. The types that are downloaded onto devices are more at risk of hacking and trojan attacks that software wallets that are purely online, although if an online wallet is connected to a cryptocurrency exchange, which would also make it more at-risk than an unaffiliated online wallet.

Although software wallets are more practical since they can be easily accessed from their associated device, this is also what makes them more at-risk of attacks from adversaries than with hardware wallets. This is why many cryptocurrency traders feel that it is important to get a hardware wallet to connect their software wallet to. This is because since the private key to the software wallet is stored offline on the hardware device, it makes it that much harder for the adversary to access the private key and hack the encrypted password.

Hardware vs Software Wallets

HardwareSoftware
OfflineOnline
Stores keysStores cryptocurrency
ExpensiveFree
More secureLess secure
Requires access to hardwareCan be accessed anytime
Good for long-termGood for short-term
Good for storing large amounts of cryptoGood for storing small amounts of crypto
TangibleIntangible
Requires a software walletIndependent