Wallets in the cryptocurrency world are programs or devices that allow users to store their cryptocurrencies. Mainly there are two types of cryptocurrency wallets software and hardware. While the discernment between each other is given in the title itself, they both have several advantages and disadvantages. You need to be aware of both crypto wallets to know what is best for you.
What are Crypto Wallets?
Table Of Contents
- 1 What are Crypto Wallets?
- 2 Software Wallets
- 3 Hardware Wallets
- 4 Pros and Cons of Software Wallets
- 5 Pros and Cons of Hardware Wallet
- 6 How to Choose Your First Crypto Wallet
- 7 How to Use Crypto Wallets
- 8 Crypto Wallets Safety Tips
- 9 Conclusion
Cryptocurrencies are virtual assets that exist online. You need private and public keys to the cryptocurrency to access them. The public key is available to anyone like an email ID, whereas the private key is kept secret like the password to the email. Devices or software that allow users to store their keys and the address of the cryptocurrency are called crypto wallets.
Anyone who has the crypto address and the private key will have access to the cryptocurrency associated with that address. The keys are either stored locally on your device or on third-party online servers such as exchanges. Based on the way the data is stored, wallets can be categorized into custodial and non-custodial wallets. Let’s explore more about them:
1. Custodial Wallets
In custodial wallets, you are giving complete custody of your cryptocurrency to a trusted third party such as exchanges. This means that the keys in custodial wallets are stored on the servers of the platform you are using like saving your photos on a cloud storage.
It helps users to manage their cryptocurrencies better and enables them to access them on various devices. This means that as long as you can log in to your wallet, you do not have to worry about losing your cryptocurrency. However, custodial wallets are very risky and are prone to digital attacks.
Top custodial wallets:
- Cinbase
- Bybit
- Binance
- Coinbase
- Cash App
2. Non-Custodial Wallets
Non-custodial wallets or self-custody wallets are a type of cryptocurrency wallets that allow users to store and access their cryptocurrency without using an intermediary. In non-custodial wallets, the complete control of the cryptocurrency owned is given to the user.
So, users need to make sure that they keep it safe. If the device you choose to install a non-custodial wallet gets stolen or misplaced, you will potentially lose your cryptocurrencies with it. However, many modern non-custodial wallets provide users with a recovery phrase, or “seed phrase” which can be used in case the wallet gets destroyed, lost, or deleted.
Non-custodial wallets can be mobile apps, hardware wallets, or paper wallets. They are a good option for more experienced crypto traders and investors who can take on the responsibility of keeping the keys safe.
Top non-custodial wallets:
- Best wallet
- Exodus
- Ellipal
- Zego
- Ledger Nano
The wallets can be mobile applications, web extensions, other software programs, or USB devices. While wallets that need dedicated hardware devices are called hardware wallets, wallets that can be installed on smartphones and computers are called software wallets.
Also Read: How To Buy Bitcoin For Beginners?: Comprehensive Guide
Software Wallets
Cryptocurrency wallets that can be downloaded to your devices are known as software wallets or digital wallets. Most of the software wallets can be installed and used on a variety of devices including smartphones, computers, and tablets. It offers a convenient and easily accessible way to manage your cryptocurrency possession.
Since software wallets are usually connected to the internet, they are also known as hot wallets. The internet connectivity of software wallets allows users to easily use cryptocurrencies for various applications including buying, selling, trading, and interacting with decentralized applications without using physical devices.
Top software wallets:
- Garuda wallet
- Exodus
- Electrum
- Mycelium
- Coinbase wallet
Hardware Wallets
Hardware wallets are specialized USB devices specifically designed for safely storing cryptocurrency keys offline. You can connect the device to your computer when you need to make transactions or to withdraw your crypto from other wallets and disconnect securely after use.
They do not connect to the internet on their own, making it most safe from cybersecurity threats. However, it is a less convenient way than software wallets, but that is a small price you have to pay for security and peace of mind. Mainly there are three types of software wallets mobile wallets, desktop wallets, and web wallets.
Top hardware wallets:
- KeepKey
- Trezor
- Cypherock X1
- CoolWallet Pro
- BitBox02
Pros and Cons of Software Wallets
Software wallets are easy to use and are a better option for storing cryptocurrencies that you actively trade. But to decide whether software wallets would be good for your specific needs, you need to know its pros and cons.
Pros:
- Convenience and ease of use: You can easily download software wallets to your phone or computer and start using them without having to buy specialized devices.
- Cost-effective: Usually software wallets cost less than what it would cost to buy hardware wallets.
- Mobility: Users can rely on software wallets for everyday transactions especially if they travel a lot.
- Beginner-friendly: Software wallets are better for beginners in the cryptocurrency market, because of their easy-to-use interface.
- Additional features: software wallets not only store cryptocurrencies but can also be used for linking decentralized applications, and allow you to conduct buying, selling, and trading of cryptocurrencies directly.
Cons:
- Security threats: Although internet connectivity of software wallets is one of its advantages, it makes the wallets susceptible to viruses, scams, and hackers.
- Loss of control: Most of the software wallets are non-custodial wallets that store the private keys on the respective company’s server. This gives the company complete control over its cryptocurrency and exposes it to the threats that the company may face.
- Potential loss of access: You may lose access to your cryptocurrency if you forget your login information to the wallet.
Pros and Cons of Hardware Wallet
Now, let’s explore the pros and cons of hardware wallets in the same way, before finalizing a decision on what fits your needs the best.
Pros:
- Better security: The major advantage of using hardware wallets is that they can keep your private keys offline and away from possible online threats.
- Always in control: Hardware wallets give users complete control of their cryptocurrency, no one can access them without your active approval.
- Supports various digital assets: Depending on the hardware wallet you choose, it can support a huge range of digital assets including cryptocurrencies and NFTs.
Cons:
- Expensive: When compared to software wallets, hardware wallets may be expensive. This can be due to the physical construction and the security features it can offer.
- Less convenient: Since hardware wallets are physical devices, active traders may have to carry them with you especially if you are on long vacations.
- Hard to use: Hardware wallets may seem hard to use especially for beginners. They require a level of technical knowledge to set up and use.
- Vulnerable to physical damage: Hardware wallets are susceptible to physical damage and getting lost. If the user loses their hardware wallet and forgets their recovery password, they will lose access to their cryptocurrency permanently.
How to Choose Your First Crypto Wallet
We have seen what hardware and software wallets are with their pros and cons. So, you already know that hardware wallets stand for security, while software wallets offer better convenience and ease of use.
To select a cryptocurrency wallet, you should first evaluate what your needs are. For example, if you are looking to store small amounts of cryptocurrency to be used for active trading and use in dApps, then it is better to stick with software wallets. However, if you’re opting to store large amounts of cryptocurrency long-term, you can go for hardware wallets.
To better understand the differences between software and hardware wallets here is a comparison table:
| Features | Software Wallets | Hardware Wallets |
| Accessibility | Easy accessibility through the internet | Need specialized hardware device |
| Security | Lower security that may be susceptible to online threats, viruses, and hacking | Immune to online threats and online theft |
| Cost | Free/low-cost | Usually cost about $40 – $200 |
| Mobility | Offers high mobility | Low mobility, requires carrying a physical device |
| Convenience | High | Low |
| Storage | Internet-connected (hot storage) | Offline storage (cold storage) |
| Setup | Easy to set up | Can be hard for beginners |
| Private key control | Often managed by third parties | Direct ownership |
| Vulnerabilities | Vulnerable to software issues and malware | Vulnerable to physical damages or loss |
| Compatibility | Supported in a range of devices including computers and smartphones | Limited compatibility |
| Use case | For small amounts needed for day-to-day use | Suitable for storing large amounts long-term |
| Supported coins | Usually supports a wide range of digital assets but may vary by wallet | Supports multiple cryptocurrencies, varies by model |
How to Use Crypto Wallets
After selecting what crypto wallet you would like to use, you can start using it for storing, managing, and trading cryptocurrencies. Let’s see some of the common steps involved in using software crypto wallets and hardware crypto wallets respectively.
Step-by-step guide for using software wallet:
1. Pick a wallet
There are a range of wallets available today. Choose a crypto wallet that is compatible with your device (mobile app, desktop software, or web app) and proceed to download it.
2. Create a new account
Create a new account and write down the recovery phrase. A recovery phrase is a random group of words that are needed for recovering your cryptocurrency if the wallet gets accidentally deleted or you lose your device.
3. Keep the recovery phrase in a safe place
It is important to keep your recovery phrase safe and secure in a location only you would know. It is better to keep the device your crypto wallet installed device and the paper written with the recovery phrase and different locations.
4. Transfer crypto
Now that you have completed setting up your crypto wallet, you can start transferring crypto from exchanges or other wallets. To transfer crypto from an exchange, you may have to do additional verifications such as KYC.
Step-by-step guide for using a hardware wallet
1. Choose the wallet
When it comes to a hardware wallet, you need to do a thorough study about the device’s compatibility with your computer or smartphone, supported cryptocurrencies, affordability, and other features such as the display and interface specifications.
2. Purchase the wallet
You can purchase hardware wallets from the official website of the company or popular retail stores such as Walmart or BestBuy. Once you receive the wallet, power it on. You may have to set a PIN to use the wallet.
3. Install the software
The hardware wallets may require you to use specific software for connecting them to exchanges and other crypto wallets. When setting up a new account on the software, remember to write down your seed phrase and store it in a safe place.
4. Connect your device
Hardware wallets can be connected to other devices such as computers through a USB cord or WiFi. Check the usage instructions to connect your crypto wallet to your computer.
5. Add crypto to your wallet
After connecting your hardware crypto wallet to your computer, you can transfer cryptocurrencies from exchanges, or other wallets straight to the device.
Crypto Wallets Safety Tips
As with any other financial sector, the cryptocurrency market is also filled with scams and possible threats. Here are some of the possible things you can do to protect yourself from such threats and secure your crypto possessions:
- Set unique passwords that include numbers, and special characters. Do not reuse passwords and never use personal information such as DOB as a password.
- Do not save your passwords on your browsers or other vulnerable locations
- Use multiple wallets and store your possessions in fragments to reduce risk.
- Use separate wallets for different activities such as airdrops, or trading to minimize risk.
- Use dedicated devices for cryptocurrency transactions and keep them updated with the latest security patches.
- Always ensure you are entering your private keys in the correct website by verifying the URL.
- Don’t fall for phishing attempts and never reveal your private keys to anyone.
- Only store an amount of cryptocurrency you can afford to lose on your cold wallets.
Read More: Step-By-Step Guide To Mining Bitcoin At Home
Conclusion
Cryptocurrency wallets store the private keys needed for accessing the cryptocurrency. Majorly there are two types of crypto wallets, software and hardware. While most software wallets are custodial wallets, hardware wallets are non-custodial.
They both have their advantages and disadvantages. In this article, we have explored the pros and cons of hardware and software wallets in detail. We have also explored some safety tips for using crypto wallets and cryptocurrency in general.
