Hardware Wallets vs. Software Wallets: Which Provides Better Security?

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Many people choose to store their cryptocurrency on exchanges like Binance, Gemini and Coinbase. This is a bad idea, and circumvents the entire purpose of blockchain technology that puts you in control of your own assets. Exchanges are targeted by hackers, and your funds do not actually belong to you until you transfer them to your own wallet and the public ledger is updated with your address.

If you are planning to use Bitcoin you need a Bitcoin wallet or else you’ll not receive, store or spend Bitcoin. The same would apply to any other cryptocurrency you own. The wallet acts as a personal interface to the public ledger, in the same way an online bank account acts as an interface to the conventional monetary system. There are many options, including software and hardware wallets, and each has its advantages and disadvantages.

Generally, wallets come in a few varieties:

  • Hot Wallet – accessible from any web portal, generally very convenient but the most easily hacked
  • Cold Storage Wallet – stored offline, less accessible to hackers but typically has enormous storage requirements for the entire blockchain, and inconvenient and cumbersome backups are necessary, in the event of hardware failure, fires and other unforeseen circumstances
  • Paper Wallet – a printout or barcode of your private and public keys. They’re safe as long as they remain in your sole possession. If the paper is lost or damaged (laundry and fires come to mind), then you’re out of luck unless you’ve got another copy stored somewhere
  • Hardware Wallet – generally a cold storage wallet that generates keys on demand while making transactions.

Digital wallets generally have private keys which are codes that enable you to use your digital currency. It becomes a challenge to have different wallets for every currency you own. As a result, people often look to solutions that enable them to store multiple currencies in the same wallet.

Software wallets are generally PC or mobile apps. They generally have no up-front costs for the software, and are easy to acquire and install. Hardware wallets are generally small USB devices, similar in size and shape to flash drives.

Jaxx is a multi-asset software wallet that stores Bitcoin and altcoins. It’s convenient because it supports at least 13 digital currencies, making it very popular and versatile, supporting not just Bitcoin, but also Tether, Monero, Ripple and other popular currencies.

Jaxx allows users to export private keys and transfer Bitcoin or altcoins from paper wallets. Jaxx is open source, meaning that it is freely available to anyone willing to review its code. It is free to download to your desktop or mobile device but there is an applicable transaction fee every time you move funds in and out of your wallet. In addition, there are security risks. A report from Vx Labs revealed a major security bug with Jaxx, where users have reported lost funds. Another way to hack a software wallet is for a piece of malware to install a key logger on your machine, or to otherwise gain access to your computer when it’s attached to the internet. These are common techniques used to steal passwords and credit card numbers, and it’s only a matter of time before they become more popular in stealing your crypto.

Trezor is another hardware wallet, specific to Bitcoin, and has been around since 2014. Its security features don’t tamper with usability, making it user-friendly. A more recently developed hardware wallet is Ledger Nano S. It looks like a USB drive that connects to a typical USB port and only starts up when connected to a computer or mobile device. The Ledger is smartcard-based, where its cryptographic procedure scans for integrity once it’s powered on. Nano’s OLED screen and two side buttons provide effective checks for confirming transactions.

With Ledger Nano S you store your private keys offline and you don’t have to worry about your coins’ security every time you surf the web as you would with a software wallet. Once it’s unplugged, it’s secure. So, you only plug it in when you make a transaction, similar to how you might swipe a credit card. Nano S supports Bitcoin (BTC), Ripple (XRP), Dogecoin (DODGE), Litecoin (LTC), Dash and STRAT among others.

The disadvantage to hardware wallets is their price. You might pay in the $100 range for a good one. However, transactions are generally free, so if you’re moving a lot of currency back and forth, it will probably save you money in the long term, versus software wallets that charge you extra for every transaction.

You can generally back up your hardware wallet with a passphrase, which consists of a long list of random words that serves as a coded version of your private key. Similar to a paper wallet, you’ll want to keep a copy somewhere safe, where it cannot be accessed over the internet, damaged or lost.

We like hardware wallets. They’re regarded by many as the safest method for storing digital currencies, they’re easy to use, and generally after the initial investment, they’re free to use.

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