Software wallets fall under the umbrella of hot storage wallets. These wallets are considered hot storage because you are able to access your digital coins quickly, and because they are easily connected to the Internet. Remember, there is a great risk of a potential hack or theft.
Now, there are some software wallets that are not always connected to the Internet and therefore, they offer some similarities to cold storage wallets. If your software wallet is installed on your computer, laptop, tablet or phone, which are usually connected to the Internet, it is not secure.
For example, if someone steals your laptop or phone, or the devices get corrupted and you do not safely secure and store your private keys, you would lose your digital currency. Another potential threat arises if someone hacks your computer and the hacker is able to get a hold of your software wallets or private keys, your digital coins could be stolen. This type of wallet uses cryptography to encrypt and therefore, secure your digital coins. Again, keep in mind your software wallet is only as secure as your device.
Now, there are three main types of software wallets: desktop, mobile and online.
Desktop wallets are software that are expected to be downloaded on a laptop or desktop computer and store your digital currency locally. One of the main advances of a desktop wallet is control. Users have complete control of their digital tokens and do not have to rely on third parties. Additionally, you’re able to easily access and use your coins. However, keep in mind since you have more control, you also have to worry about potential security threats.
For example, if your computer is hacked or your hard drive is corrupted, you could potentially lose your digital currency forever. Since some users do not want to risk being hacked, they store their cryptocurrency on desktop wallets that do not have access to the internet. That said, the coins would also be considered as a cold storage wallet.
Online wallets are also considered hot storage wallets. The wallets are web-based and users could access their digital currency from anywhere. Additionally, online wallets could be linked to desktop and mobile wallets. Although online wallets are very convenient, users have to sacrifice security. Since the website owners store the private keys, you could potentially lose your digital coins. You really have to trust the website owners to hold your coins. That in mind, if you want high-level security for your coins, you should stay away from online wallets.
Mobile wallets, as the name suggests, allows you to access your coins from your mobile device. Mobile wallets operate through an application on your device and also offers convenience. Since you are able to quickly and easily access your digital coins, you could use your coins in store and while you’re on the go.
There are two flavors of mobile wallets: ones that store locally on your mobile device and ones that provide access to online storage. The format that stores your coins locally on your mobile device is similar to a desktop wallet. On the other hand, the format that provides you access to online storage servers is similar to online wallets.
Although software wallets are easy to use, users are vulnerable to cybersecurity attacks. Therefore, if you consider storing your digital currency on a mobile, online or desktop wallet, you should be comfortable with losing the amount “stored” in those wallets.
Another way to store your digital currency is on paper.
A paper wallet is a document containing a private key and public address. The private key allows users to spend and transfer digital currency stored on the address. Paper wallets often have a QR-code so users are able to scan the code and add those keys to a software wallet to conduct a transaction.
One primary advantage of a paper wallet is the fact that the keys are not stored anywhere online, making it immune to hacks. However, if someone gets a hold of the paper wallet, you would obviously risk losing your digital coins. Therefore, you need to practice precautionary measures if you consider using a paper wallet. Keep in mind, with paper wallets your funds are only “secure” (unless someone has a copy of your paper wallet) until you use a software wallet. If your computer or mobile device, or website are comprised, your cryptocurrency could be hacked.
That in mind, paper wallets are secure, but you’re the one in charge of security. If you’re considering using paper wallets, you will need to guard your private keys and make sure your devices and computers are not compromised. If you do not want to deal with all that, one way to store your digital currency with a high-level of security is on hardware wallets.
Hardware wallets are dedicated small devices that provide an additional layer of security to other cold storage options. For example, a paper wallet is considered a cold storage option. If you recall, your funds are “secure” until you use a computer or mobile device. If your device or computer is hacked, then you run the risk of losing all your cryptocurrency.
One way hardware wallets combat this problem is the fact that some have a secure chip in them. These chips are similar to the technology found in PIN and chip payment cards or SIM cards. This means users are protected against physical attacks. Secure chips allow users to connect their hardware wallets to a computer to send your currency. You never have to input your private key on your computer. Rather, you generally would input a pin code on the hardware wallet. Therefore, if your computer is comprised, there is a lower risk that hackers could steal your coins.
Even if you lose or break your hardware wallet, you could still restore access to your digital currency on a new hardware wallet from the seed words that come with the wallet. Seed words are simply strings of random words that are used to restore your hardware wallet and access to your digital currency.
Although there are a lot of pros to owning a hardware wallet, there is one con: you have to purchase a hardware wallet. Since hardware wallets are extremely secure, the price of the hardware wallets could be a deal breaker. For example, if you are only planning to hold $100 in cryptocurrency, it probably would not make sense to purchase a hardware wallet. On the other hand, if you are planning to hold over $1K in digital coins, you probably want to invest in a hardware wallet.
Now, in order to use hardware wallets, you would need a software wallet in order to interact with the device. Generally, hardware wallets have their own dedicated software wallets. However, you could use other software wallets with your hardware wallet.
This brings us to two of the most widely-used hardware wallets: Ledger Nano and Trezor.