Why use a hardware wallet over software wallet? Benefits and trade-offs
Back in 2018, Bitcoin’s all-time high was in the $20,000 ballpark. Then, it plummeted below the $6,000 mark, and everyone was ready to give up on cryptocurrencies. Less than three years later, we’re witnessing another bull run that has recently hit a record Bitcoin price of $60,000.
Every time a bull run happens, we see a spike in new adopters and enthusiasts who don’t want to miss out on the opportunity. Naturally, everyone wants their cryptocurrencies safe, so considering the available storage options goes without saying.
Hardware wallets are the safest Bitcoin storage method that’s impervious to hacks for the most part. Here’s more about these devices.
How it used to be
Basically, there are software and hardware wallets. Software wallets are convenient, easy to use, relatively safe, and completely non-physical. On the other hand, hardware wallets come in physical form, are more complicated to use but provide the user with complete security, as long as they don’t lose the actual device or the mnemonic seed.
In the past, the biggest downside of hardware wallets was ease of use. And, frankly, it remains the biggest problem to this very day. Hardware wallets will always be less convenient to use than software wallets (at least for the foreseeable future). But they’re much more straightforward to use these days than they used to be, and they offer the degree of protection that a software wallet would never be able to.
How does it all work?
To understand the essence behind Bitcoin wallets, you need to know how Bitcoin works.
The most important thing to recognize about cryptocurrencies is that they aren’t centralized. In other words, there isn’t a central financial institution that controls Bitcoin. Cryptocurrencies rely on the blockchain technology to record the transactions. A blockchain works like torrents – it’s a ledger that thousands of independent computers store and update.
Bitcoin transactions take place using public and private keys. Simply put, the public key is your address that people who want to send you coins / tokens enter. The private key is the address which gives access to your crypto. If someone gets hold of your private key, they also access your funds.
Storing this private key safely is the pillar of crypto security. This is why many software wallets resort to various means of protection. However, a hardware wallet stores your key on a physical device, which automatically makes them safer than software wallets.
To understand the benefits of using a hardware wallet, you need to understand the different crypto wallet types. There are two crypto wallet types available out there: software and hardware wallets.
Software wallets are pieces of software used to store the information about your crypto funds that’s necessary to access them. You have online software wallets and desktop software wallets. Online wallets are either website-based (you go to the wallet’s website, log in, and use it) or extensions (you add an extension to your browser for example Metamask).
With website wallets, you might be exposed to various phishing scams. Extensions offer more protection in this department. Either way, these wallets are prone to various hacks.
Although desktop software wallets are also prone to hacks to an extent, they are safer than their website and extension counterparts. Plus, some desktop wallets are accessible when offline, which means that you can access your funds without connecting to the internet.
Software wallets vary in degrees of safety, but they aren’t the safest option around.
Hardware (Physical) Wallets
When people talk about hardware crypto wallets they usually think about USB-type devices. In the main, these are the most popular hardware wallet option. However, paper wallets are also a thing.
An actual hardware wallet is a USB stick-like device that you can use to store and transfer crypto funds to another device / software wallet or exchange account. Although it’s not as straightforward as plugging it in and copy/pasting your funds, it revolves around that basic principle. While a hardware wallet is connected to a device (computer, for example), it is prone to cyber-attacks. Quality hardware wallets feature some form of protection against this, though.
A paper wallet is definitely a physical wallet. In a nutshell, it’s a piece of paper with your public/private keys and their QR code alternatives. This makes the paper wallet very easy to use. It’s also safe from cyber-attacks. However, lose the said piece of paper, and you lose all the funds stored on it. Understand the risks of paper wallet before you use one.
Benefits and Trade-Offs
A clear benefit of using a hardware wallet is safety. The safety does come at a price, though. Hardware wallets aren’t ideal for when you need to make a quick transaction; first, you’d need to plug the wallet in, access it using your credentials via a computer/mobile/tablet device, and then actually transfer the funds.
Additionally, if you happen to lose a hardware wallet or if you lose the backup recovery phrase, you lose all the funds stored using it – they are unrecoverable.
Why use hardware wallets?
It’s clear that hardware wallets come with a set of downsides. They aren’t the most convenient crypto wallet type to use, and you won’t want to use them frequently, to avoid the risk of losing them.
But should you use hardware wallets at all? Absolutely! Without a doubt. Every crypto holder should use a hardware wallet, but that doesn’t exclude the need for using software wallets.
In truth, the best way to stay safe and enjoy convenience using crypto wallets is to use them in a combination.
As a rule of thumb, you should store small “trading amounts” of money on crypto exchange platforms. A somewhat larger sum can be placed on your software wallet(s). These are safer than an average exchange wallet but are still hackable.
The bulk of your funds should be kept on hardware wallets. The safest way to go with cryptocurrencies is by using a combination of various wallet options.
Although they’re not the most straightforward crypto storage method, hardware wallets are definitely the most secure option. Using hardware wallets is recommended, no matter how large or small your crypto investment is. Be sure to store your Bitcoin the right way from the start.
Author Bio: Hitesh is a digital marketing strategist and entrepreneur with more than 15 years of experience in digital marketing, start-ups, branding, and customer acquisition strategies. Hitesh is the CEO and Founder of Reposition Group, which specialises in digital growth strategies for companies in the cryptocurrency market such as Bitamp.com.
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