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Crypto wallets are used to store, send and receive popular digital currencies such as bitcoin. Most coins have a wallet of their own or a recommended third-party wallet, but how do these wallets work exactly and what’s the difference between a hardware and software wallet?

Let’s find out more:

How Does a Digital Wallet Work?

Digital wallets are generally considered to be a safer option than cryptocurrency exchanges. While one can safely store small amounts of cryptos on exchanges to carry out regular transactions, it is always advisable to use a wallet to store the remaining holdings.

Interestingly, crypto tokens themselves are not stored in the wallet. Instead, a wallet is a software program which keeps your private and public keys safe. What does this mean? Well, a private key is a secure digital code that only you should know and a public key is a public digital code linked to a certain amount of currency. In order to unlock funds, your private key must match the public address the currency is assigned to. The transaction will be recorded on the blockchain and the balance in your digital wallet will adjust accordingly.

Types of Cryptocurrency Wallets

There are many different cryptocurrency wallets with hardware and software wallets being two of the most common options. So, what’s the difference?

Software Wallets

As their name suggests, software wallets are based on computer software and are available in three formats: desktop, mobile and online.

  • Desktop Wallet: With a desktop wallet, your currency is stored on a PC or laptop. Many traders prefer this type of wallet as it offers optimum control without a third-party interface. That said; security can be an issue as it’s totally up to you to protect your coins.
  • Mobile Wallets: These wallets are accessible through an app on your mobile device and can be used anywhere. While one type of app stores your coins on your phone, the other gives you access to online storage servers. It is advisable to store a limited amount of digital currency on such wallets.
  • Online Wallets: Web-based wallets can be accessed from any device and any location. While this option is very convenient, the major drawback is that these wallets store the private keys online and are controlled by a third party, making them more vulnerable to fraud and hacking.

Hardware wallets

In contrast to software wallets, hardware wallets are designed to make your crypto storage options more secure. These wallets store private keys on a hardware device meaning you don’t have to leave your private keys on a computer which may potentially be hacked into.

Such wallets are compatible with several web interfaces and support different currencies too. All a user needs to do is plug in their hardware device to any internet enabled machine, enter a pin, send the currency and confirm the transaction. A major advantage of this type of wallet is that it is not only safe but also easy to use. Trezor and Ledger Nano S are highly popular hardware wallets. A good hardware wallet contains physical buttons, an LED screen and is capable of backing up and offering recovery of the private keys stored on it.

So, crypto holders have the option to store their holdings in different types of wallets with hardware and software options being two of the most popular.


If you liked this educational article please consult our Risk Disclosure Notice before starting to trade. Trading leveraged products involves a high level of risk. You may lose more than your invested capital.

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