Software Wallets

What is a software wallet, and what makes it a hot wallet?

What is a crypto wallet? – A software wallet is a digital application that allows users to store, send, receive, and manage cryptocurrency by controlling the private keys associated with their blockchain addresses. These wallets are typically installed as mobile apps, desktop software, or browser extensions, and they are described as hot wallets because they operate on devices that are connected to the internet. This constant connectivity allows transactions to be approved quickly and makes it easy to interact with decentralised applications, exchanges, and blockchain services without additional hardware.

The defining characteristic of a hot wallet is convenience rather than maximum isolation. Because it is always online, it supports fast transfers, token swaps, and seamless Web3 access, which is why hot wallets are widely used by traders and everyday crypto users. Most software wallets are self-custody, meaning the user is responsible for safeguarding the recovery phrase that controls access to the wallet. There is no central authority that can reset or recover access if this phrase is lost or compromised.

In practical terms, software wallets are best suited for active use rather than long-term storage of large balances. They form a core part of the crypto ecosystem by making blockchain participation accessible, but they require users to understand basic security responsibilities.

 Software wallets are apps or extensions that manage crypto access

Hot wallets are connected to the internet for fast transactions

Most are self-custody, placing responsibility on the user

Designed for everyday use rather than deep storage

Central to trading, DeFi, and Web3 activity

Are hot wallets safe for storing cryptocurrency?

Hot wallets can be safe when used correctly, but their security depends heavily on user behaviour and device hygiene. Because they operate on internet-connected devices, they are more exposed to phishing attacks, fake apps, malicious browser extensions, and malware than offline storage solutions. This does not mean hot wallets are inherently unsafe, but it does mean they require more attention and discipline from users.

Most real-world losses involving hot wallets occur due to scams or mistakes rather than failures of the wallet software itself. Users may be tricked into revealing their recovery phrase, approving malicious transactions, or installing unofficial versions of wallet apps. When basic precautions are followed, such as downloading wallets only from official sources, keeping devices updated, and never sharing recovery phrases, hot wallets can be used safely for everyday activity.

From a risk management perspective, hot wallets are best used for smaller balances that are actively moved or traded. Larger or long-term holdings are usually better protected in cold storage. Many experienced users adopt a layered approach, combining hot wallets for convenience with hardware wallets for security.

Safe when paired with strong security habits

Higher exposure to phishing and device-level threats

Most losses result from scams, not wallet flaws

Best for active, smaller balances

Often used alongside cold storage

What are the biggest risks of using a software wallet?

The primary risks associated with software wallets stem from social engineering and device compromise rather than the underlying blockchain technology. Phishing is the most common threat, where scammers impersonate wallet providers, exchanges, or support teams to trick users into revealing recovery phrases or signing malicious transactions. These scams often rely on urgency and appear through emails, social media, or messaging apps.

Malware is another major risk, particularly on poorly secured computers. Malicious software can interfere with browser extensions, alter clipboard addresses, or capture sensitive data. SIM swap attacks are also relevant when users rely on SMS-based security for linked accounts such as email or exchanges, allowing attackers to intercept verification codes.

What makes these risks serious is the irreversible nature of blockchain transactions. Once funds are moved, they cannot usually be recovered. This places a strong emphasis on prevention, education, and conservative wallet usage. Users who understand common scam patterns and limit permissions and balances typically avoid most problems.

Phishing targets recovery phrases and approvals

Malware exploits insecure devices

SIM swaps affect linked accounts

Blockchain transactions are irreversible

Awareness reduces most real-world risk

How much crypto should I keep in a hot wallet versus cold storage?

There is no fixed amount that suits everyone, but a widely accepted guideline is to keep only what you actively use in a hot wallet and store the rest in cold storage. Hot wallets are designed for convenience, not maximum protection, so as balances increase, so does the potential impact of a single mistake. Even experienced users can fall victim to convincing scams, which is why limiting exposure is considered best practice.

Many people compare this setup to traditional banking. A hot wallet functions like a current account for spending and transactions, while a hardware wallet acts more like a savings account for long-term holdings. This approach balances usability and security without forcing users to sacrifice either.

It is also important to review balances regularly. As cryptocurrency prices fluctuate, a wallet that once held a small amount may grow into a significant holding. Periodic rebalancing helps maintain appropriate risk levels over time.

Keep active funds in hot wallets

Store long-term holdings in cold storage

Treat hot wallets like spending accounts

Review balances as values change

Move excess funds periodically

What is the difference between a hot wallet and leaving funds on an exchange?

The main difference between a hot wallet and an exchange account is who controls the private keys. When funds are held on an exchange, the platform controls the keys and users access their balance through a login system. This is known as custodial storage. With most hot wallets, users hold their own keys and control access through a recovery phrase, which is known as self-custody.

Exchanges are convenient for trading and fiat conversions, but they introduce platform-level risks such as account freezes, withdrawal limits, or regulatory changes. Self-custody wallets remove reliance on a third party, but they also place full responsibility for security on the user. There is no customer support process to reverse mistakes or recover lost access.

Many users combine both approaches. Funds are kept on an exchange only while actively trading, then withdrawn to a wallet when not needed. This reduces dependency on any single provider and spreads risk.

Exchanges are custodial, wallets are usually self-custody

Wallets give direct control over assets

Exchanges introduce platform risk

Self-custody increases responsibility

Many users use both strategically

What is a seed phrase or recovery phrase, and why is it so important?

A seed phrase, also known as a recovery phrase or mnemonic, is a sequence of words that acts as the master key to a self-custody wallet. Anyone with access to this phrase can recreate the wallet and take full control of its funds. For this reason, it is the most sensitive piece of information associated with a software wallet.

Wallet providers design systems so they cannot access or reset recovery phrases. This protects users from third-party interference but also means there is no fallback if the phrase is lost. If a device fails or is stolen, the seed phrase is the only way to restore access. If both the device and the phrase are lost, funds may be permanently inaccessible.

Because of its importance, users should treat the seed phrase with the same care as irreplaceable documents. It should never be shared, photographed, or entered into websites. Understanding this concept is central to safe self-custody.

The seed phrase controls wallet access

Anyone with it can take the funds

Providers cannot recover it for you

Required to restore wallets on new devices

Must be stored securely offline

Where should I store my seed phrase, and what should I never do with it?

The safest way to store a seed phrase is offline, written clearly and kept in a secure location protected from loss, theft, fire, and water damage. Many users store it in a secure physical location, while others use durable metal backups designed to withstand environmental risks. The key principle is that the phrase should remain private and inaccessible to unauthorised people.

What users should never do is store the seed phrase digitally in places such as cloud storage, screenshots, email drafts, or unencrypted notes. Digital storage increases the risk of exposure through malware, account breaches, or syncing across devices. Wallet providers also warn never to enter the recovery phrase on any website or share it with anyone claiming to be support.

For added resilience, some users keep multiple physical copies in separate secure locations. This reduces the risk of permanent loss due to accidents.

Store seed phrases offline

Protect against fire and water damage

Never store as photos or cloud notes

Never share with anyone

Consider multiple secure backups

What happens if I lose my phone or computer with the wallet installed?

Losing a phone or computer that has a software wallet installed can feel alarming, but the outcome depends on whether you still have your seed phrase (recovery phrase) and how well your device was secured. In most self-custody wallets, your crypto is not “stored on the phone”, it is stored on the blockchain, and your device simply holds the keys that let you access it. If you still have your seed phrase, you can usually restore the wallet on a new device by reinstalling the same wallet app and choosing the restore option. That is why the seed phrase is the real lifeline, not the device itself.

If the device is lost or stolen, it is wise to assume it could be compromised, especially if it was not protected by a strong passcode or if it contained other sensitive accounts such as email. A cautious approach is to restore your wallet on a clean, secure device and move funds to a new wallet address, because that breaks any potential access the thief might gain later. It is also sensible to review connected apps and token approvals if you used DeFi, and to tighten security on related accounts. Device locks help, but they are not a substitute for proper backups and quick action when something goes missing.

Restore the wallet on a new device using your seed phrase

If stolen, move funds to a fresh wallet address as a precaution

Check and secure email, exchange logins, and cloud accounts linked to the device

Review connected dApps and revoke old token approvals if relevant

Improve future protection with strong passcodes, updates, and secure backups

Can I recover my wallet if I forget my password but still have the seed phrase?

In most software wallets, the password, PIN, or biometric lock is a local security layer that protects the wallet app on a particular device, but it is not the same thing as the seed phrase. The seed phrase is the master backup that recreates your wallet and restores full access to your funds on any compatible wallet app. So, if you forget your password but you still have your seed phrase, you can usually recover by reinstalling the wallet app and using the “restore wallet” option, or by restoring the seed phrase on a different device. This is exactly why self-custody wallets emphasise writing down the seed phrase during setup and storing it offline.

It is important to understand the trade-off: self-custody wallets typically cannot reset your password for you, because the provider does not hold your keys and does not have access to your wallet. That is a security benefit, but it also means your recovery process is entirely in your hands. Be cautious of websites or messages offering “wallet recovery” services, because scammers often use password panic to trick people into entering seed phrases into fake pages. The safest recovery route is always through the official wallet app, downloaded from an official source, on a device you trust.

Passwords lock the app locally, seed phrases restore the wallet globally

Reinstall and restore using the seed phrase if you cannot unlock the app

Wallet providers usually cannot reset self-custody access

Avoid “recovery services” websites, they are commonly scams

Keep seed phrases offline, legible, and protected from loss or damage

What should I do if I think my wallet has been compromised?

If you suspect your wallet has been compromised, act quickly and assume the attacker may already have enough access to cause further loss. The safest first move is to create a brand-new wallet on a clean, secure device and transfer your funds to the new address immediately. This matters because many compromises involve stolen seed phrases, malicious browser extensions, fake wallet apps, or risky DeFi approvals, and once an attacker has a foothold, delays can be costly. If you cannot move everything at once, prioritise high-value assets first, then return to mop up smaller tokens.

Once funds are secured, take a methodical approach to identifying what happened. Check recent transactions and connected dApps, and revoke token approvals you do not recognise or no longer need, because approvals can allow contracts to move tokens without requiring a fresh confirmation each time. Scan devices for malware, remove unknown extensions, update your operating system, and change passwords for your email and any exchange accounts, ideally strengthening security with authenticator-based two-factor protection. Avoid reusing the compromised wallet, even if it seems fine afterwards, because the original weakness may still exist. Prevention is the goal, but fast containment is what stops a suspected compromise becoming a full loss.

Move funds to a new wallet created on a clean, secure device

Treat the old wallet as unsafe, do not keep using it

Revoke unnecessary token approvals and disconnect suspicious dApps

Scan devices, remove unknown extensions, and update software

Change passwords and strengthen security on email and exchange accounts

How do I spot fake wallet apps, browser extensions, or scam support messages?

Fake wallet apps, malicious browser extensions, and scam support messages are among the most common ways people lose funds, because attackers focus on deception rather than breaking cryptography. The safest habit is to verify before you install or click anything. Only download wallets from the official website of the wallet provider or from trusted app stores, and double-check the publisher name, spelling, and reviews. Be wary of sponsored ads and lookalike domains, because scammers often pay to appear above legitimate results and use near-identical names to confuse users.

Scam support messages usually follow predictable patterns: urgency, fear, and a request for sensitive information. Legitimate wallet providers do not need your seed phrase, and they do not ask you to “verify” it to fix an issue. Support scams are particularly common on social media and messaging platforms, where impersonators copy logos and pretend to be official staff. Another warning sign is being pushed to connect your wallet to a site to “resolve” a problem, or to sign a transaction as a “security check”. If you are unsure, stop, go directly to the official help centre through the wallet’s website, and never rely on links sent to you. If anyone asks for your seed phrase, treat it as a confirmed scam.

Download only from official wallet websites and verified app store listings

Ignore urgent messages claiming your wallet is at risk

Never share or type your seed phrase, not even with “support”

Watch for lookalike domains, misspellings, and sponsored ad traps

Verify via official channels, not links sent in messages

What does approving a transaction mean, and why do token approvals matter?

In decentralised finance, approving a transaction often refers to granting a smart contract permission to spend a specific token from your wallet. This is different from a normal transfer, because an approval sets an allowance that a contract can use later when you perform actions such as swapping, staking, lending, or providing liquidity. In many dApps, you will first approve the token, then complete the main action, such as the swap or deposit. The approval step is a necessary part of how many token standards work, but it can also create risk if users do not understand what they are agreeing to.

Token approvals matter because the allowance can persist beyond a single transaction, and in some cases, dApps request unlimited approvals to reduce friction for frequent users. Unlimited approvals can be convenient, but they increase exposure if the approved contract is malicious, if you connected to a fake dApp, or if a legitimate contract later becomes vulnerable. That is why it is good practice to keep allowances as tight as possible, approve only what you need, and regularly review and revoke old approvals you no longer require. If you use a hot wallet for DeFi, learning approvals is one of the most valuable security skills you can develop, because it reduces “silent” risks that can sit unnoticed for months.

 Approvals grant a contract permission to spend your tokens

Allowances can remain active after the initial transaction

Unlimited approvals increase risk if something goes wrong

Review and revoke old approvals you no longer need

Approve only trusted dApps and check what you are signing each time