Glossary / Wallets & custody
Software wallet
Also known as Mobile wallet, Desktop wallet.
- Definition
- A software wallet is an app on a phone or computer that holds your keys in that machine's storage and signs transactions with the same processor that runs your browser.
Most people's first wallet is one of these, and that is a reasonable place to start. The category is old and well tested: Electrum has been maintained since November 2011 and still ships releases. What varies between products is not the cryptography but the surface area, because an app inherits every weakness of the operating system underneath it.
How it works
A software wallet keeps its key material in an encrypted file and unlocks it with a password or a device PIN when you sign. On mobile the encryption key is usually held by the platform keystore, so the secret is protected by the same hardware that guards your screen lock, which is a real improvement over a plain file on a laptop.
Where the wallet gets its data is the second design decision, and the one nobody reads about. Some apps connect to your own node, some to public Electrum servers, and some to the vendor's backend. That server learns which addresses you asked about, which is enough to reconstruct your balance and your payment history, so the privacy of a software wallet is set mostly by this choice rather than by anything on your screen.
Being software does not force a wallet to be hot. The same program installed on a laptop that has never joined a network, moving unsigned and signed transactions on a memory card, is a cold signer. Sparrow and Electrum are both used that way, and Bitcoin Core will happily run a wallet with no network at all.
Where you see it
Software wallets come in three shapes that cover almost everything. Mobile apps handle spending, receive payments over Lightning, and live on the device most likely to be lost or infected. Desktop apps such as Electrum, Sparrow and the Bitcoin Core wallet handle coin control, fee bumping and multisig, and are what most people use when a transaction needs care. The same desktop apps double as coordinators for hardware wallets, in which case the software holds no keys at all and behaves as a watch-only front end.
The realistic threat is a fake copy rather than broken cryptography. Search advertisements, app store clones and pushed "updates" have all been used to distribute wallets that look right and forward your recovery phrase somewhere else, and a joint FBI, CISA and Treasury advisory in April 2022 documented trojanized cryptocurrency apps built for exactly this purpose. Download from the project's own domain, check the signature or hash the developers publish, and never restore a phrase into an app that arrived through a link someone sent you.
Judge a wallet on three checks before you trust it with money. Is the source public, so bugs can be found by people who do not work there. Does it release reproducible builds, so the binary matches the source. And can you point it at your own node when you eventually run one, because a wallet that cannot is a wallet that will always report your balance to a stranger.
Software wallet vs hot wallet
Almost every software wallet is hot, but the two terms answer different questions. Software wallet describes the form: an app rather than a dedicated device. Hot describes the state: keys on a machine that is online when it signs. The overlap is close enough that people use the words interchangeably, and the gap shows up in exactly two places. An air-gapped laptop running Electrum is a software wallet that is not hot, and an exchange account is hot without being your wallet at all.