I've owned a Lumia 620 and currently rocking a Lumia 830, both having capacitive/hardware buttons.
Before buying my 830, I've checked the 640 and 735 out, as well as playing with my classmate's Lumia 920 and 635, all with software/on-screen buttons.
I find the on-screen buttons on the said Lumias much better since you can hide it during gaming (having used the 620 and 830, I sometimes hit the buttons and would exit the game. Once I was battling a boss in Dungeon Hunter 4, almost winning and used my last potion. Accidentally pressed the Windows button. When returning to the game, the game returns to the start menu, and when I resumed, I had to face the level from the start with ZERO potions. #sadlife), the colour follows the theme of your phone, as well as following the brightness of your display.
Capacitive buttons however, are practical. It's always there so I don't have to swipe up or down or whatever (efficiency). After owning the L620 and L830 for a few years, I've rarely had any accidental press (even during gaming!). Also, the capacitive buttons look VERY SEXY on my L830, which is why most WP enthusiast would rate the appearance of L830 highly.
My point is, both types has its pros and cons, and everything comes down to personal preference. But if you ask for my opinion, Microsoft should put capacitive buttons on the more 'Premium' devices because it makes the phone look sexier/attractive. On-screen buttons should be used in other devices as it makes the phone cheaper, thus cutting down the cost of the phone.
Also, one of the reason why this topic is trending is probably due to the leaked images of the L950/950XL. I guess it's okay to use software buttons (if you never try, you'll never know), but that bezel at the bottom is way too large compared to those in L735, 640, or 635. It makes the phone look ugly IMO.