What’s the Difference Between a Crypto Wallet and Exchange?

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What’s the Difference Between a Crypto Wallet and Exchange?

Cryptocurrency wallets and exchanges are two important tools that allow this revolutionary digital industry to function properly. A number of wallets and exchanges are managed by the same companies, and this sometimes causes confusion of their differences. This guide aims to explain the difference between crypto wallet and exchange as well as suggest a few alternatives for each.

Crypto exchange vs wallet

The key difference between a crypto wallet and exchange is that the wallet’s main purpose is to safe-keep your digital assets, while the exchange is there to facilitate trading from one coin to another.

With an exchange traders can:

  • Buy and sell crypto;
  • Convert fiat currency into cryptocurrency;
  • Send crypto to a wallet.

Meanwhile, crypto wallets are there to:

  • Secure your cryptos;
  • Access tokens at any time;
  • Long-term store them.

Exchanges are there to conveniently trade cryptocurrency, therefore storing Bitcoin there might be convenient for a short period of time. However, it is highly recommendable to ultimately transfer funds to a wallet where the user is responsible for securing, backing-up and managing his own funds. This is where the importance of knowing the difference between a crypto wallet and exchange comes in handy.

Difference in control

Whilst it is possible to store cryptocurrencies in both wallets and exchanges, one of the major differences between the two lies in control of your funds. With a wallet, you maintain full control over the use and transfer of funds. You decide when and where to transfer Bitcoin and other cryptocurrencies, and you keep hold of all the necessary passwords and private keys.

On the other hand, when your digital funds are kept in an exchange account, sometimes referred to as an exchange wallet, you hand out part of that overall control over to the platform.

To better understand this mechanism you only need to look at traditional money. When you’ve got cash in your physical wallet you control when, if, and how much to spend. However, if you deposit the cash in a savings account you lose some of that control, as the bank may set certain limits on your spending habits.

When determining where to keep your cryptocurrency you must look at what you plan to do with it. And here lies the main difference between a crypto wallet and exchange: it is always safer in wallets than in exchanges, as the latter may be prone to hacks, regulation or other external effects which may limit the use of your funds.

A matter of responsibility

If you are new to cryptocurrency and still learning how to invest in Bitcoin and other currencies, you might be better off keeping part of your funds in an exchange wallet. You can quickly trade digital funds and it makes the process much easier to manage and oversee. In fact, major exchanges such as Binance and Coinbase will set up your storage automatically.

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With normal cryptocurrency wallets, even the best ones such as Ledger Nano X and CoolWallet S, you are solely responsible for the security of your funds. Just like a real wallet, if you lose it or forget all the access passes, no one can help you and your funds are lost.

Your private keys are, by far, the most important component of your cryptocurrency wallets. You must ensure that you keep them safe and secure. With exchange wallets, meanwhile, the private key is kept within the platform, and if you happen to forget your passcodes there are ways to easily recover your accounts.

Without a doubt, however, once you learn how to trade Bitcoin and other currencies successfully you will want to look into getting your own private wallet. You might keep a reserve stored in an exchange wallet for daily use, but the majority of your digital funds should be stored safely in a hardware or software wallet.

Concluding Thoughts

Often confused – particularly by novice traders – one of the most crucial things to learn and understand is the difference between a crypto wallet and exchange. While it is true both can be used as tools for digital currency management, knowing how to distinguish one from the other can be a determining factor in your success or failure as an investor in the cryptocurrency world.

Choosing between a crypto wallet and exchange is one of the main decisions any trader will need to take. Both allow you to store crypto but it is really up to you to decide which will benefit you in your trading journey in the long run.

In layman’s terms, cryptocurrency investing can be equated to fiat currency trading: there are a multitude of ways where one can invest their money. The same can be said for your digital assets.

A crypto wallet is a set public or private keys. If you happen to be their owner, you automatically own any coins those keys can access. Thus, if you want full control over your cryptocurrencies, and have easy access, a cryptocurrency wallet is the route to take. Moreover, a crypto wallet tends to give its user more peace of mind since you know exactly where your assets are being stored.

On the other hand, if you happen to be an avid trader and somewhat of a risk taker who likes buying and selling digital assets, perhaps an exchange might be better suited for you. However, be warned, if an exchange fails to take the proper security measures to protect your key, it is quite possible for someone else to gain access to your funds.

Think of a cryptocurrency exchange as a stock exchange: you trade one asset for another. There are a variety of exchanges available out there, these include (but are not limited to): decentralized, wallet-less and more ‘traditional’ ones, which offer a wallet service. Examples of the latter include Bitfinex and the more popular, Binance.

Traditional exchanges let you deposit coins and leave them in the exchange’s custody, and should you decide to, you can trade the deposited amount instantaneously – without the need for a transaction. While coins purchased are credited to you on the exchange platform, unlike using a wallet, you are not entirely in control of your assets until you actually withdraw them to your own wallet. Using exchanges that also act as wallets still make you vulnerable of fraudulent activity. Worse off your account could be compromised in the unfortunate case of hacking.

The bottom line is this: if you opt for a wallet-less exchange or an exchange with a built-in wallet feature, good practice dictates that you only keep funds which you are actively trading on it. If you tend to be a trader who errs on the side of caution by buying coins and keeping them for a longer period of time, perhaps it would be wiser to withdraw said funds and transfer them to a paper or hardware wallet.

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