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 which 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 differences between them.

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

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. 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 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.

In other cases, if you opt to trade via a CFD broker such as eToro or Plus500 you wouldn’t need to worry at all about having a wallet due to the nature of CFD trading.

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.

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