You will hear the terms crypto wallet and crypto exchange a lot once you start exploring the world of digital currency. These terms are also what you will encounter when you first learn how to purchase or sell coins and keep them safe.
Although exchanges and crypto wallets are both essential tools for trading, they serve different purposes in the crypto ecosystem. However, it can be confusing. What distinguishes an exchange from a cryptocurrency wallet? Which one is more secure if you can use both for crypto storage? How does it all work?
What's a crypto wallet?
A crypto wallet can be described as a software, app, or physical device that allows cryptocurrency owners access to their digital assets from one location.
It can be compared with a regular wallet.
Although we store our cash in regular wallets, crypto wallets do not store cryptocurrency. Instead, stores the keys that are linked to blockchain transactions. Also, they store records that show your history of cryptocurrency trading.
A crypto wallet is an online bank that allows you to track your balance and access digital assets.
How does a crypto wallet work?
There are two types:
-
Hot wallets: are wallets with internet connectivity. You can use the desktop, web (crypto-exchange), or mobile device wallets (apps).
-
Cold wallets: are physical devices that protect your digital assets offline (hardware, paper wallets).
A crypto wallet has two keys: a public and a private key. These keys are unique to each hardware wallet and allow you to interact with the blockchain network.
Both keys are extremely important. At the same time, the public key helps to identify you on a blockchain (think about it as your bank account number, showing you're the one sending or receiving funds), and the private key acts more like a password. It allows you to access your wallet and sign crypto transactions and provides proof that you're the owner of the public key.
If someone takes your private key, they will access your data. The same applies to losing your private key. You can't restore it, and your crypto wallet is not accessible.
You can also use a wallet address to receive funds. It is a shorter version of your public keys.
Everything is easy from here. Direct the sender directly to your wallet address (or a QR code) to receive any digital asset. You can spend cryptocurrency with your wallet by directing a certain amount to another wallet address.
What's a crypto exchange?
You can use a crypto exchange to track the cryptocurrency market, exchange cryptocurrencies, buy, trade, or exchange them, and convert fiat money into digital currency (and vice versa).
There are three types:
-
Centralized Exchanges (CEX) are the most popular platforms for cryptocurrency trading. A central organization governs them (e.g., Errna).
-
Decentralized Exchanges (DEX) An alternative to centralized exchanges that rely on automated processes without the central presence (peer–to–peer trading).
-
Hybrid cryptocurrency exchanges (HEX). It's a mixture of both two.
No matter which one you choose, remember that each exchange has its own "definition." This means that every exchange may have different currencies and transaction fees. It might take longer or shorter for your transaction to move forward.
What is a crypto exchange?
Crypto exchanges can be described as a stock exchanges but are also where buyers and sellers meet.
You can buy and sell cryptocurrencies such as Bitcoin (BTC), Ethereum(ETH), Tether ($USDT), Solana ("SOL"), and other cryptocurrencies once you have created an account on the cryptocurrency exchange platform. You can also purchase fiat currency using crypto, buy crypto coins with regular money, and convert one digital currency to another.
Many crypto exchanges allow you to store digital assets in your native wallets. To store all your NFTs and crypto, Errna allows you to use the Errna wallet.
This is where we reach the question: How does crypto trading differ from crypto storage in a crypto wallet?
Types of wallet
-
Physical wallet: Cold wallets, also known as physical crypto wallets, are the most basic and secure type of cryptocurrency wallet. These physical devices store your private keys offline and are not connected to the internet.
-
Digital Wallet: Digital wallets allow you to store, send, and receive cryptocurrency to an address. This is typically a string of numbers and letters different from your mobile wallet or credit card number. It is simple to set up a digital wallet. You can open a wallet application on your phone or tablet. A online wallet can make easy withdrawals, purchase coins in-app, and receive alerts when funds arrive at its address.
-
Desktop Wallet: Any Bitcoins stored on an exchange would be considered desktop wallet crypto. This is because they require internet connectivity, even if they're offline at the time or place they receive funds. Although desktop wallets offer greater security than paper wallets, they can be hacked by hoses' wireless connections. However, unlike cold wallets, they have limited storage space.
Also Read : What are the Different Types of Cryptocurrency Wallets for Businesses
Key differences between crypto wallet and exchange
You can store your cryptocurrency in either a crypto exchange wallet or a crypto exchange. Still, there are some key differences that every crypto enthusiast should be aware of.
Definition and purpose
Crypto wallet allows users to track their crypto balance and hold the keys to crypto. Crypto exchange is focused on giving people a place to buy and sell cryptocurrency. You can store your crypto on an exchange, but that's not the main purpose.
Private keys
Crypto wallets allow you complete control of your private keys and give you full ownership of the cryptocurrency in that wallet. This means that anyone can rarely access your digital assets, so keeping your private keys safe is crucial.
However, crypto kept on an exchange does not allow you full access to your private keys. This could lead to serious problems when withdrawing your coins and if any other issues occur to the platform.
Private keys don't mean you are the owner of crypto coins. Instead, you permit the third party to manage your money.
Or, "Not your keys. Not your coins."
Convenience Trading
Crypto exchanges are a step ahead of crypto wallets regarding trading efficiency. You can trade currencies quickly by keeping your coins on the exchange.
Additionally, it doesn't make sense to keep your money out of the exchange if you do multiple daily transactions. You will have to pay different fees and gas prices every time you transfer coins to or from an exchange.
Should your crypto be kept in a wallet?
The final question in this cryptocurrency wallet vs. exchange battle is which one you should use so that your sleep can be peaceful and you don't worry about losing your money.
The short answer is that if you have large amounts of money, and don't intend to trade them soon (long-term holdings), then it's safer for you to keep them in an offline cryptocurrency wallet like Errna. The smarter choice for active traders is to keep cryptocurrency on the exchange.
The long answer is that no matter which option you choose, each has its pros and cons. See some of the potential risks below.
Risks of keeping crypto on an exchange
You are putting your digital assets on an exchange, which means you trust a third-party platform with funds. The main risks associated with this are hacks, mismanagement, or scam.
The large amounts of cryptocurrency held by crypto exchanges make them attractive targets for hackers. Unfortunately, this trend is not likely to change.
Coincheck, one of the 20 most popular exchanges worldwide, suffered losses of $534 million in virtual assets in 2018. This is one of the largest crypto hacks.
Crypto.com admitted that 500 users of its platform had been compromised in January 2022. This resulted in losses of 443.93 BTC and 4,836.26 Ethereum (roughly 33.8 Million USD).
While most crypto exchanges offer insurance to cover lost funds, it is highly recommended that you only trade coins frequently and leave them on the exchange.
Holding crypto in a crypto wallet: risks
Although using a crypto wallet to store your digital money is safer than traditional methods, it does come with some risks, such as theft (if you have a physical wallet), computer failure, forgetting your keys, and so on.
This means that you are responsible for keeping your money safe. This doesn't just mean that you have to remember your keys. It also means that you need to maintain other security measures, such as backups and regular hardware updates.
You are the only person with access to your coins, so all your money could be lost.
There are also hot wallets that connect to the internet, which are crypto wallets. These wallets are susceptible to hacking, just like crypto exchanges.
The Verdict
How safe you store your digital assets, whether they are on an exchange or crypto wallet, will depend on many factors, such as how active you trade and how much money you have.
It is generally agreed that crypto assets are safest if they are kept in an offline location that hackers cannot access. This makes you the only person responsible. Crypto exchanges may work fine as long as you don't hold any cryptocurrency or have no large amounts of money that you are afraid to lose.
This is a personal decision that every person who has become familiar with the crypto world must make. It is important to assess the risks and choose which method suits you best.
