When first buying cryptocurrency, you'll need to decide whether to use a wallet to transfer crypto or use an exchange to trade and store crypto, but what is the difference between a crypto wallet vs exchange?
Binance, Coinbase and Kraken are among the most popular exchanges, while the likes of Trezor, Electrum, Ledger and Wasabi are notable wallets.
Here's a look at the differences between the two, along with the advantages of both wallets and exchanges.
Crypto Wallet vs Exchange: Differences
One of the main differences between a crypto wallet and an exchange is how they hold your cryptocurrency.
A cryptocurrency wallet is not just a digital wallet, per se. It is a piece of software that doesn't store your cryptocurrency, but instead holds the keys to your currency. These private keys are the proof that you own your currency.
Wallets are distinguished as being either hot or cold. Cold wallets are entirely offline wallets, stored in physical hardware, such as a USB, or even in paper form. Hot wallets are instead hosted online.
In fact, cryptocurrency exchanges are among the most common examples of hot wallets. These also allow you to buy and hold cryptocurrency in online accounts.
This currency will be linked to your account and can be traded freely, along with being transferred to other exchanges or a wallet. But when these holdings are in your account, you will not have access to your private keys.
Alongside acting as an online-only wallet, exchanges also facilitate the trading of cryptocurrency, displaying various forms of information, such as the latest prices, and your total balance.
Read More: How To Withdraw Cryptocurrency From Coinbase And Transfer To Crypto Wallet
Crypto Wallet vs Exchanges: Advantages
Both crypto wallets and exchanges have their various advantages and disadvantages, primarily relating to security and control.
Cryptocurrency wallets offer you total control over your private keys - both now, and in the future. With further governments imposing regulations on exchanges, there remains a fear that activity on exchanges may be further restricted, cutting users off from their keys.
Aside from that, holding an entirely offline wallet could further reduce the likelihood of key theft.
However, with this total control comes total responsibility. If you lose your cryptocurrency wallet password, or somebody does gain access to your data, you could lose all of your cryptocurrency holdings.
Indeed, one of the most infamous rumours about Satoshi Nakamoto, BTC's now-silent founder- is that they lost access to their wallet, losing out on billions worth of BTC.
While hacks and lost passwords are possibilities for exchanges, the damage can more easily be mitigated in these circumstances.
Of course, the two are not mutually exclusive. While many cryptocurrency users operate entirely with wallets or solely with exchanges, some also use both. This allows them to store cryptocurrency in wallets long-term, while keeping some in an exchange for faster trading, for example.
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[Featured Photo By DrawKit Illustrations on Unsplash]