Crypto Wallet Vs. Exchange: Where To Store Your Coins?
Still figuring out what is the safest way to store your digital assets? Let's go through the crypto wallet and exchange definitions, risks, and find out how does it all work to help you make an informed decision.
Crypto wallets and crypto exchange are the crypto terms that you can expect to hear pretty often once you set foot into the digital currency world. They’re also something that you’ll encounter in the very beginning, trying to figure out how to buy or sell your coins and how to keep them safe.
Crypto wallets and exchanges are essential trading tools, however, they play different roles in the crypto ecosystem. It can quickly get confusing, though – what is the difference between a crypto wallet and exchange? If you can use both to store your crypto, which one is safer? Finally, how does it all work?
Let’s dig into answers!
What is a crypto wallet?
A crypto wallet is a software, app, physical device, or service that allows cryptocurrency owners to access their digital assets in one place.
Can it be compared to a regular wallet?
While we use regular wallets to store cash, crypto wallets don’t actually store cryptocurrency. Instead, they store the keys that link to blockchain transactions. Or, in other words, records showing your cryptocurrency trading history.
So in a way, a crypto wallet is more like online banking, allowing you to keep track of your balance and access the digital assets that you own.
How do crypto wallets work?
There are two types of crypto wallets:
- Hot wallets – wallets that are connected to the internet. Can be desktop, web (crypto exchange), or mobile wallets (apps).
- Cold wallets – physical devices that keep your digital assets offline (hardware and paper wallets).
Essentially, a crypto wallet comes with two keys – public and private. They are unique to each wallet and are something that allows you to interact with blockchains.
Both of those keys are very important – while the public key help to "identify" you on a blockchain (think of it like your bank account number, showing that you're the one sending and receiving funds), the private key is more like a password that is used to access your wallet, sign transactions and provide the proof that you’re the owner of that public key.
In case someone steals your private key, they can get access to everything that you own. Similarly, if you lose your private key – it can’t be restored and you can no longer access your crypto wallet.
Finally, there’s also a wallet address – a shortened, easier version of your public key – that you can use to receive funds.
From here, everything is relatively simple – to receive any digital asset, you direct the sender to your wallet address (can also be a QR code). If you want to spend with the wallet, you direct a specific amount of cryptocurrency to someone else’s wallet address.
What is a crypto exchange?
Crypto exchange is a platform where you can observe the cryptocurrency market changes, monitor coin prices, buy, sell, or exchange different cryptocurrencies, and convert fiat money into digital (and vice versa).
There are three types of cryptocurrency exchanges:
- Centralized exchanges (CEX). Centralized exchanges are the most commonly used platforms for crypto trading, governed by some central organization (e.g., Coinbase, Binance, Kraken).
- Decentralized exchanges (DEX). Alternative to centralized exchange that relies on automated processes without a central presence (peer-to-peer trading).
- Hybrid cryptocurrency exchanges (HEX). As the name implies, it’s a combination of the two above.
Whichever one you decide to use, keep in mind that they differ from each other, even though they fall under the same “definition.” For instance, every exchange has different currencies available for sale, come with their own transaction fees, and it might also take longer/shorter for your transaction to go forward.
How does a crypto exchange work?
In simple terms, similarly to the stock exchange, crypto exchanges are where buyers and sellers meet.
Once you create an account on the crypto exchange platform, you can start buying and selling various cryptocurrencies, like Bitcoin (BTC), Ethereum (ETH), Tether (USDT), Solana (SOL), and others available on that specific exchange. You can also buy fiat currency with crypto, purchase crypto coins using your regular money, or convert one digital currency into another.
Most crypto exchanges also allow you to store your digital assets in their native wallets. For instance, if you’re trading on Coinbase, you can also use the Coinbase wallet to keep all of your crypto and NFTs.
Here’s where we get to the question – how keeping crypto on exchange differs from storing your digital assets in a crypto wallet?
Crypto wallet vs. exchange: key differences
Although you can use both crypto wallet and crypto exchange to store your cryptocurrency, there are a couple of key differences between these two that everyone entering the crypto world should be aware of.
Definition and purpose
While cryptocurrency wallet is aimed at allowing users to monitor their crypto balance and holding the keys to cryptocurrency, crypto exchange is primarily focused on providing people with a place where they can buy and sell crypto. Simply put, you can keep your crypto on an exchange, but it's not its main purpose.
Crypto wallets give you full control over your private keys, also presenting full ownership of cryptocurrency on that particular wallet. It also means that it’s barely possible for someone else to access your digital assets, and it’s crucial that you keep your private keys to yourself.
On the contrary, keeping crypto on an exchange doesn't allow full access to your private keys (= you don’t have full access to your funds), which may also raise some serious issues when withdrawing your coins or if anything happens to the platform.
Not owning private keys means that you're not the true owner of your crypto coins – instead, you allow a third party to control what you can do with your money.
Or, as the popular saying goes, “Not your keys, not your coins.”
Regarding the trading efficiency, crypto exchange is a few steps ahead of crypto wallets. Keeping your coins on the exchange allows you to quickly trade currencies without the need to deposit your funds in a trading avenue since they're already there.
Moreover, if you make multiple transactions daily, it just doesn't make financial sense to store your money outside the exchange as you have to pay various fees and gas prices each time you transfer coins to and from an exchange.
Should you keep your crypto in a wallet or an exchange?
So the final question in the crypto wallet vs. exchange battle is – which one to use so that you can peacefully sleep at night and stop worrying about losing your funds?
The short answer: if you have larger amounts of money and don’t plan to trade them anytime soon (long-term holdings), it’s safer to keep them in an offline crypto wallet, like Ledger. For short-term active traders, the smarter option is keeping cryptocurrency on the exchange.
The longer answer – whichever option you decide to go with, they all have their pros and cons; see some of the risks below.
Keeping crypto on exchange: risks
Since keeping your digital assets on the exchange means that you're trusting some third-party platform with your funds, the main risks that come with it is the possibility of hacks, simple mismanagement, or, well, scam.
Crypto exchanges hold enormous amounts of cryptocurrency, making them an attractive target for hackers, and, unfortunately, it's not going to change anytime soon.
For instance, in 2018, one of the top 20 exchanges in the world, Coincheck, lost around $534 million worth of virtual assets, which is also one of the biggest crypto hacks ever.
In January 2022, Crypto.com acknowledged that nearly 500 of the platform’s users had their accounts compromised, resulting in 4,836.26 ETH and 443.93 BTC losses (roughly 33.8 million USD overall).
Although most crypto exchanges have insurance that can cover lost funds, it’s highly recommended to leave coins on exchange only if you’re trading them frequently.
Holding crypto in a crypto wallet: risks
Using a crypto wallet for your digital money is a safer option, yet it still possesses some risks, including theft (if your wallet is a physical device), computer failure, forgetting or losing your access keys, etc.
In this case, the "burden" of keeping your funds safe falls entirely on you. That doesn't only mean remembering your keys, but maintaining other security measures, like back-ups, updating hardware regularly, etc.
Besides, since you're the only one who can access the coins you own, all of that money can be lost if something happens to you (assuming you haven't shared your private keys and instructions on how to reach your funds with your family members).
Finally, there are also crypto wallets that are connected to the internet (hot wallets), and just like crypto exchanges, this type of wallets is also prone to possible hacks.
Crypto wallet vs. exchange: the verdict
Choosing how to safely store your digital assets – whether on a crypto wallet or an exchange – depends on many different factors, like how actively you’re trading and how much money you have, just to mention a few.
The general consensus regarding the highest safety of crypto assets is storing them in an offline location that hackers can't access and makes you the only one responsible for them. Meanwhile, crypto exchanges might work just fine if you're not holding your cryptocurrency or don't have large funds that you'd be afraid to lose.
It’s a purely personal choice that everyone getting familiar with the crypto world has to make. The key here is to evaluate the possible risks and decide which method best suits your needs.