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How is a Cryptocurrency Exchange Different from a Cryptocurrency Wallet?

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author
With a background in journalism and digital marketing, Marcel is a keen crypto enthusiast and investor. A regular contributor to several crypto publications, he believes that META-based projects will soar in the coming years and is super-bullish on MeritCircle and the increase in P2E gaming platforms. Marcel is also excited about AVAX and FTM as ETH-chain alternatives, and any projects with strong utility, transparency, experience, and community marketing.
By Marcel Deer
author
With a background in journalism and digital marketing, Marcel is a keen crypto enthusiast and investor. A regular contributor to several crypto publications, he believes that META-based projects will soar in the coming years and is super-bullish on MeritCircle and the increase in P2E gaming platforms. Marcel is also excited about AVAX and FTM as ETH-chain alternatives, and any projects with strong utility, transparency, experience, and community marketing.
on January 31, 2024 | 6 min
Updated on Jan 31, 2024
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The two most common mediums for accessing cryptocurrencies are exchanges and wallets, but their purpose and functionality differ substantially. At the simplest level, exchanges allow users to buy, sell, or trade cryptocurrencies, whereas wallets hold crypto balances and facilitate crypto transfers, but there’s far more to these two crypto tools.

 

It’s critical when starting out with cryptocurrencies to understand the difference between cryptocurrency exchanges and cryptocurrency wallets to use them safely and effectively and access the wider cryptocurrency ecosystem.

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What is a Cryptocurrency Exchange?

Definition and Basic Functionality

A cryptocurrency exchange is a platform for buying, selling, and trading cryptocurrencies. An exchange allows crypto-to-crypto exchanges and usually fiat-to-crypto exchanges. These platforms are where most people start their cryptocurrency experience, buying cryptocurrency in exchange for a fiat currency, like the dollar.

 

There are many cryptocurrency exchanges, and the number of cryptocurrencies listed and fiat currencies accepted, as well as the fees and security will vary from exchange to exchange. Exchanges will list the currencies and the trading pairs supported. A trading pair is, for example, the US dollar (USD) in return for Bitcoin (BTC).

 

Exchange users buy, sell, or trade by creating buy and sell orders. An exchange will match orders in its order book to execute trades and charge a fee.

 

Cryptocurrency exchanges offer visibility of cryptocurrency prices, facilitate cryptocurrency trading strategies such as day trading, and allow the storage of cryptocurrency balances. Exchanges often have additional features. It’s important to note that leaving cryptocurrency balances in an exchange account is usually considered the least safe method to store cryptocurrency. The most secure method to store crypto is by using a cold wallet or cold crypto storage option.

Types of Cryptocurrency Exchanges

There are two main types of cryptocurrency exchanges: the centralized exchange (CEX) and the decentralized exchange (DEX).

 

A centralized cryptocurrency exchange is run by an exchange operator; examples are Binance, Coinbase, and eToro. The operator facilitates transactions and charges fees. Centralized exchanges usually accept fiat currencies, and credit or debit cards can be used to buy crypto.

 

A decentralized cryptocurrency exchange is open source, without a third party or operator. These exchanges facilitate peer-to-peer (P2P) trading, where crypto holders will exchange directly with one another but are enabled by the platform’s software. They can be more complex to use for crypto beginners than centralized exchanges.

 

Some traditional securities brokers may also allow the purchase of cryptocurrencies, and there are over the counter (OTC) crypto brokers who deal in larger orders. 

How Exchanges Facilitate Crypto Trading

As we’ve seen, a cryptocurrency exchange allows users to buy, sell, or trade crypto by creating buy and sell orders. An exchange matches orders in its order book to execute trades and charges a fee for the transaction. Trades are made in pairs, such as BTC/USD or BTC/ETH (Bitcoin (BTC) for Ethereum (ETH)).

 

There are two key types of orders. A market order where the exchange will trade funds at the best available market price. Then, there’s the limit order, where a user can request a trade at a specific price or better. The order will only be fulfilled if a matching buyer/seller is at that price.

 

Cryptocurrency trading has emerged as a pursuit, much like trading stocks and shares. Where some investors will only make infrequent purchases or look to hold cryptocurrency balances long-term, serious crypto traders will day trade using any number of strategies to take advantage of the short-term price movements of cryptocurrencies.

What is a Cryptocurrency Wallet?

A cryptocurrency wallet is a software application or hardware device for storing cryptocurrencies. It protects the public and private keys required to authorize cryptocurrency transactions and prove the ownership of cryptocurrency balances.

 

Cryptocurrency wallets can be used to transfer crypto funds from one wallet to another and to access cryptocurrency products and services such as dApps or to enable cryptocurrency staking and other activities.

Wallet Fundamentals

A cryptocurrency wallet is a tool to securely store, send, and receive cryptocurrency. These wallets don’t store the actual cryptocurrencies but rather the secure keys associated with crypto balances and the blockchain address to access the funds.

Types of Cryptocurrency Wallets

There are different types of cryptocurrency wallets and lots of different features available.

 

A hot wallet is a mobile or desktop application, “hot” because it’s always online and connected to the internet. Hot wallets enable fast cryptocurrency transactions but are most vulnerable to hacks.

 

A cold wallet stores cryptocurrencies, or the crypto keys and addresses, offline. A hardware wallet is a cold cryptocurrency wallet. When not in use to make a transfer, a hardware wallet is disconnected from the internet, making it less susceptible to hacks. 

You can expand here on the differences between hot wallets and cold wallets.

Security Features of Crypto Wallets

Hot wallets use common online security methods such as strong passwords and two-factor authentication and can also use multi-signature authorization and additional security features.

 

Cold wallets or hardware wallets can come in a variety of forms and have different ways of connecting and disconnecting from the net to provide security.

 

Cold wallets are less susceptible to hacks, but as physical devices, they can be lost, stolen, or damaged.

 

If wallet access is lost or cryptocurrency keys are lost or stolen, the user will lose access to their cryptocurrency funds. There have been multiple incidences of Bitcoin holders losing access to millions of dollars in funds for such reasons.

Comparing Cryptocurrency Exchanges and Wallets

Functional Differences

A cryptocurrency exchange is usually used to purchase, sell, or trade cryptocurrency. Frequent investors or crypto traders may leave funds in an exchange account to be able to use them immediately. Generally, the safer option is to keep cryptocurrency balances in a cryptocurrency wallet. From a wallet, crypto transfers can be made between users and crypto balances can be used for a multitude of purposes.

Security Aspects

The safest option to keep cryptocurrency is a cold wallet or hardware device. Cryptocurrency users should always try to use a cold wallet or hardware wallet as much as possible to mitigate crypto storage risks.

User Experience

Cryptocurrency exchanges are used to buy, sell, and trade cryptocurrencies. They can also be a way to track crypto prices, gain insights into crypto markets, and conduct technical analysis for crypto trading strategies. Some exchanges offer further features like access to cryptocurrency staking or investing in new cryptocurrency projects.

 

Cryptocurrency wallets can vary from the simple to the complex. Some hardware wallets have very simple interfaces to maximize device security. Wallets can be compatible with certain cryptocurrencies, but not all. Hot wallets can integrate with other services such as exchanges, browsers, and dApps.

Choosing the Right Platform for Your Needs

Factors to Consider

Most cryptocurrency users will utilize cryptocurrency exchanges and wallets as and when they need to, depending on their crypto activity.

 

The primary concern when buying and holding cryptocurrency should be security. Here are some elements to consider when choosing a crypto platform and when choosing between using an exchange and a wallet:

 

  • What features and functions are needed?
  • Does the exchange or wallet support the required cryptocurrency?
  • Is it safe, secure, trustworthy, and reputable?
  • What are the fees or costs?
  • Are there any limits and terms and conditions?
  • Is an exchange registered and regulated?
  • Is it the safest way to keep cryptocurrency?
  • What customer service, help, or guides are available?
  • What protection is offered, if any, if something goes wrong?

Best Practices for Using Exchanges and Wallets

Here are a few common best practices to ensure the utmost security for cryptocurrency use:

 

  • Use strong passwords, pins, and seed phrases.
  • Setup two-factor authentication and any other security or backup options available.
  • Consider using multiple wallets or platforms where necessary.
  • Never trust public wi-fi.
  • Always be wary of hacks and attacks.
  • Hardware wallets are the safest crypto storage option.
  • Hardware devices must be protected from theft, loss, and damage.
  • Use a burner wallet for airdrops, pre-sales, or new projects.

Future Trends in Cryptocurrency Exchanges and Wallets

Innovations on the Horizon

Cryptocurrency exchanges and wallet providers are innovating quickly, often with security in mind. The features and functions available will continue to grow, and as blockchain networks work to become more interoperable, the range of crypto supported by each platform is also likely to increase.

 

Cryptocurrency wallets will do more than hold crypto balances. They already support NFTs, tokenized assets, and art. In the future, these digital wallets could hold or verify anything from identity to property ownership and be used instead of traditional financial services.

Conclusion

This article covered the basics of how a cryptocurrency exchange differs from a cryptocurrency wallet. These differences range from what they can be used for to the level of security and regulatory oversight available. There are common best practices for choosing cryptocurrency exchanges and wallets, and usually, the combination of use will depend on the level of cryptocurrency experience and the desired activity.

FAQ

  • Which is safer, a cryptocurrency exchange or a wallet?
    Usually, a cryptocurrency wallet is safer than leaving a cryptocurrency balance on an exchange, and the safest crypto storage option is a cold wallet or hardware wallet.
  • Can I use an exchange as a wallet?
    Crypto funds can be temporarily stored on an exchange, although this is not the safest option. Exchanges can have wallets with additional features, but cryptocurrency wallets are used to make direct transfers and payments and to access crypto products and services.
  • How do I transfer cryptocurrency between an exchange and a wallet?
    Cryptocurrency balances can be easily transferred between an exchange or an exchange wallet and an independent cryptocurrency wallet by following the provider’s instructions.
  • Are there fees for using exchanges and wallets?
    Cryptocurrency exchanges charge fees. Some cryptocurrency wallets are free, while others may require subscriptions or other charges. Hardware wallets must be purchased upfront.
  • What should I do if my exchange or wallet is compromised?
    If a cryptocurrency exchange, account, or cryptocurrency wallet appears to be compromised, a user should take the immediate appropriate steps for the issue and secure their cryptocurrency balances and accounts.
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About Marcel Deer
With a background in journalism and digital marketing, Marcel is a keen crypto enthusiast and investor. A regular contributor to several crypto publications, he believes that META-based projects will soar in the coming years and is super-bullish on MeritCircle and the increase in P2E gaming platforms. Marcel is also excited about AVAX and FTM as ETH-chain alternatives, and any projects with strong utility, transparency, experience, and community marketing.
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