Cryptocurrencies, like Bitcoin and Ethereum, have rapidly gained a mainstream appeal over the last few years. Investors and large-scale companies have started buying in more than they ever have.
New investors will often ask how they can buy, sell, and store their cryptocurrencies. They will have two options to choose from: crypto wallets and crypto exchanges.
Though there is overlap between the two options in terms of storage, critical differences are essential to know before investing in crypto.
What is a cryptocurrency digital wallet?
When you think of a physical wallet, you think of storing money inside it. It would be natural to think of a crypto wallet as a digital version of an old-school wallet, but you don’t actually store crypto inside the wallet. You store a key.
When you own crypto, your private key is the key to your proof of ownership. A crypto wallet is where those keys reside. The key holds the unique digital codes you need to access your crypto assets. It does so by locating your cryptocurrency on the blockchain and matching it with your key.
A wallet does not allow you to buy and sell crypto; you need an exchange account to facilitate transactions.
There are two types of keys. Public keys are how people send you money. Think of sharing your email address for an e-transfer. They are open to the public and pose no safety risk.
Your private keys are used for purchasing crypto. Think of it like your PIN. Private keys should never be shared. If you lose your private key, you lose your money.
Are there different types of cryptocurrency wallets?
There are three types of cryptocurrency wallets: digital, physical hardware, and paper wallets. They are typically classified as hot and cold wallets. Hot wallets are connected to the internet, like a mobile app or an extension on your web browser. Cold wallets are not connected to the internet. A USB stick or piece of paper are examples of cold wallets.
Both hot and cold wallets have their pros and cons. Because a hot wallet is connected to the internet, there is always the risk of a hack. But the connectivity also provides greater ease of access wherever you are.
A cold wallet is more secure—you need to physically have a USB stick connected to your computer to access your funds. Your private keys are stored directly in the device. As you can imagine, the drawback is that if you lose the USB, you have lost the key. Like any physical item, it is susceptible to damage or theft. They are also more inconvenient because you must have the item with you to access your key.
What is a cryptocurrency exchange?
A crypto exchange is a digital marketplace where users can buy and sell crypto using a fiat currency or altcoin. Crypto exchanges are similar to online brokerage platforms, acting as intermediaries between the buyer and the cryptocurrency seller.
Because the exchange facilitates the transaction and may have wallets built into the platform, they hold the private keys to the crypto. This arrangement is often called a custodial wallet, as another party has your private key. The risk of a custodial arrangement is that you could lose access to your crypto if the exchange got hacked.
Because you trust an exchange with your investment, you want to do your research to ensure it is a secure and reputable platform.
There are several key differences between a crypto wallet and an exchange. Choosing the right one depends on how often you want to trade, the amount of crypto you’re looking to purchase, your technological knowledge, and how you want to use your crypto. Here are the main differences:
Comfort with technology: Investing in crypto can be complex for novice investors. On top of the technology, there is a whole world of new terms and jargon to learn. An exchange makes your life a little easier to store your crypto than a wallet.
If you are comfortable with online banking or an online brokerage, you’ll be pleased with a crypto exchange. An exchange allows you to buy, sell, and store crypto in a simplified way.
If you are more tech-savvy, a digital wallet is a better option for storage. A noncustodial wallet lets you access more advanced crypto activities like yield farming, staking, lending, and borrowing.
Security: A cold wallet offers the top level of protection. It is free from hacking because it is a physical item and is not connected to the internet.
On the other hand, exchange wallets are provided and managed by the exchange. If the exchange is hacked or your account is compromised, you lose your funds.
If you have seen someone post “not your keys, not your coin,” they refer to the custodial nature of an exchange wallet and the potential for disaster.
Long-Term Storage: A crypto wallet is the best place to store crypto for the long term. An exchange is built for transactions, not for holding.
Holding your crypto on an exchange for an extended period exposes it to more risk than storing it in your crypto wallet.
Control: A cryptocurrency wallet gives you complete control over your private key. Conversely, a cryptocurrency exchange does not allow full access to your private key
Though a wallet gives you complete control, you also have to be comfortable backing up, securing, and managing your wallet.
Bitbuy is your trusted crypto exchange
Bitbuy was designed for new traders seeking a simple interface and advanced traders who know their way around the crypto world. We understand that getting started with cryptocurrency can seem a little daunting, and our goal is to make the process easier for you.
You can always start your crypto commerce on the Bitbuy platform by creating an account (it’s as simple as sharing your telephone number and email), depositing your funds, and buying, selling, and trading crypto with as little as $50.
