What is the difference between a cryptocurrency wallet vs exchange? Some people use several cryptocurrency wallets to store your digital assets. Others leave their funds on a secure cryptocurrency exchange. But what distinguishes one from the other?
Cryptocurrency Wallet vs Exchange Storage: Who Really Controls Your Crypto?
There’s one key difference between using a crypto wallet vs exchange account to store and manage your digital assets. When you use a cryptocurrency wallet, you and only you are in complete control over what happens to your Bitcoin. But when you keep your crypto on an exchange account, sometimes referred to as an “exchange wallet,” you share control of your crypto with the exchange itself.
On an Exchange, You Don’t Completely Control Your Crypto
So what does that mean? There are a few analogies that can help clarify, but perhaps the most illustrative is the bank vs wallet analogy. Set aside the fact that your U.S. dollars are really just IOUs the government promises to honor.
When your money is sitting in a saving account, your access to it and what you can do with it (withdraw, spend, etc.) is determined by the bank’s policies. Furthermore, banks can use the money you deposit to issue loans or make investments. In short, with a bank, you don’t completely control your money at every moment.
And the same is true when you store your cryptocurrency on an exchange. When it comes to wallet vs exchange storage, the exchange controls the coin and basically promises that you own a share of the exchange’s assets. But this leaves investors with exchange accounts open to risks. Anything that impacts the exchange—hacks, network problems or finance issues, like when OKCoin was broken into—also impacts your funds and your ability to use them.
Why do people leave themselves open to such risks? Convenience. Keeping crypto on an exchange lets you to quickly trade digital funds for other crypto and fiat. Given the ease of use, the fact that most major exchanges will set up your exchange storage for you, many investors just leave their funds on exchanges without giving it a second thought.
You Control Your Cryptocurrency Wallet
With cryptocurrency wallets, control over your digital assets is entirely yours. When contrasting a wallet vs exchange, think of a crypto wallet as the equivalent of having cash with you. You can access it wherever you have it with you and use it with anyone who will accept it. Like a physical wallet holding cash, if you lose it you’re out of luck.
How that works in the digital realm is somewhat different. A cryptocurrency wallet isn’t necessarily a physical device, though it can be a specialized hardware device, like John McAfee’s “unhackable” wallet.
Instead, a crypto wallet is a software program that stores and secures files containing your private keys. For context, it’s good to know what is cryptocurrency and understand how blockchain technology works. But essentially, each cryptocurrency transaction involves a public key and one or more private keys that “sign” off on the exchange. Your private keys are mathematical proof that you—or whoever controls your keys—owns a certain amount of crypto and can, therefore, use it to complete transactions.
As such, your private keys are the most important part of your cryptocurrency holdings. Lose them, and you lose your crypto until you know how cryptocurrency wallet recovery works.
And this brings us back to the issue with using a crypto wallet vs exchange storage already discussed. If your wallet is on an exchange, you don’t control the private keys—the exchange does. And that introduces the problem of trust that digital currency is supposed to do away with. That’s why using your own wallets, maintaining multiple wallet backups and keeping them secure offline is a must for anyone seriously investing in crypto.
Crypto Wallet vs Exchange Storage
Maintaining complete control over your digital currency assets requires a bit more know-how than simply setting up an exchange account. But in return, you place security and trust in your own hands. But the topic of using a crypto wallet is too involved to go into here. Our guide on hot vs cold wallets offers detailed explanations and strategies for storing and trading your crypto using software and hardware wallets.