When a user acquires (or uses) cryptocurrencies such as Bitcoin, Ethereum, or Tether for the first time, he usually questions the best way to obtain, store, or manage these cryptocurrencies. In this article, we will discuss two terms that generate confusion among new cryptocurrency users, wallet and exchange, as well as their main differences.
Wallet
A digital wallet is a place where the user stores the private keys he needs to access and manage his cryptocurrencies. Private keys are necessary to sign/approve transactions and prove ownership of cryptocurrencies associated with a specific address within the blockchain.
Exchange
An exchange is an online platform that allows users to buy, sell, and exchange cryptocurrencies. Exchanges work to be a “mediator” that connects various buyers and sellers, thus facilitating cryptocurrency operations or transactions.
The main differences between a wallet and an exchange
The following are the main differences between a cryptocurrency wallet and a cryptocurrency exchange.
Property
With a wallet, it provides the user with greater control and ownership over their private keys. It is important to note that wallets allow users to manage their keys and can be of different types (hardware and software wallets).
In the case of an exchange, the cryptocurrencies are under the control of the exchange until the user withdraws them to an external wallet; this means that the user will rely on the security and integrity of the exchange for the temporary storage of their cryptocurrencies.
Role and purpose
These two tools differ in their function and purpose within the industry. They created the exchange to facilitate cryptocurrency trading (buying, selling, and exchanging), acting as an “intermediary” and allowing users to transact with each other. On the other hand, the wallet’s design purpose is to manage, guard, and store cryptocurrencies, specifically storing the private keys that allow access to and control these cryptocurrencies.
Trade
Another essential difference lies in trading; through an exchange, users can buy, sell, and exchange cryptocurrencies for additional digital assets and even for other FIAT currencies. In contrast, they usually use wallets for commercial purposes to purchase products or services, whether online or in establishments that work with that same cryptocurrency or wallets.
Private Key security
A wallet’s security will largely depend on the type of wallet used. For example, hardware wallets are typically regarded as more secure since they store private keys offline; on the contrary, software wallets have a lower level of security since their keys are online.
Regarding an exchange, the security of cryptocurrencies depends on the security measures implemented by the platform or company behind the exchange service. It is important to note that some exchanges have experienced hacks or security breaches at one time, so it is essential to choose reliable exchanges and use additional security measures, such as two-step authentication.
Control and access to funds
One of the most significant characteristics that differentiates a wallet from an exchange is the level of control and access that each one gives its users. Through an exchange, control of the keys and funds is given to the company that provides the exchange service, which controls the private keys and dictates the policies that must be complied with to access or manage such funds.
On the other hand, in the case of a wallet, the user has complete control and access to its funds and private keys, which are available at any time of the day, no matter the user’s location. It is essential to note that most times, when employing an exchange, you can also have an exchange wallet; however, in this type of wallet, the control and access will also depend on the company’s policies supplying the exchange service.
What do you think about this topic? Do you want to learn more about the cryptocurrency wallet and cryptocurrency exchange service?
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