Investing in bitcoin, especially for novices, is quite difficult. The terms that are flung around may appear to be the same. Individuals can make costly blunders if they do not receive help or conduct study. When it comes to trading cryptocurrency, you’ll have to decide between a wallet and an exchange. Both will allow you to store your cryptocurrency, but each has its own set of perks and downsides.
To understand better whether you should choose a cryptocurrency wallet or exchange, you have to understand the difference between them. Read on to find the answer you seek.
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What Is a Cryptocurrency Wallet and How Does It Work?
Source: cointelegraph.com
Cryptocurrency Wallets are software that allow you to see your bitcoin holdings and conduct transactions.
Each form of wallet is a little different, but in theory, each wallet works with one or more cryptocurrencies and can save one or more “public addresses” for each crypto-monetary type.
Public addresses are similar to cryptocurrency account numbers in that they can be used to receive a certain form of cryptocurrency (for example, a Bitcoin address can be used to receive Bitcoin) and can be shared publicly.
Each address on a coin’s blockchain is linked to all transactions associated with that address.
As long as you are the owner of the address, a wallet allows you to see the balances associated with an address and move funds around the blockchain.
In non-custodial wallets, proving you own the address is done via a private key (a secret code associated with a public address). The custodian (a third party such as an exchange, broker, or other) stores the key for you in custodial wallets, and all you have to do is enter your password into their wallet software.
In essence, a wallet is similar to your online bank account platform, with your address serving as your account number, the blockchain serving as the bank’s ledger, and the custodian serving as your banker in the case of custodial wallets.
What Is a Cryptocurrency Exchange and How Does It Work?
A cryptocurrency exchange, often known as a digital currency exchange (DCE), is a platform for buying and selling digital currencies. We can trade them with e-currencies, fiat currencies, and other digital assets. Fiat currencies, such as the dollar, euro, pound, yen, and yuan, are those that governments designate to be legal currency. Any asset that exists electronically, such as domain names, data, virtual property, or digital currency, is referred to as a digital asset.
A typical cryptocurrency exchange is open 24 hours a day, seven days a week, and never closes. People prefer them for a variety of reasons, one of which being their anonymity. Nobody knows who the cryptocurrency exchange buyers and sellers are.
Each currency has a market rate that fluctuates in the same way that the stock market does. In most circumstances, when you utilize an exchange, it will also have a wallet stored on the website. These wallets are primarily internet-based.
You’ll need to sign up for an account on the exchange, then log in to gain access to your wallet.
The advantage of using an exchange is that you can easily access all of your account information. This allows you to rapidly check your balance, make deals, and sell your cryptocurrency. An exchange, in reality, works similarly to a bank in that it holds all of your “currency” for you.
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Control differences
Source: cointelegraph.com
While both wallets and exchanges can hold cryptocurrencies, one of the biggest differences between the two is ownership of your assets. You have complete control over the use and transfer of monies when you utilize a wallet. You control when and where Bitcoin and other cryptocurrencies are sent, as well as all passwords and private keys.
When you keep your digital cash in an exchange account, which is also known as an exchange wallet, you give up some of your overall control to the platform.
You merely need to look at traditional money to get a better understanding of this mechanism. When you have cash in your wallet, you have complete control over when, if, and how much you spend. If you put the money in a savings account, though, you lose part of that power since the bank may impose spending restrictions.
When deciding where to store your cryptocurrency, consider what you intend to do with it. And this is where the fundamental difference between a crypto wallet and an exchange comes into play: wallets are always safer than exchanges, as the latter may be vulnerable to hackers, legislation, or other external factors that limit your ability to spend your assets.
Conclusion – What should you choose?
One of the most important things to learn and comprehend is the distinction between a crypto wallet and an exchange, which is often misunderstood, especially by new traders. While both can be utilized as digital currency management tools, knowing how to discern one from the other can make the difference between success and failure as a cryptocurrency trader.
One of the most important considerations any trader will have to make is between a crypto wallet and an exchange. Both allow you to store cryptocurrency, but it is ultimately up to you to determine which will help you the most in the long run in your trading journey.
A cryptocurrency wallet is a collection of public and private keys. You automatically own any coins that those keys can access if you happen to be their owner. A cryptocurrency wallet is a way to go if you want complete control over your assets and quick access. Furthermore, because you know exactly where your funds are housed, a crypto wallet tends to provide its owner more peace of mind.
If, on the other hand, you’re a frequent trader and a risk-taker who enjoys buying and selling digital assets, an exchange might be a better fit for you. However, if an exchange fails to take the necessary security precautions to protect your key, it is possible that someone else will obtain access to your cash.
Choose wisely and happy trading!
