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Exchanges vs Wallets

Summary

  • You can easily buy, sell and exchange a range of cryptocurrencies

  • Some activities are limited  e.g. max withdrawal limit.

  • Various services are offered such as loaning, futures and leverage trading depending on platform

  • Useful for holding cryptocurrencies securely for a long amount of time

  • Protecting your cryptocurrencies

  • Users have full control over the cryptocurrencies

What are Crypto Exchanges?

Platforms allow you to buy, hold and sell cryptocurrencies similarly to stock exchanges. The types of exchanges and what they do are listed below:

Trading Platforms

Trading platforms allow buyers and sellers to trade their crypto just like the stock exchange. The platform acts a middleman between the users and the crypto price is set equal to the market price. Some trading platforms charge a fee, some only allow cryptocurrencies trading, and some allow fiat (USD, GBP etc.) trading as well. 

Examples include Binance and Coinbase.

This is the place to start when you are new to crypto. You are likely to move away if you find smaller market cap coins which aren't available for trading on the trading platforms. 

Brokers are exchanges that allow users to buy and sell crypto at a price set by the broker which is above market price and usually higher than trading platform fees. This is different to a trading platform in that the user is buying and selling from the broker rather than another user.

One benefit of using a broker is that the broker will give access to different products such as margin trading. Useful for traders and less useful for investors.

Crypto Brokers

Direct Trading

Direct trading platforms allow peer-to-peer trading. The exchange rates are set by the sellers and not by the market price. The buyer searches for the sellers or they can set an exchange rate they are willing to trade at and the exchange find a seller.

Decentralised Exchanges (DEx)

The above explained all about centralised exchanges which are officiated by any intermediary party such as brokers. With the world of crypto, decentralisation is possible and this is the case with decentralised exchanges which are a peer-to-peer marketplace where the coins are traded directly between the buyers and sellers. 

Rather than setting a price based on orders like centraslised exchanges, DEx set a price between each crypto using the "liquidity pool" and algorithms.

Decentralised exchanges give users the freedom to exchange many more tokens than centralised exchanges. These are where you will trade the smallest market cap coins. 

What are Crypto Wallets?

Crypto wallets work slightly differently to your normal wallet in that they don't actually store any cryptocurrencies. The crypto sits in the blockchain and not in the wallet. You are given a private key when you buy crypto which is used to prove ownership and allow you to make a transaction. Wallets are used to keep those private keys safe and protect them from any hackers and stop them from being lost.

If you lose your private key, you lose access to your crypto!

The three main types of crypto wallets are:

Paper Wallets

Writing the private key down onto a piece of paper or any other physical means without the use of any devices. 

This is the the most safe way to prevent your keys being hacked into and stolen but also is the most risky as you can easily misplace the paper and lose everything. Another disadvantage of this is that you would not be able to do anything with your crypto because it lives in the digital world so you would need to connect to the internet to make any transactions. 

My recommendation is to not use this from of storage. The disadvantages outweigh the advantages.

Hardware Wallets

A hardware wallet is one where you keep your keys safe on a memory stick or any deice that can be disconnected from the internet and your computer. This means that even if your computer is hacked into via a virus, the memory stick/device will not be connected for the hacker to have any access. 

When you connect your device to the to computer, you will be able to use it to make transactions which combines safety and convenience. 

I recommend you use this type of wallet if you plan to hold your crypto for many years and wont be making many transactions.

Example: Trezor hardware wallet.

Online and Software Wallets

Your private keys are kept safe online and protected by various encryptions and safety measures dependant on the software provider. These wallets allow you to buy, sell, receive and send crypto very easily similar to a bank account. 

These are similar to exchanges but there are some differences; discussed at the bottom of this page. 

I would recommend using this type of wallet for safety but also easy access to sell your crypto. 

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