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If you’re getting started with cryptocurrency, one of the first things you’ll need to understand is the difference between a crypto exchange and a crypto wallet. At first they may seem similar since both let you handle your digital assets, but they actually serve different purposes.
A crypto exchange is an online platform where you can buy and sell cryptocurrencies. A crypto wallet is where you securely store and manage the keys needed to access your cryptocurrencies. Both exchanges and wallets are essential for navigating the crypto world, but knowing how they differ is key to keeping your assets safe. This guide explains how each works, what sets them apart, and how to choose the right platforms and tools for your needs.
Key Points
• Exchanges enable buying and selling of cryptocurrencies, while wallets store and manage private keys.
• Many exchanges provide wallet services as a convenience for customers.
• Private wallets offer self-management of keys and greater control.
• Offline wallets are generally more secure than online and custodial wallets.
• Exchanges require identity verification, but wallets can be used anonymously, enhancing privacy.
Why Knowing the Difference Between Crypto Wallets and Exchanges Is Essential
While the terms “crypto wallet” and “crypto exchange” are sometimes used interchangeably, they aren’t the same thing. A crypto wallet is a piece of hardware or software that enables you to access your cryptocurrencies, which are technically stored on the blockchain. Crypto exchanges, on the other hand, are online marketplaces where users can buy and sell crypto.
The idea of a crypto wallet vs. exchange can be confusing for beginners, however, because many exchanges provide wallet services to account holders — these are known as custodial wallets.
Control, Security, and Risk Management
While you can use custodial wallets (which live on an exchange) to store your crypto keys and manage your assets, the wallet itself is technically owned and controlled by the exchange. A personal crypto wallet, by contrast, puts you in charge, allowing you to store and secure your private keys independently.
Dangers of Confusing Exchanges and Wallets
Leaving assets on an exchange for long-term storage (using a custodial wallet) comes with some risks. Unlike non-custodial wallets where you control your own keys, a custodial wallet requires you to trust the exchange with the security and management of your funds. If the provider encounters technical difficulties, goes bankrupt, or restricts withdrawals, users could lose access to their assets. If the exchange gets hacked, a user’s funds could potentially be lost.
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What Is a Crypto Exchange?
A crypto exchange is a marketplace for cryptocurrencies. It primarily serves as a platform where crypto prices are listed and people can buy and sell crypto. Many exchanges also provide their users with wallet services, though that is not their main purpose. Some exchanges also offer other financial services such as credit and debit cards and crypto-backed loans.
Core Functions and Services
The core function of a crypto exchange is to act as a marketplace for buying and selling cryptocurrencies and other digital assets. It facilitates transactions between buyers and sellers, matching orders based on price and liquidity, and typically charges a fee for these services.
Many exchanges also provide a platform where users can convert fiat currency (government-backed currency) such as the U.S. dollar to digital assets and swap one cryptocurrency for another.
Types of Exchanges
There are two main types of cryptocurrency exchanges — centralized and decentralized. Here’s a closer look at how each one works.
Centralized (CEX)
A centralized crypto exchange (CEX) is an online platform operated by a single, for-profit company that acts as an intermediary, facilitating the buying and selling of cryptocurrencies. Different CEXs work in different ways, but generally customers deposit assets into a custodial wallet managed by the exchange and submit their trading instructions. An internal order book tracks and prioritizes these requests, which are then automatically executed to settle trades and credit users’ accounts.[1]
CEXs typically offer user-friendly interfaces, strong customer support, and fiat-to-crypto exchanges, making them appealing to beginners.
Decentralized (DEX)
A decentralized exchange (DEX) is a peer-to-peer crypto trading platform that operates without a central authority or intermediary. Instead of a company managing funds and transactions, DEXs use blockchain technology and smart contracts (self-executing, automated contracts) to enable direct transactions between users.
Unlike most centralized exchanges, DEX users make transactions directly from their wallets, keeping full control of their assets. Without an intermediary, however, DEXs offer little or no customer support, which means that user mistakes can result in permanent loss of funds. In addition, DEXs typically don’t support fiat-to-crypto trades and require users to know their way around wallets, private keys, and smart contracts. As a result, they generally aren’t ideal for beginners.
How Exchanges Enable Buying and Selling
Crypto exchanges match buyers and sellers of specific assets and facilitate swaps between the two. However, there’s a lot that happens in the background to enable these transactions.
Account Creation, KYC, and Regulatory Aspects
Centralized exchanges require users to complete Know Your Customer (KYC) verification, which entails submitting ID documents to comply with anti-money laundering (AML) laws. While this adds legitimacy, it reduces anonymity.
DEX users can usually remain more anonymous. These exchanges generally do not require identity verification (KYC) or personal account creation, allowing users to transact directly from their own crypto wallets.
Exchange Fee Structures and Hidden Costs
Crypto exchanges typically charge fees for their services. They are the main way these exchanges make money and can vary significantly depending on the platform and type of transaction. Common types of fees include:[2]
• Trading fees: These are fees charged for buying or selling cryptocurrencies (sometimes referred to as maker and taker fees).
• Deposit fees: This is the cost of transferring funds (fiat or crypto) into your exchange account.
• Withdrawal fees: This is a fee for transferring funds out of the exchange.
• Network fees: These are blockchain-related fees that are not controlled by the exchange.
Security Protocols and Risks on Exchanges
Reputable exchanges will employ a variety of security features. These may include:
• Whitelisting withdrawal addresses (this means users can only withdraw to pre-approved wallet addresses)
• Withdrawal time delays and approval requirements
• AI-driven transaction monitoring to flag suspicious withdrawals
• Daily or weekly withdrawal limits
• End-to-end encryption and secure data handling
Still, crypto exchanges remain high-profile targets for hackers. If an exchange is compromised (or were to collapse or go bankrupt), you could lose your funds. Unlike bank deposits, cryptocurrency holdings in wallets are not covered by Federal Deposit Insurance Corporation (FDIC) insurance.
What Is a Crypto Wallet?
A crypto wallet is a tool — digital or physical — that stores your cryptocurrency keys and allows you to send and receive funds securely.
Main Purpose and How Crypto Wallets Work
The term “crypto wallet” is somewhat misleading because it doesn’t hold your digital assets. Instead, a wallet securely stores the private keys that prove your ownership of cryptocurrency on the blockchain. When you make a transaction, your wallet uses your private key to sign and authorize the transfer.
Types of Crypto Wallets
Crypto wallets generally fall into one of two categories: software wallets (or hot wallets) and hardware wallets (cold wallets). Software wallets can be further subdivided into custodial and non-custodial. Here’s a closer look at the different types of crypto wallets.
Hardware Wallets (Cold Storage)
Hardware wallets are small, physical devices (resembling USB sticks) that hold a user’s private keys offline or in “cold storage.” By keeping private keys separate from the cloud and connected computers, hardware wallets protect them from online threats like malware and hacking. However, hardware wallets have an upfront cost and are less convenient for making frequent transactions. They also carry physical risks like being lost, stolen, or damaged.
Software Wallets (Hot Wallets)
A software wallet, also known as a hot wallet, is a digital wallet that is constantly connected to the internet. These wallets are designed to store private keys on internet-connected devices like smartphones, desktop computers, or through web browser extensions. Hot wallets can be custodial (part of an exchange) or non-custodial, where you have control over your private keys.
Hot wallets allow for easy and quick access to your crypto, but are more vulnerable to cyberthreats, such as hacking and malware. Due to the higher security risk, they are generally best for holding small amounts of crypto.
Paper Wallets
A paper wallet is a physical document where a user writes or prints out their public and private keys. This method keeps keys away from online threats like hackers but carries risks of physical damage or loss. If you lose your keys, you may lose access to your holdings.
Custodial vs Non-Custodial Options
In a custodial wallet, a third party service holds and manages your private keys. This offers convenience and easy recovery but requires you to trust them with your assets. In contrast, a non-custodial wallet gives you complete control and ownership of your private keys. This offers more privacy and potentially higher security, but makes you fully responsible for their safekeeping and recovery.
Understanding Private Keys and Public Addresses
There are two main parts to a crypto wallet: the private key and the public key. The private key is a secret, unique code that gives you the ability to access and spend your cryptocurrency. If someone gets access to your private key, they have full control of your funds, so it must be kept highly secure.
The public key is mathematically linked to the private key but does not compromise your security when shared. The public key is used to generate a public cryptocurrency address, which is a shorter, more convenient version of the public key for sending and receiving funds. This public address is like a bank account number that anyone can use to send cryptocurrency to your wallet.
Security Features and Backup/Recovery Methods
Crypto wallets can have a number of security features, depending on the type of wallet. A software wallet will typically require two-factor authentication (2FA) for access. A hardware wallet might have biometric authentication features, so you can’t physically get into your wallet unless you can scan your fingerprints, for example.
Non-custodial wallets typically generate a seed phrase, which is also known as a recovery phrase. A seed phrase is a randomly generated list of words (typically 12 to 24) words that acts as a master key for your cryptocurrency wallet. It provides a backup mechanism that allows you to restore access to your private keys if you lose your device, forget your password, or need to restore your wallet on a new device.
Privacy and Anonymity Considerations
The type of crypto wallet you choose plays a major role in determining your level of privacy and anonymity.
Custodial wallets, such as those offered by exchanges, require users to complete identity verification (KYC), meaning your transactions are tied to your real identity and stored by a third party. Non-custodial wallets, on the other hand, give you full control over your private keys, allowing for greater privacy since no personal information is required to create or use them. However, even with non-custodial wallets, transactions on blockchains are publicly viewable, which means they generally don’t guarantee complete anonymity.
Wallet Fees and Transaction Costs
Hot wallets, which are software-based and connected to the internet, are typically free. Cold wallets, which are physical devices that store crypto offline, have an upfront cost.
Using your wallet to buy and sell cryptocurrencies will come with some transaction fees. Crypto exchanges charge fees whenever you buy or sell digital currencies on their platforms. In addition, you may be charged fees by the blockchain network to process transactions.
Crypto Exchange vs Crypto Wallet
While crypto wallets and exchanges are two different things, they do have some overlap. Here’s a closer look at how they compare.
Transaction vs Storage Functions
In simple terms, wallets are for storage, while exchanges are for buying and selling. Wallets may have some transaction features, and exchanges may have some storage features, but broadly speaking, those are the two main functions of each.
Who Controls Your Crypto? (Custody and Access)
As mentioned, custody is important to understand. If you own your wallet and your holdings are in that wallet, you are the sole custodian. If you’re using a hot wallet supplied by an exchange, a third party holds your private keys for you.
When using a custodian for your cryptocurrency, you are entrusting your assets to a third party’s honesty, competence, and financial health, rather than maintaining absolute control yourself.
Security Levels and Risk Exposure
Exchanges are online and connected to the internet. Many private wallets are, too, but not all. Cold storage or hardware wallets are the most secure, as they’re offline and untouchable by hackers or bad actors (unless, of course, someone steals the physical device). Overall, exchanges can be inherently less secure than private wallets, depending on the wallet type.
Private Key Access and Responsibility
If you store your crypto keys on an exchange (in a custodial wallet), you access your wallet and funds through an account, using credentials like a username and password.
If you’re using your own private wallet, you’re responsible for keeping it safe and keeping track of your private keys and seed phrases. If you lose those, you could lose access to your holdings — and there may be no way to get help regaining access.
Connectivity: Online (Hot) vs Offline (Cold) Storage
Crypto exchanges are always online (hot), whereas wallets can be hot (software) or cold (hardware/paper).
Regulatory Compliance and KYC Requirements
Exchanges (and custodial wallets) typically must comply with KYC/AML laws. Non-custodial wallets typically do not require submitting any personal data.
Exchange vs Wallet Comparison Table
Here’s a side-by-side comparison of crypto exchanges vs. wallets:
| Crypto Exchange | Crypto Wallet | |
|---|---|---|
| Primary function | Buying/selling crypto | Storing crypto |
| Private key access | No | Yes |
| Security level | Moderate | High (especially hardware) |
| Connectivity | Always online | Online or offline |
| Ease of use | Beginner-friendly | Moderate to advanced |
| Recovery options | Password reset | Seed phrase backup |
| Custody | Custodial | Non-custodial |
| Best for | Active crypto users | Long-term holders |
How to Move Crypto From an Exchange to a Wallet
If you want to move your crypto from an exchange (where it’s held in a custodial wallet) to a personal wallet, here’s a look at how the process works.
Setting Up and Securing Your Wallet
The process for setting up a wallet will depend on the type of wallet. Generally, you’ll need to:
• Download or purchase a reputable wallet
• Download the official wallet software or app (if applicable)
• Create a “new wallet”
• Set up a strong password to protect your wallet
• Securely back up your recovery (or seed) phrase offline
Step-by-Step Guide to Transferring Cryptocurrency
The steps for transferring your cryptocurrency from an exchange to a personal wallet will vary depending on the exchange and type of wallet you’re using, but these are often the steps involved:
1. Log into your exchange account
2. Navigate to “Withdraw” or “Send”
3. Copy your wallet’s public address for the specific crypto
4. Paste it carefully in the withdrawal form
5. Choose the correct blockchain network
6. Confirm and send
Tips for Smooth Transfers
For safe and secure transfers, you’ll want to:
• Avoid public Wi-Fi when transferring
• Keep devices malware-free
• Never share your private key or seed phrase
• Bookmark official sites to avoid phishing
Common Mistakes to Avoid With Exchanges and Wallets
There are a number of common mistakes people make when using crypto exchanges and wallets. Here are some to be aware of and try to avoid.
Leaving Assets on Exchanges for Too Long
It can be easy to make a transaction on an exchange and then simply leave your holdings in the hot wallet supplied by that exchange — and in the exchange’s custody. While that’s not necessarily unsafe, it could mean that your holdings may be less secure than they would be in your own private wallet.
Failing to Back Up Seed Phrases
Failing to properly back up a seed phrase is a critical mistake in crypto that can lead to permanent loss of funds. A seed phrase is the master key to your wallet, and without it, there is no way to regain access to your assets if your device is lost, stolen, or damaged.
To backup your seed phrase, you’ll want to write it on durable, offline materials like paper or fireproof metal plates and store multiple copies in separate, secure locations.
Falling Victim to Phishing and Scams
Phishing and other crypto scams involve being tricked into revealing personal wallet information or sending cryptocurrency to fraudsters. To avoid this mistake, be wary of unsolicited offers of free tokens or guaranteed high returns; avoid clicking on links in questionable emails/texts; and always check the exact URL of any website to ensure it’s legitimate.
Recommended: How to Report Crypto Scams & Seek Recovery 2025
Overlooking Two-Factor Authentication (2FA)
Having to take extra extra steps to get into an account is a hassle, but neglecting to set up 2FA can be a costly mistake. This leaves your accounts vulnerable to unauthorized access and potential loss if your password is compromised.
Forgetting to Test Small Transfers First
Cryptocurrency transactions are irreversible. Once confirmed, funds sent to a wrong address or on an incompatible network are generally lost forever. Sending a trivial amount first can save you from a potentially expensive mistake. Once the test is confirmed, you can proceed with confidence and send the full amount of crypto.
The Takeaway
Crypto wallets and exchanges are different entities. Crypto wallets can be software or hardware based. And while you don’t technically hold actual crypto in a cryptocurrency wallet, these wallets are specially constructed so you can send and receive crypto via different blockchain platforms using private and public keys.
Crypto exchanges are like online marketplaces where people can buy, sell, and swap crypto. You can use a centralized exchange, which is a third-party platform that acts as an intermediary for cryptocurrency transactions, or a decentralized exchange, which allows users to buy and sell cryptocurrencies directly with each other without an intermediary.
Soon, SoFi members will be able to buy, sell, and hold cryptocurrencies, such as Bitcoin, Ethereum, and more, and manage them all seamlessly alongside their other finances. This, however, is just the first of an expanding list of crypto services SoFi aims to provide, giving members more control and more ways to manage their money.
FAQ
Is it better to keep your crypto in a wallet or an exchange?
It is generally safer to store your crypto in a private wallet rather than on an exchange. A private wallet gives you full control of your private keys and complete autonomy over your assets. In contrast, exchanges use custodial wallets, where the exchange holds the private keys for your assets. This means you do not have full control, and your funds are vulnerable to exchange-specific risks, such as hacking, account freezes, or platform bankruptcy. For frequent traders, exchanges may be convenient, but for long-term storage, a hardware or software wallet may be the more secure option.
Should I move my crypto from an exchange to a wallet?
If you have crypto on an exchange, it’s technically in a custodial wallet, where the exchange holds your private keys on your behalf. You must trust the exchange to keep your keys secure, manage your funds, and grant access when you need to make a transaction.
It’s a good idea to move your crypto to a personal wallet, especially for long-term holdings. Exchanges can present risks like hacks and mismanagement, whereas a personal wallet gives you sole control over your private keys and, therefore, your assets.
What should I do if I lose access to my wallet or exchange account?
If you lose access to your private wallet, recovery depends on whether you saved your seed phrase — this is essential for regaining control. Without it, your funds may be unrecoverable. For exchange accounts, contact the exchange’s customer support immediately, verify your identity, and request an account recovery.
Should beginners use an exchange or a wallet?
Beginners often start with an exchange because they offer user-friendly interfaces, built-in wallets, and simple buying and selling options. However, exchanges control your private keys, acting as a custodial third party. Once you become familiar with crypto, you may want to transition to a personal wallet, which can offer greater security.
Do wallets charge transaction fees like exchanges?
Yes, both cryptocurrency wallets and exchanges charge transaction fees, but they are for different purposes. Wallets primarily charge network fees, which compensate the miners or validators who process and secure transactions on the blockchain. In contrast, exchanges typically charge fees for executing buy-and-sell orders. They may also charge withdrawal and deposit fees.
About the author
Julia Califano
Julia Califano is an award-winning journalist who covers banking, small business, personal loans, student loans, and other money issues for SoFi. She has over 20 years of experience writing about personal finance and lifestyle topics. Read full bio.
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