Crypto wallets and exchanges are two different things. Crypto exchanges are like online marketplaces where people can buy, sell, and trade crypto.
A crypto wallet is a piece of software or hardware that can be used for storing, receiving, and sending crypto. Many exchanges provide custodial wallets for their users, so people can also hold crypto on an exchange if they choose.
Here we’ll explore the similarities and differences between holding crypto in a crypto wallet vs. an exchange. Different users might prefer one option over the other for different reasons.
What Is a Crypto Wallet?
A crypto wallet is a piece of software or hardware that allows users to interact with different blockchains, and thus buy, sell, and store various types of crypto.
There are two main parts to a crypto wallet: a private key and a public key. The private key is like the key to a safe deposit box. Anyone with access to the private key can take control of all the crypto assets held in a given wallet. Do not share your private key with anyone under any circumstances.
The public key is derived from the private key and allows users to receive funds. This key is safe to share. When someone wants to receive crypto, they use their wallet to generate a public key and share it with the person who will be sending them coins.
A single wallet can generate many public keys, also known as addresses. A wallet address can come in the form of a QR code or a long string of randomly generated alphanumeric characters.
How Do Crypto Wallets Work?
Technically, a crypto wallet doesn’t contain actual coins. It provides a way to engage with a blockchain network and prove that you have ownership of specific digital assets. Using the private key, a wallet holder can initiate or “sign” a transaction, proving that the coins are theirs to send. This is an important fact to know when it comes to the discussion of different types of wallets.
While wallets are generally used for storing, receiving, and sending crypto, some have additional functionality as well. Wallets can also provide the ability to swap different tokens, buy and sell crypto, or interact with different decentralized applications (dApps).
Wallets are built so that a user doesn’t have to do much more than enter the correct information and click a few buttons. The details are handled on the backend, so users don’t have to know everything about how cryptocurrency works.
Different types of wallets work somewhat differently as far as the user experience is concerned. The best type will depend on a user’s wants and needs.
Setting up crypto wallets requires some general knowledge of using computer programs. It’s not all that complicated, but this can vary according to the type of wallet.
Types of Wallets
Now that you know what crypto wallets are, let’s discuss the different types of wallets.
Crypto wallets generally fall into one of two categories: software wallets and hardware wallets. Software wallets can be further subdivided into additional categories like web wallets, desktop wallets, and mobile wallets. Wallets can also be custodial, meaning a third-party holds the private keys, or non-custodial, meaning the user holds their own private keys.
Let’s explore some key characteristics of these different types of wallets, including hot vs. cold wallets.
A software wallet is a computer program that has no physical counterpart. There are different types of software wallets, depending on where the program runs. Wallets like these can exist in a web browser, mobile device, or desktop computer. Software wallets are hot wallets by default because they exist on an internet-connected device.
Web-based wallets work in a web browser and allow for easy integration into apps like NFT marketplaces or decentralized finance (DeFi) markets. These wallets are among the least secure and aren’t suitable for long-term crypto storage.
Mobile wallets exist on a mobile device like a smartphone or tablet. These wallets can be convenient for sending or receiving small amounts of crypto. If someone wants to buy Bitcoin at a Bitcoin ATM or use Bitcoin to pay for something, a mobile wallet might be a good option.
Desktop wallets run on a desktop or laptop computer. They can be useful for those who want to use crypto without having to go through an exchange. While desktop wallets allow users to hold their own private keys, they are still considered to be less than secure because those keys are held on an internet-connected device.
Hardware wallets are small devices that hold a user’s private keys and allow for the sending and receiving of transactions. These wallets usually interact with a user’s computer via apps or web-based interfaces.
When not in use, a hardware wallet stores keys offline or in “cold storage.” Coupled with the fact that the signing of a transaction happens on a separate device that is seldom connected to the internet, this makes hardware wallets much more secure than other wallet options.
Up to $100 in bitcoin2 – just for you.
With 30 coins available, our app offers a secure way to trade crypto 24/7.
What Is a Crypto Exchange?
A crypto exchange is a marketplace for cryptocurrencies. It’s a website where people can buy, sell, and trade crypto. Exchanges also provide their users with wallets for different cryptocurrencies. An exchange could also be thought of as a digital bank where people can store their crypto and access certain financial services.
Some crypto exchanges provide users with the option to take out a loan against their crypto, for example. Others allow for advanced trading options like using leverage and derivatives such as options or futures contracts.
Money held in a bank doesn’t technically belong to the depositors — those funds become property of the bank. In a similar way, funds held in a custodial wallet on an exchange aren’t in direct possession by the exchange’s users. A non-custodial crypto wallet, by contrast, allows users to take personal control of their funds.
How Do Crypto Exchanges Work?
There are two types of crypto exchanges: centralized exchanges and decentralized exchanges (DEX). Most of the largest exchanges are centralized. Some of the biggest exchanges include Binance, Kraken, Coinbase, KuCoin, Crypto.com. A centralized exchange has a single entity that makes a market for buyers and sellers and maintains an order book containing the bids (buy orders) and asks (sell orders) of users.
Many exchanges allow users to place a “market” order that will execute a buy or sell at the current market price. The market price is determined by the point at which buyers and sellers meet at any given time.
Alternatively, traders can place a buy or sell order at a price above or below the current market price. The order will then be filled when the price falls or rises to the price set by the trader.
By contrast, DEXs have no central entity controlling the order books. Many don’t even have order books at all. One of the most common methods used by decentralized exchanges is what’s called an automated market maker (AMM). Using real-time price data from oracles, AMMs match buyers with sellers automatically.
Decentralized exchanges often don’t require a user to verify their identity, unlike centralized exchanges, which must comply with regulations like anti-money laundering (AML) and know-your-customer (KYC) laws.
DEX users can therefore remain more anonymous. They can also potentially access other decentralized finance (DeFi) services such as borrowing and lending without having to undergo a credit check.
Crypto Wallets vs Exchanges
The idea of a crypto wallet vs. exchange can be confusing for beginners because exchanges provide users with custodial wallets for different types of crypto. While users can use wallets like these to transact with or hold crypto, the wallet itself is owned and controlled by the exchange.
For the purpose of our discussion here, the term “crypto wallet” refers to non-custodial wallets held by users, and the term “crypto exchange” refers to the marketplace where people buy and sell crypto, as well as any associated custodial wallets and financial services.
Let’s look at some of the similarities and differences between a crypto wallet vs. exchange.
A wallet and an exchange are two very different things. Yet they still have some characteristics in common.
Crypto wallets vs. exchanges are similar in that they both:
• Allow for the storage, receiving, and sending of crypto
• Provide an easy way for people to interact with the crypto ecosystem
• Are designed to be as simple as possible
Despite performing some of the same functions, wallets and exchanges differ in some important aspects.
Crypto wallets vs. exchanges are different in the following ways:
• Wallets allow people to hold their own private keys, exchanges do not
• You can’t buy crypto with a wallet alone, although some have connected exchanges
• Most exchanges require users to verify their identity, whereas wallets can be used pseudonymously.
|Crypto wallets vs exchanges|
|Allow for the storage, receiving, and sending of crypto||Wallets allow people to hold their own private keys, exchanges do not|
|Provide an easy way for people to interact with the crypto ecosystem||You can’t buy crypto with a wallet alone, although some have connected exchanges|
|Are designed to be as simple as possible||Most exchanges require users to verify their identity, whereas wallets can be used pseudonymously|
Investing in Crypto Today
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 trade crypto. You can use a centralized exchanges, which operates similar to a regular securities exchange, or a DEX — a decentralized exchange, which relies on automated market makers rather than order books.
If you’re ready to start trading and investing in crypto, you can open an Active Invest account with SoFi Invest, and set up a crypto trading account in minutes. SoFi doesn’t offer staking or a crypto wallet, but you can trade dozens of different coins 24/7, from SoFi’s secure app.
Is it safer to keep your crypto in a wallet or an exchange?
Keeping crypto in a non-custodial wallet, where you control the private keys to your crypto assets, is widely considered to be a safer option than keeping crypto on an exchange. When you store crypto on an exchange, a third-party holds the keys, and therefore has control over those assets. If an exchange gets hacked or its employees steal from the exchange’s wallets, users could be left with nothing.
What happens if you move crypto from an exchange to a wallet?
Moving crypto from an exchange to a wallet means that a user will obtain ownership of their private keys. This brings with it a new level of security and sovereignty, but also an additional layer of responsibility. When holding one’s own private keys, a user effectively becomes their own bank, making them responsible for anything that could happen, including total loss of funds.
Which type of crypto wallet is considered the safest?
Hardware wallets are widely considered to be the most secure type of crypto wallet. This is because when using a hardware wallet, the “signing” of a transaction happens on a separate device, keeping the private keys safer. The keys can also be held in offline cold storage when not in use, where they are safe from hackers.
Photo credit: iStock/AndreyPopov
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.
2Terms and conditions apply. Earn a bonus (as described below) when you open a new SoFi Digital Assets LLC account and buy at least $50 worth of any cryptocurrency within 7 days. The offer only applies to new crypto accounts, is limited to one per person, and expires on December 31, 2023. Once conditions are met and the account is opened, you will receive your bonus within 7 days. SoFi reserves the right to change or terminate the offer at any time without notice.
First Trade Amount