Virtual/Hot Wallets Basics
To understand the difference between cryptocurrency wallets and exchanges, we first have to understand that these types of wallets aren’t like traditional wallets. Unlike traditional wallets which hold your dollars in paper form, cryptocurrency wallets don’t store currency. Instead, they record the transactions which are stored in the blockchain.
Since they record the transactions stored in the blockchain they are able to keep track of how much money you have or more correctly monitor your balance while you make transfers or get more cryptocurrencies. Most cryptocurrency wallets are software programs that store your public key which is the key used to receive funds and your private key which is used to sign transactions that prove you are the owner of the public key used to receive the funds.
There are three options you should consider for software-based wallets:
- There are wallets you can download on your computer. You can only access this wallet from the computer you downloaded the software on.
- There are wallets that run on a cloud. This means you can access it from anywhere, however, that means that your private keys will be stored online which makes you more vulnerable to possible hacking attacks.
- There are wallets that run on an app on your phone. The nice thing about this option is that you can use it basically anywhere when purchasing things.
Exchanges Usage And Risks
The big difference between Cryptocurrency wallets and exchanges is that the purpose of exchanges isn’t to keep or store your cryptocurrency.
Instead, the main goal or purpose of an exchange is to provide you with a place to be able to buy, sell or exchange cryptocurrencies for other digital currency or traditional currency like US dollars.
There are three different types of exchanges:
- Brokers: Websites that allow people to buy cryptocurrencies at a price set by the broker.
- Trading Platforms: Websites with trading platforms help connect buyers and sellers and take a fee from each transaction.
- Direct Trading: Platforms like these provide direct person-to-person trading. These types of exchanges do not have a fixed market price, each seller will set their own exchange rate. Our Top Choices for Exchanges:
Alternative options to software-based wallets are:
- Hardware-based wallets store your private key on a hardware device like a USB. Hardware wallets make transactions online however unlike software-based wallets they do not keep/store your private key online.
- Paper-based: is a printable type of wallet. You would keep your private and public keys on a piece of paper and save it so you can have the ability to send and receive cryptocurrency. Your private key would act as your password and your public key will be like your email address.
Which Is Safer?
After comparing Cryptocurrency wallets and Exchanges. Wallets are considered safer for storing your cryptocurrencies than exchanges since exchanges rely on a third party which won’t guarantee that your cryptocurrencies will be safe.
We consider hardware wallets the best option for full security but they can lack some convenience if you plan on using them daily. If you would like to learn more about hardware wallets click here.