A crypto exchange allows you to trade crypto, while a wallet lets you “store” it. But, it is much more difficult to operate a crypto wallet. A crypto exchange is essential for trading crypto currency, as you can’t purchase it through traditional channels such as a bank or an investment firm.
How a cryptocurrency wallet works
Crypto is decentralized and digital. It is stored on a Blockchain. This is a distributed network that holds all kinds of cryptocurrency. The blockchain allows you to access your cryptocurrency and transact with it.
Two pairs of keys are generated by the wallet software: one public and one private. These keys enable you to send, receive and manage your crypto.
An “hot wallet” is a device that can be created on any internet-connected computer. A “cold wallet” is another option. It’s a piece of hardware, such as a flash disk. A “cold wallet” is invariably seen as the safer option as the offline nature prevents hackers gaining access, however as it is then on a physical object, theft of that object is still a concern.
While most wallets accept many types of cryptocurrency now, not all wallets will. Before you send or buy crypto, it is important to check which wallets are capable of accepting the cryptocurrency.
How exchanges and cryptocurrency wallets work together
While it is the best way to manage cryptocurrency, it can be more difficult and less secure than if you keep it on an exchange. Hacking and cyber attacks can make exchanges vulnerable.
These exchanges are not regulated, and do not offer insurance against theft, fraud, or collapse. If an exchange shuts down, you could lose your crypto. This happened in Australia in October 2021 and December 2021.
You can create your own cryptocurrency wallet if you want to make yourself more secure. While it’s more complicated to use a wallet for crypto, some investors find it worth the extra security.
What are the Different Crypto Exchanges
There are three types available for digital currency exchanges: decentralized, centralized and hybrids. Here are their differences:
These transactions are conducted by a third party similar to a broker.
It may seem counterintuitive as one of the founding principles behind cryptocurrency is that they are not regulated or issued centrally by any government. A central cryptocurrency exchange can make it easier to buy your desired crypto with regular currency.
Because they are owned by one entity, some centralized exchanges can pose a risk.
Decentralized cryptocurrency exchanges, or DEX, operate independently of third-party exchanges. Because they are open-source, decentralized exchanges (or DEX) are closer to cryptocurrency’s spirit and nature. They rely on users trading peer-to-peer.
Decentralized cryptocurrency exchanges might be safer than centralized ones. Because there is no central server or entity that can be hacked, it might be easier to steal cryptocurrency. You might find that transactions can be processed quicker and with lower fees through a DEX.
A DEX might have some limitations compared to their central counterparts. The DEX may not allow you transfer funds from your bank account, or to use debit cards to buy crypto.
Some DEXs do not allow fiat currency exchanges. One cryptocurrency might be more than the other. Your funds are not insured because there is no central authority.
Hybrid cryptocurrency exchanges
Hybrid cryptocurrency exchanges combine both central and decentralized exchanges to create one. They offer both the security and convenience of a central exchange as well as freedom and security from a decentralized one to end users.
Hybrid exchanges may not be as popular as centralized ones, but they could provide a way for crypto enthusiasts to stay happy long-term.