The cryptocurrency world is rapidly evolving, and users have a choice in where they can safely store their crypto investments. As the mainstream adoption of digital assets gains further traction, it becomes ever more important for investors and enthusiasts to be familiar with the different types of storage options available.
For instance, while cryptocurrency exchanges can make it easy to buy and sell crypto, they’re not always the best place in which to store digital assets. This is where crypto wallets can be of more use, but in what other scenarios would a wallet be more proper than a decentralized or centralized exchange?
This guide will delve into the fundamentals of crypto wallets and exchanges, highlighting their unique characteristics before discussing which are the best way to store crypto.
What are Crypto Wallets?
In the simplest terms, crypto wallets are essentially digital storage spaces which feature the tools needed for securely managing digital assets. Crypto wallets enable users to access, send, and receive cryptocurrencies, so they’ve become especially useful for online gamers needing wallets for crypto gambling and consumers making high-value trades or purchases.
Unlike fiat currencies, decentralized coins “live” on their respective blockchains, meaning that crypto wallets don’t actually store the assets (literally or physically). Instead, they can secure cryptocurrencies via a series of private and public keys, which grant users access to the coins they’ve received.
Private keys are typically seed phrases (a series of random words generated by the wallet), and they enable users to access their assets on any device. Even if users lose their primary device, such as a smartphone, they’ll still be able to gain access to another secure device through their private keys.
On the other hand, public keys can be thought of as ‘addresses’ through which users can receive crypto transactions. They’re cryptographic keys that are typically represented by a long string of alphanumeric characters. Just as consumers can share their email addresses to receive eFinance transactions, crypto wallet users share their public keys when they want to receive decentralized funds.
There are several different types of cryptocurrency wallets in use, but they all fall into one of the following categories:
- Software wallets: Software apps like MetaMask and Phantom. They’re commonly known as hot wallets since they’re always online.
- Cold wallets: Hardware devices, similar to external hard drives or USBs, which store private keys offline. Trezor and Ledger are two of the most widely used examples.
- Custodial wallets: Unlike cold wallets, custodial wallets such as Binance don’t allow users access to their private keys. Instead, they’re secured and guarded by a third party.
- Self-custodial wallets: Crypto wallets that give users constant access to their private keys. Self-custodial wallets allow users to fully own their crypto assets.
What are Crypto Exchanges?
While most crypto wallets are typically decentralized software programs akin to eWallets like Neteller and Skrill, cryptocurrency exchanges serve as digital marketplaces in which users can buy, sell, and trade various digital assets including NFTs. These platforms supply a convenient way for investors to enter the crypto market, offering a wide array of trading pairs and liquidity. In short, crypto exchanges act as intermediaries, matching buy and sell orders from users.
Crypto exchanges can be Centralized or Decentralized:
Centralized exchanges (CEX) are the most common type of cryptocurrency exchange. As the name suggests, they’re operated by a centralized authority or company that manages the platform and executes trades on behalf of its users. CEX platforms typically require users to create an account, complete a verification process, and deposit funds before they can trade on them.
While CEX platforms offer more advanced trading features, such as limit orders, margin trading, market analytics etc. Since they store user funds, they present a higher security risk than other crypto storage options.
Alternatively, decentralized exchanges (DEX) run on decentralized networks that are typically powered by blockchain technology. While crypto itself facilitates peer-to-peer transactions, DEX platforms enable peer-to-peer trading, cutting the need for intermediaries and offering users more control over their funds. DEX platforms often employ smart contracts to automate trade settlements without the need for a central authority.
DEX platforms offer higher levels of privacy and security than centralised exchanges, as users keep control of their funds throughout the trading process. Moreover, DEX platforms enable anonymous trading since users don’t need to undergo extensive verification procedures when creating their accounts.
What’s the Best Way to Store Crypto?
Just as there’s no one best cryptocurrency or one best trading approach, the best way to store crypto is subjective to the needs and preferences of the user.
In most cases, choosing the option that gives direct control over private keys is often the more proper choice, particularly among users who prioritize independence and security. However, with full crypto ownership comes great responsibility; users need to ensure they perform regular backups and take the necessary precautions to ensure security still is airtight.
There are also several instances when crypto exchanges can present a more effortless way to store digital assets. For casual investors or users with limited tech knowledge, for example, leaving their crypto on an exchange is a much more convenient approach than having to learn about crypto transfers and self-custodial wallets.
