A crypto exchange is where you can trade crypto and a wallet is where you “store” it. However, the operation of a crypto wallet is more complicated. As you are unable to purchase cryptocurrency through traditional means such as a bank or investment firm, a crypto exchange is vital for cryptocurrency trading.
How a crypto wallet functions
Crypto is digital and decentralized. It exists on a Blockchain, which is a distributed network of computers that create and maintain all types of cryptocurrency. You can access your crypto through the blockchain and transact with it.
The wallet software generates two pairs of keys: one public, one private. These keys allow you to send, receive, and manage your crypto.
A “hot wallet” can be set up on any computer or other internet-connected device. Or, a “cold pocket,” which is a piece or hardware such as a flash drive.
Most wallets can now accept many different types of cryptocurrency, but not all wallets do. You should check which wallets can take what cryptocurrency before you buy or send crypto.
How cryptocurrency wallets and exchanges work together
Although it’s the best way to manage crypto, keeping crypto on a crypto exchange limits your options and can make it less secure. Exchanges can be susceptible to hacking or cyber-attacks.
The exchanges are not regulated and offer no insurance for theft, fraud or collapse. You could lose your crypto if an exchange closes down, as happened in Australia recently in December 2021 and October 2021.
If you want to be more secure, you can set up your own crypto wallet. Although it is more difficult to use a wallet, some investors find the added security worth it.
What are the Different Crypto Exchanges?
There are three types of digital currency exchanges available: centralized, decentralized, and hybrids. Here’s how they compare:
The third party who conducts transactions on these exchanges is similar to a broker.
This may seem counterintuitive, since one of the founding principles of cryptocurrency is that they are not issued or regulated centrally by any government. However, a central cryptocurrency exchange can make buying your desired crypto easier with regular currency.
Some centralized exchanges pose a risk because they are held by one entity.
Decentralized cryptocurrency exchanges (or DEX) operate without third-party exchanges. Decentralized exchanges, or DEX, are closer to the spirit and nature of cryptocurrency because they are open-source and rely on users to trade peer-to-peer.
A decentralized cryptocurrency exchange might be more secure than an centralized one. It might be harder to steal cryptocurrency because there is no central server or entity to hack. A DEX might have lower fees and your transactions may be processed faster.
There might be some disadvantages to a DEX compared with their central counterparts. A DEX might not allow you to transfer funds from your bank account or use debit cards to purchase crypto.
Some DEX do not offer fiat currency exchanges. You might only be able to trade one cryptocurrency for the other. Because there is no central authority, your funds are not insured.
Hybrid Cryptocurrency exchanges
Hybrid cryptocurrency exchanges combine the best of both centralized and decentralized exchanges to create one. They are designed to offer end users both the convenience and security of a central exchange, as well as the freedom and security of a decentralized one.
Although hybrid exchanges are not yet seeing the same adoption as centralized exchanges, they could be setting a path for a middle ground that will keep crypto enthusiasts and consumers happy in the long-term.