Cryptocurrency wallet: What it is, how it works, types, security

The increasing growth in cryptocurrency demand is forcing traders and investors to master new tools. It is necessary to learn how to use new assets correctly. But immediately appears the first question, how is a cryptocurrency exchange different from a cryptocurrency wallet? Where should a beginner create his first wallet and how to store coins far away from scammers and frauds safely?

We will tell you more about it in this article compiled by our experts.

What is a cryptocurrency wallet?

A cryptocurrency wallet is the so useful digital tool to store such currency. Functionality is not limited to this and is complemented by sending, accepting, or exchanging cryptocurrency within the program. The wallets themselves may vary, but they have in common that, the user acquires full control over his assets.

To deal with the question of how is a cryptocurrency exchange different from a cryptocurrency wallet, necessary to understand exactly what such a vault consists of:

• a public key. The so-called wallet number, which you will provide to your counterparties for the transaction. If we talk about traditional financial instruments, this is your bank account;
• private key. This is something similar to the PIN code on your card. You must carefully guard the key from being seen or used by third parties. Thanks to the secret code, you are free to use your funds.

You should use your wallet carefully and responsibly. In this case, you will not lose access to your assets and will not pass your key to fraudsters.

The wallet works on the principle of signing each transaction with its key. Thanks to this, there is proof that you are the owner of the funds. The transaction will be registered in the blockchain, allowing you to record it in an immutable ledger. Thanks to his private key, the recipient can start owning the funds, see them on the balance, and send them further.

An extremely important note that allows you to understand better how is a cryptocurrency exchange different from a cryptocurrency wallet. The wallet itself does not store the coins because they are a record in the blockchain itself. 

Types of cryptocurrency wallets

When dealing with the question of how is a cryptocurrency exchange different from a cryptocurrency wallet, it is necessary not to forget that the storage itself can be different. Specialists classify them by storage method, access, security, and convenience. Here are the main ones:

• hot. They are often the most convenient and are characterized by a network connection. Thanks to this, investors and traders get round-the-clock access to assets. Ideal for storing coins that you intend to ship soon;
• cold. Do not maintain 24/7 network connectivity. Because of this, they are more secure and great for long-term storage of large assets. It can be either paper-based, meaning no software at all, or hardware-based, appearing as physical devices like thumb drives;
• multi-currency. This type plays a key role in the question of how is a cryptocurrency exchange different from a cryptocurrency wallet. You will likely get this type of wallet, which combines several coins on exchanges;
• decentralized. The most sophisticated storage options are considered secure and anonymous. You will interact directly with the blockchain, requiring a certain level of knowledge. In most cases, it’s not for beginners.

Understanding how is a cryptocurrency exchange different from a cryptocurrency wallet will allow you to choose the right one for your business. The main question is what sacrifices you can make to get the comfort and convenience of managing your assets.

Your first cryptocurrency wallet is most likely an exchange wallet

It doesn’t matter how long our experts have been working with the question of how is a cryptocurrency exchange different from a cryptocurrency wallet, the truth remains the same – the wallet you started with is likely an exchange wallet. If you listen to any expert, they will tell you that this is the best wallet for your start with cryptocurrency.

Here are a few reasons:

• simplicity. Professional programmers and designers do the creation, so you will interact with an intuitive interface. There will also be features inside to purchase, exchange, or sell coins in minutes;
• fast access. Internal transactions are most of the time instantaneous. Because of this, you will also be able to interact with the markets and make quick decisions to hold, sell or buy;
• security. Two-factor authentication is most often used. Various hacking protection algorithms are supported, and it is possible to restore your account;
• training. There are a lot of materials on the Internet that will help you understand all the functionality of such wallets;
• customer support. User support will be ready to solve any of your problems and answer all your questions.

In most cases, such wallets are provided by exchanges and trading platforms interested in making you understand cryptocurrencies. That’s why you will not find complex interfaces here or the need to interact directly with the blockchain. Everything is done for users who will become loyal customers and can easily use any types of crypto wallets.

An exchange wallet is generally a hot wallet, and a cold wallet

You already know what is a crypto wallet and, therefore have an idea of what they are. In most cases, you will use hot or cold storage versions provided by exchanges and trading platforms.

Hot ones are characterized by constant connectivity, great functionality for fast transactions, constant use of coins, and active trading. At the same time, they are more vulnerable to various kinds of attacks. Additional security measures will be required, among which is two-factor authentication.

Cold at the same time, more time do not have a connection to the Internet, and therefore more secure and less susceptible to hacking. Great for large sums and cryptocurrencies that you won’t be using daily.

The question of how is a cryptocurrency exchange different from a cryptocurrency wallet is not only about security but also about user convenience.

That’s why we recommend you combine vaults, which will give you two privileges:

• the ability to engage in trading, sending, and receiving coins, as well as instant exchanges for small amounts that you need daily;
• leave your main investments in a cold wallet, which you will not use daily.

With this risk diversification, you can get ease of use and crypto wallet security. It is important to find a balance between the two amounts so that you do not lose out on functionality compared to other traders.

Safety and precautions when using an exchange wallet

Using an exchange wallet is convenient, modern, and extremely attractive from a new user’s point of view. For these reasons, our experts emphasize the security aspects you need to learn and use. Due to this, your investments will be safe, and the question of how to use crypto wallets will disappear.

Here are the most important recommendations:

• 2FA. It is necessary to use a system of double authentication, which increases the security of the wallet;
• passwords. Complex, unique, and large passwords are needed. The same ones should not be used;
• caution. Do not click on controversial links sent to you by e-mail or messengers. This can be phishing;
• backup. Make extra copies of your keys and store them physically or in another safe place;
• limiting access. You need to keep only those tools that you will be actively using shortly;
• software updates. Don’t forget to install new updates that can address past security issues or vulnerabilities;
• hardware wallets. Use physical vaults to handle large sums of money;
• awareness. Don’t ignore news about the world of cryptocurrencies. Fraudulent attacks evolve. If you are aware, you are protected.

You should know what is a bitcoin wallet and use these eight important guidelines. By doing so, the risks of losing capital due to fraud or hacking are reduced many times over, which means you can enjoy your assets without worry.

Crypto wallets vs. exchanges

With an understanding of the differences between these two vaults, you will be able to make a decision and start using one of them.

Digital crypto wallet:

• key functionality. Key storage to use assets on the blockchain;
• control. Full control over the private key you need to use the funds;
• security. Depends on the type of wallet and how careful the user is;
• risks. Loss of private key results in complete loss of access to funds.

Exchanges:

• key functionality. Exchange, buying, and selling coins between users;
• control. The exchange controls the private keys. The user has only control of their account on the exchange itself;
• security. High due to exchange actions, encryption, additional authentication;
• risks. Loss of funds in case of a hacker attack on the exchange. You can face temporary restrictions on access to your account.

In conclusion, crypto wallets are better suited for the long-term storage of assets and investments. Active trading will be many times more convenient on exchanges.

Author’s opinion

Johnson Qi

The most obvious difference between crypto wallet and exchange is security and convenience. You can sacrifice one for the second and vice versa. Your goals play a decisive role in your assets. Based on this, you can decide and register your wallet on the exchange, personal, diversified, custodial, or cold. At the same time, no one is limiting you. 

We recommend taking everything from the market and using several vaults at once.