Safe storage of Bitcoin or any other cryptocurrency is the number one priority for anyone involved with the crypto world. To ensure absolute security, the information about cryptocurrencies is placed in software or hardware wallets. Although there are various wallet options available, you should understand their primary division.
There are two main wallet types available on the market: private and exchange wallets. Whether we’re talking about choosing the perfect private Bitcoin wallet or understanding exchange wallets, you should be clear on how the two work.
How Crypto Wallets Work
Crypto wallets are considered storage platforms. However, let’s take a look at typical banking applications that store fiat (non-crypto) money. Banking apps don’t hold the users’ funds inside them. They represent communication with banks and allow the user to task various transactions.
Similarly, crypto wallets represent a means of communicating with the famed blockchain. No real coins are stored within these apps.
Still, safety is of utmost importance with digital wallets.
The Two Categories
Let’s dive deeper into the two crypto wallet types. Although they both store data on the user’s cryptocurrency balance and communicate with the blockchain, they are vastly different.
For most people, crypto trading starts with one of the available exchanges. These exchanges are environments used to quickly trade various cryptocurrencies. To trade your coins and cryptocurrencies, you will need a crypto balance on such an exchange. The information regarding your crypto balance is located on exchange wallets. Each crypto exchange platform has one of its own.
Private crypto wallets are extensions, apps, or hardware devices that store the user’s crypto balance. They belong to the user and aren’t legally accessible by anyone else.
As mentioned above, the two wallet types are vastly different. For one, a private wallet’s primary purpose is safety – here, you are responsible for your private key, and no one else has access to it (unless you share it with them or store it in an unsecured location). With exchange wallets, the exchange in question also keeps your private key. The trouble here is that these platforms have been known to succumb to large-scale hacks, which can rob many users of their crypto money.
Long-term and safe crypto “storage” is the primary goal of private wallets. Although moving your crypto funds using these wallets isn’t hard, it’s nowhere near as convenient as with exchange wallets. The exchange wallets, on the other hand, are there for trading convenience, as explained earlier.
Other than that, the functions of both wallet types are identical. They both connect to the blockchain and enable the user to transfer funds from one wallet to another.
Which One Should I Use?
Usually, when there’s a division of a particular category, you choose between one of the two. This isn’t the case with crypto wallets.
If you are someone who doesn’t care about their cryptocurrency safety or is just practising trading and building a currency’s volume using small amounts of currency, you can make do with an exchange wallet.
But if you care a great deal about your financial safety and don’t exercise crypto trading at all, you need a private wallet.
In reality, you’re likely to start getting into digital currencies via exchanges. The moment you make an account on an exchange, you are assigned their wallet. You can choose not to use a private wallet and solely rely on the one available on your exchange of choice. This is risky, though.
Private wallets are built with personal safety and security in mind, while exchange wallets deal with functionality, performance, and ease of use. However, this is not to say that exchange wallets don’t have safety features of their own. Still, they are a long way from the safety measures of private wallets.
The answer here is that you’re best off using both private and exchange wallets. For instance, store most of the BTC you own on your private Bitcoin wallet but have some BTC for trading on your exchange wallet. This goes for any other cryptocurrency, as well. The more you divide your digital possessions, the safer you are.
The Two Wallet Types
Cryptocurrencies, Bitcoin, wallets, it can all get very confusing, even for someone who’s been dealing with crypto for some time now. Thankfully, at least the difference between private and exchange wallets is simple to understand. Although the two operate on the same principle, they are vastly diverse and best used in combination.
Author Bio: Hitesh is a digital marketing strategist and entrepreneur with more than 15 years of experience in digital marketing, start-ups, branding, and customer acquisition strategies. Hitesh is the CEO and Founder of Reposition Group, which specialises in digital growth strategies for companies in the cryptocurrency market such as Bitamp.com.