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Storing Crypto: Crypto Wallets vs. Exchanges

4.7 | by Joel Agbo

Crypto Wallets vs. Exchanges

Crypto wallets are used for storing, receiving and sending crypto, while exchanges are marketplaces for users to buy, sell, and trade crypto. Centralized exchanges also offer their users crypto storage solutions, although private keys will be held by the custodian (the exchange). 


Key Takeaways

  • Cryptocurrency investors who choose to use a non-custodial crypto wallet hold the private and public keys of their personal wallet. This gives them full custody of assets stored in their wallets and they retain the right to these assets as long as they hold their private keys.

  • On the other hand, investors who use centralized exchanges and other custodial institutions enjoy a more user-friendly experience with the reassurance of the exchange’s support team, although their assets are held by the platform until withdrawn into a non-custodial wallet. 

  • Self-custody of assets through personal wallets is considered a more secure way of holding crypto assets, but keeping assets in custodial wallets also comes with a few advantages.


Crypto wallets vs Exchanges

Cryptocurrency wallets are a medium to keep hold of your crypto assets. They can be anything from accounts on centralized exchanges to hardware (cold) wallets, and they are designed to present a record of your account and holdings on the decentralized ledger in a comprehensive interface.

Cryptocurrency wallets can be split into two broad types: non-custodial and custodial wallets. In the case of non-custodial wallets, the wallet owner is responsible for their private keys and recovery phrases. These keys are not stored on any database, and therefore can’t be retrieved from anyone except the owner, which ensures that non-custodial wallet owners are in full control of their wallets and assets. 

Non-custodial wallets can also take the form of software wallets that can be installed on smartphones and personal computers, or specialized hardware devices.

Centralized exchanges also offer crypto storage through their own inbuilt wallets, which are accounts managed by the custodial institution (in this case a centralized exchange), where the private keys are held by the institution on behalf of the user. The institution manages the user’s wallet key, signs transactions and is also responsible for protecting the user’s crypto assets. On the other hand, decentralized exchanges only offer trading facilities, and require linking to a non-custodial wallet before a user can swap cryptocurrencies. 

Let's start with looking at non-custodial software wallets as a crypto storage solution.

Non-Custodial Wallets

Just like mobile phones, wallets with companion mobile applications are the most popular cryptocurrency wallets. These mobile wallets are convenient and enable holders to perform transactions from the comfort of their devices. However, one significant safety risk around software wallets is that they are connected to the internet and are more exposed to the risk of phishing and data sniffing. 

Two popular non-custodial software wallets with a mobile app are MetaMask and Trust Wallet.

MetaMask

MetaMask is a fully-constituted cryptocurrency wallet with support for Ethereum, its Layer 2 networks, and standalone EVM blockchains.  MetaMask offers storage for Ethereum’s native coin ETH and ERC-20 tokens on the Ethereum network, along with any EVM network manually added by the user. With its compatibility with Ethereum and its related network, plus the convenience offered by its mobile app, MetaMask aids easy access to crypto assets.

MetaMask also offers liquid staking options, where users can deposit their ETH with Lido and Rocket Pool, receiving a token of equal value which they can then use in other DeFi activities like lending and providing liquidity. 

At the time of writing, the MetaMask wallet is one of the most used DeFi wallets and is currently used by over 10 million cryptocurrency enthusiasts. 

Trust Wallet

Trust Wallet is a multi-chain wallet, built with support for different cryptocurrency networks with markedly different modes of operation. Its support spreads through payment solution blockchains to established smart contract Layer 1 blockchains. As of July 2021, it is confirmed to be supporting over 33 chains, including Bitcoin and Solana, while MetaMask is limited to Ethereum and EVM-compatible networks. 

Trust Wallet lets users stake certain coins, where they earn a share of the rewards in the form of APR. For example, staking BNB on Trust Wallet offers 11% APR. It also enables Web3 enthusiasts to connect to decentralized applications through an in-built browser and the “WalletConnect” protocol. Beyond the mobile app, Trust Wallet is available for personal computers and the Trust Wallet extension can be used in desktop browsers.

 Interested to learn more about how MetaMask compares against Trust Wallet?

Hardware Wallets

Hardware wallets (also known as cold wallets) are recognized as the safest devices to store cryptocurrencies. They score high in terms of security because they are offline and less prone to phishing and other risks due to frequent use. Hardware wallets resemble storage drives and are equipped with a small user interface to allow users to perform basic activities.

Hardware wallets can be connected to other devices like a personal computer if needed. Ledger and Trezor are two very popular hardware wallet brands and they also offer users the option to connect to their respective hardware wallets’ applications to engage in additional activities like staking. 

The Ledger Nano series comes with little variations in their specifications. The Ledger Nano X allows the addition of up to a hundred crypto dApps and has Bluetooth features; in contrast, Nano S doesn’t have Bluetooth features and supports the addition of only three DApps. Meanwhile, Trezor claims to be the most advanced cryptocurrency hardware wallet. Trezor supports over 1,500 cryptocurrencies including Bitcoin, Ethereum, and the USDT stablecoin. Trezor wallets cost anywhere between $70 to $250. 

Unlike Ledger, Trezor wallet’s codes are open source, where it can be reviewed and tested by third parties. However, Ledger supports more assets and has iOS and Android applications with Bluetooth support for connecting the hardware device to mobile devices. 

Now that we've run through the different types of non-custodial wallets, let's look at their pros and cons.

Benefits of Non-Custodial Crypto Wallets

Blockchain-Level Security

Self-custody wallets, software or hardware, present personal cryptocurrency accounts the way they are on the blockchain and hand over every authority to the user. The account is well preserved in every case where the owner keeps their details safe and doesn’t expose their wallet to conditions that give an attacker a way into the wallet. Any direct attacks will only be via the on-chain route, such as smart contract exploits. 

But this security falls through whenever the wallet falls prey to internet phishing attempts, where an owner hands over their wallet security details to anyone who seeks to gain control of the wallet. However, on the blockchain, the wallet remains intact and this access is considered a normal procedure.

Complete Right to Ownership

Blockchain-level security means that a wallet owner is the only custodian of the assets in their wallet. By blockchain convention, a rightful wallet owner is anyone who holds the private key or complete passphrase to the wallet. Any party that fits this description is therefore conferred with complete rights to the wallet and any asset therein. This assumes that complete access is granted only at the owner’s request or approval.

Data Privacy

To use a centralized exchange, investors are required to provide some basic personal details to verify their identities (also known as "know your customer" or KYC). Custodial institutions’ KYC programs might require certain extra personal details to confirm an individual's identity, some of which might be confidential. This information is stored by the exchanges and can be re-visited at will, and the user data is no longer private as it is shared with the exchange.

However, when using non-custodial wallets, personal details are not required to create a wallet or to import them into the wallet applications. Transactions are anonymous as they can’t be traced to a specific sender using only the information provided by the transaction hash.

Permissionless Transactions

Executing a transaction from non-custodial wallets is straightforward. Transactions are submitted directly on the blockchain and go through the decentralized confirmation processes. Provided that the transactions are free from malicious data and the right fees are paid for them, they will be confirmed regardless of the time or the sender.

Cheaper Transaction Charges

Fees charged for transactions from custodial wallets are (almost) the same as specified by the blockchain. In most cases, they are notably cheaper than those charged on centralized exchanges. Withdrawals from centralized exchanges are known to be higher than blockchain fees due to extra exchange charges in addition to the gas fees charged by the blockchain.

Downside of Non-Custodial Crypto Wallets: No Alternative Recovery Route

As long as your assets are held in your personal wallets, you are your own bank. While that has numerous benefits as discussed earlier, it also means that you are in total control of your security, damage prevention, and control and also held accountable for any losses. Since personal wallets operate completely at blockchain level, even the identity of an attacker is also hard to trace.

In most cases, there is hardly enough information to make an attempt at tracing the attack and victims have to resort to letting go and nursing their losses.

What are Exchanges?

Cryptocurrency exchanges can be centralized or decentralized, and they provide an avenue for investors to swap their assets for other (supported) assets. 

Centralized Exchanges

Centralized exchanges are also known as custodial exchanges for their user asset management strategy. They create a hub for selected assets and allow users to swap between these assets regardless of the asset type or parent blockchain, without requiring a bridge. For example, a user can trade BTC for ETH instantly without first having to wrap their BTC and wrap their ETH.

Centralized exchanges provide support for multiple blockchain networks and users can deposit assets from their personal wallets or wallets from other exchanges. The exchange holds the keys to users' wallets and serves withdrawal requests from it.

To trade assets on centralized exchanges, investors are (usually) required to create an account on the exchange, and also need to pass the KYC process.

Decentralized Exchanges

Decentralized exchanges serve the same purpose as centralized exchanges — swapping assets. But they differ in basic operation and asset management methods. Decentralized exchanges do not take custody of users’ assets. Investors are able to exchange their assets from their personal wallets without creating an account on the exchange, using automated market makers (AMMs) to serve trade requests from assets locked in the liquidity pool.

To find out more about centralized and decentralized exchanges, check out our article comparing these two here

Pros of Storing Crypto on Centralized Exchanges

The greatest benefit of storing crypto on centralized exchanges is the convenience the platform offers. It's a one-stop destination, complete with customer support in the event you forget your password. 

Third-Party Support

If you forget your password, a centralized exchange will be able to restore access to your wallet after verifying your identity. However, if you lose your password and your seed phrase for a non-custodial wallet, you’ll have lost access to your funds permanently. 

Custodial exchanges are supposed to be accountable for the funds in their custody. This means that they are likely to provide support for users in case of erroneous transactions or even theft. Exchanges over time have assisted in tracing the movement of funds after a hack, which has proven helpful in some cases. This is because the exchanges keep a store of user identities and wallets attached to them on the exchange, making it easier to track down the personalities involved.

Ease of Use on the Platform

Using decentralized exchanges requires users to constantly sign transaction permissions and bridge assets when they wish to use another blockchain for their transactions. Each of these procedures is time-consuming and fees can add up depending on the blockchain in question. For assets on centralized exchanges, this is completely eliminated.

Users can trade every supported asset regardless of their parent blockchain without bridging or paying transaction fees at each point. While custodial exchanges charge trading fees that might equate to the charges on centralized exchanges, it saves time for time-sensitive transactions. 

Now that we’ve looked at some reasons why users may choose to store their funds on an exchange, let’s look at some of the cons.

Cons of Storing Crypto on Centralized Exchanges

Not Your Keys, Not Your Coins

Ultimately, by not holding the private keys to your wallet, you’re at risk of losing all your holdings in the event the centralized exchange collapses, as seen in the case of FTX and Celsius. This is because the custodial institution holds the private keys to your crypto, and by giving them access, you’ve essentially given them full control over your crypto holdings.

Always remember: Not your keys, not your coins. 

Data Leaks and Breaches

User data from KYC programs or regular registration procedures, stored by the custodial exchanges on their database can be compromised either by an external attacker or deliberate mismanagement. User information lost in any of these incidents can be used in numerous ways to the detriment of the exchange user.

Non-Blockchain Related Transaction Delays and Restrictions

Withdrawal or deposit transactions on custodial exchanges goes through two confirmation levels – the blockchain and the exchange. More confirmation levels including external confirmations might be required in special cases. The usual outcome of these confirmations is a delayed transaction; in extreme cases, the transaction can be completely flagged and assets withheld until every interested party is sorted. 

Are Crypto Wallets Safer Than Exchanges?

Assuming that you have stored your seed phrase safely offline on crypto steel, it is safer to keep your crypto in a non-custodial wallet, ideally using a hardware wallet to store your long term holdings. While many centralized exchanges provide wallet services, you are giving up control of your assets to the exchange. You can keep your trading funds on the exchange for convenience while storing your savings offline.

We've put together a summary table comparing crypto wallets and exchanges.

Crypto wallets vs Exchanges

Final Thoughts

Making sure that your crypto assets are safe is almost as important as making profits from your trades. In fact, the former comes first. Due to the nature of the crypto space, safety isn't as straightforward as storing your assets in a bank, or storing bonds in a safe. Unlike some other investments, there is a need to use your assets on different platforms and for different purposes. Whether you're carrying out your routine trade on centralized exchanges, sending a token to a peer, or locking up your assets in a decentralized exchange's liquidity pool, every interaction exposes your assets to risk.

Ultimately, it’s best to keep crypto assets that you intend to hold long-term in a hardware wallet, while keeping small sums for trading in either centralized exchanges or a non-custodial software wallet, depending on your preference. 

Always keep your private keys safe and offline, ideally using crypto steel for your seed phrase as paper can fade with age. 

Finally, this content is for educational purposes and should not be taken as financial advice.

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Joel Agbo
Joel Agbo

Joel is deeply interested in the technologies behind cryptocurrencies and blockchain networks. In his over 7 years of involvement in the space, he helps startups build a stronger internet presence through written content. He is the founder of CryptocurrencyScripts. Follow the author on Twitter @agboifesinachi

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