Hardware wallets vs. digital exchange
Let’s face it, the enticing world of cryptocurrency may be too tempting to avoid for some investors. For those looking to get into the game, you need to understand the ins and outs of this new frontier. At Richter, we’re here to help.
In a relatively new and unregulated industry, there are numerous types of cryptocurrency wallets, such as a paper, mobile, desktop, digital exchange or hardware. This article will focus on the main two wallets that are commonly used by cryptocurrency investors, when deciding where to store their digital assets: 1. on a digital exchange (“Exchange”); or 2. a hardware wallet (“Wallet”).
What’s the difference between holding your crypto assets in a Wallet vs Exchange?
Allow us to explain:
1. Ownership: with a Wallet you are the owner of your private key. This is the place where you store your crypto assets and only you have access to them. Although an Exchange does provide “wallet-like” features, meaning it provides a place where you can store your crypto assets, it is the Exchange itself that owns the wealth.
- Consider Binance or Coinbase, two of the biggest Exchanges on the market: you create an account with them which provides you with access to multiple Wallets for the various crypto assets they offer. The Wallets are controlled by you but are owned by the Exchange. If the Exchange is hacked and your crypto stolen, there is really nothing you can do to get your crypto back. There have been various instances where Exchanges have been hacked, resulting in users losing their crypto. Some Exchanges have credited the holders for the stolen crypto, while others have not. Additionally, if the Exchange is down for a few hours or days, you would have no access to your crypto during that time. Whereas, if you own a Wallet, the crypto is your sole responsibility and you have access to it 24/7.
Round one: Ownership:
2. Anonymity: An Exchange is a service provider which executes a transaction on your behalf. In other words, Exchanges are not entirely anonymous since they request your personal information when you sign up, and your transaction history is forever saved on their servers. Furthermore, unless you verify your identity with the Exchange, your withdrawal limits are low. When you send crypto from your Wallet, given that you are the sole owner of your private keys, it is near impossible for you to be identified. Yes, while the transaction is usually public and recorded on the public ledger, your identity is not.
Round two: Anonymity:
3. Convenience: It is important to note that Wallets do not support all cryptocurrencies. Hardware wallet companies charge a fee to add a cryptocurrency to their Wallet. This fee is often high, and most of the new cryptocurrencies cannot afford it or choose to instead spend money on developing their technology versus paying hardware wallet companies. Given that there are more than 1,500 cryptocurrencies on the market, you could be out of luck when it comes to storing them in your Wallet. Therefore, the only way to store and trade in these certain coins is on an Exchange.
Suppose you hold a particular crypto asset in your Wallet and you would like to sell it; if you don’t have an over-the-counter purchaser you are forced to sell it on an Exchange. If you use the services of an Exchange your crypto is already on their platform and therefore it is much more convenient to buy and sell your crypto instantaneously.
Round three: Convenience:
Winner: Digital Exchange
Exchanges provide users with convenience and simplicity, but that comes with a cost. The cost being that the user is more susceptible to losing anonymity, being hacked and possibly ending the day crying in the fetal position. So the question is: what do you value more, convenience or security? The choice is yours.
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