Cryptocurrency 101 – Wallet and Exchange

by Crypto Drive

Considering that cryptocurrency is a new financial technology, it is important to learn how it works. How this digital money functions, where they are stored, and how safe various storage platforms are.

When talking of acquiring cryptocurrency, one should have a wallet first. Whether the cryptocurrency is mined, or bought from other sources, cryptocurrency wallet is one vital requirement to have.

For those interested to start exploring the world of cryptocurrency, there are two basic things that one has to understand – cryptocurrency wallet and exchanges.

Cryptocurrency wallet stores digital coin and/or token, keep them safe just like banks keeps our savings safe, and also facilitate sending and receiving digital currencies. There are single coin or native wallet for a particular cryptocurrency, and there are also multi-coins, and/or tokens wallets. Wallets that can handle different cryptocurrency from different blockchain or distributed ledger technology (DLT) projects and ecosystems.

Wallet are also classified according to control, another based on online internet connection.  So that there are custodial and non-custodial wallets, and there are hot and cold wallets.

Non-custodial wallet are those wallet of which the owner has a sole full control. So that only the owner knows, and hold the private key or passphrase to that particular wallet. Unless, he voluntarily shares it to other person he trusts.  Most cryptocurrency has their own native wallet like Bitcoin Network with its Bitcoin Wallet, VeChain with its VechainThor wallet and the Pi Network with its Pi Wallet, among others.

What cryptocurrency holders should always bear in mind that once you lost the private key or passphrase of your wallet, you lost access of all the assets in that wallet. Practically, it is the same as  you have thrown away all the digital money inside it.

While custodial wallet are cryptocurrency wallet of which aside from the owner, the platform operator also have control and custody of the digital assets entrusted to them.  Basically in a custodial  wallet, the owner which is duly registered in a particular platform, can access the cryptocurrency he have on that platform based on the account name or username, password or passphrase that allows access to a particular account wallet. Some of these wallets are encrypted having passphrase that owners hold and use to access it.

Cold wallet are offline cryptocurrency storage mechanism. This is how defines cold wallet. “Cold storage is an offline wallet used for storing bitcoins or other cryptocurrencies. With cold storage, the digital wallet is stored on a platform that is not connected to the internet, thereby protecting the wallet from unauthorized access, cyber hacks, and other vulnerabilities that a system connected to the internet is susceptible to.”

While hot wallet are those “always connected to the internet and cryptocurrency network. Hot wallets are used to send and receive cryptocurrency, and they allow you to view how many tokens you have available to use.”

Cryptocurrency exchanges are platforms that facilitates trading or convertion of these digital assets.  Those who are holding crypto assets in their non-custodial wallet usually access to exchange platforms to avail of their services so that the cryptocurrency they are holding will be changed or converted into cash or fiat money, or to other  cryptocurrenc they want to have.

But before that can be done, one has to have an account in the exchange platform, create a wallet for that particular cryptocurrency, then transfer a particular crypto coin or token to that specific cryptocurrency exchange-based wallet.  This is the usual practice. Unless, the user will just directly purchase crypto on a particular platform, wait for it to gain value, then exchange or convert these assets to fiat money, or other assets for a substantial profit.

As of this writing, a total of 288 cryptocurrency exchanges are listed  On top of these are Binance, FTX and Coinbase Exchange having the highest volume of transactions.

Over the years, technology in the cryptocurrency space also evolve, and have been upgraded significantly. Ten years ago, it is more common to use single coin wallet such as bitcoin wallet and few other cryptocurrency.  Wallets just function as primary storage, then sending and receiving crypto assets.

Nowadays, wallet services, that usuallly handles multi-crypto assets,  also functions as exchange and/or swapping platforms.  There are a number of these wallet apps and platforms available in the internet.

Other platforms like Coinomi still remains as a multi-coin wallet service, but offers direct access to an exchange platform runs by a third party.  While Trust, Gemini, Abra, Klever, Exodus and other multi-crypto wallet services have their built-in trading or exchange operation among other financial services like staking and crypto interest earning mechanisms.

Crypto exchange wallets offer the simplest way to purchase and hold cryptocurrency. While some people are comfortable storing significant amounts at these crypto exchange wallets, safety and security conscious crypto enthusiasts prefers to withdraw their assets to a cold hardware wallets like Ledger and Trezor, to name a few.  Which of course entails additional cost to procure.

For newbies, it is suggested to first explore and get comfortable sending and receiving funds, and then later decide on the right storage strategy. Evaluating all the pros and cons on these various wallet types.

Most crypto owners uses a  combination of several wallets, crypto exchange wallets, mobile wallets, and hardware wallets, of which the latter is used to secure store large balances. Depending on their purpose and use of their cryptocurrency holdings.  Most long term crypto investors with sizeable portfolio prefers cold wallet storage, while crypto traders strike a balance among the various wallet services and storage facility available.

What is important is that safety and security should be given primary consideration in deciding what, where and which type of wallet to use.  Considering that most holders acquires some for their future use of these digital assets.

Please do take note that brand names of wallets and crypto exchange platforms mentioned here in this article is not a recommendation.  It will be up for the reader to do extensive research and read reviews of a particular wallet, exchange platforms and mobile apps to be able to decide what is best for them.

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