Exchange vs Wallet — when to use each (practical guide)
Read time: 6–9 min • Category: Custody & Security
Differences, risks, and practical decisions: start small on the exchange, understand custody, and only then migrate to your own wallet safely.
1) What is an exchange?
A crypto exchange is a platform where you buy and sell digital assets (for crypto or fiat), with an order book, user account, and products like Spot and P2P. The main function is to provide liquidity and a continuous market for order execution.
Advantages
- Liquidity and pricing: typically tighter spreads; deeper books.
- Fast onboarding: KYC, fiat deposits/withdrawals, simple conversions.
- Products & services: Spot, instant conversions, P2P, among others.
Risks
- Third-party custody — “not your keys”: you depend on the platform to access funds.
- Counterparty & governance risk: failures, freezes, mismanagement.
- Proof of Reserves (PoR): can show assets but not liabilities; without liabilities, the picture is incomplete.
Base rule: use an exchange to transact, not to “store forever”.
2) What is a wallet?
A crypto wallet stores and manages private keys that prove ownership of your assets on-chain. Two main groups: custodial (a third party controls the key) and non-custodial (you control the seed/key).
Types
- Custodial: simpler; the provider holds the keys (e.g., the exchange account itself).
- Non-custodial: full sovereignty — the seed is 100% your responsibility (hardware/app).
- Hot vs Cold: hot (internet-connected) is convenient; hardware/cold improves long-term security.
Advantages (non-custodial)
- Sovereignty: you control the keys; no one can freeze your balance.
- Resilience to third-party failures: less exposure to exchange issues.
Risks
- Total responsibility: losing the seed = losing access; beware phishing/user error.
3) Proof of Reserves (PoR) — what it is and what it is not
Proof of Reserves (PoR) publicly demonstrates that a custodian holds enough assets to cover deposits. However, without proof of liabilities we don’t know whether obligations exceed assets; PoR without liabilities is incomplete.
4) Essential security
- 2FA via TOTP app (avoid SMS); for critical accounts, consider MFA.
- Password manager and long passphrases; avoid reuse.
- Tested backups of the seed; confirm the address on the device screen (hardware) before sending.
5) When to use each?
Exchange
- Immediate liquidity to buy/sell.
- Short-term operations or quick conversions (includes P2P).
- Fiat on-/off-ramp (bank deposits/withdrawals).
Avoid keeping large idle balances. If there’s balance, keep only the operational amount and seek transparency (PoR + governance).
Non-custodial wallet
- Store value for medium/long periods.
- Sovereignty and lower counterparty risk (hardware recommended for relevant amounts).
- dApps/DeFi directly from your own key (with caution).
6) Practical decision (pocket checklist)
- Horizon & amount: short term/small amounts → exchange; long term/relevant value → wallet (preferably hardware).
- Counterparty risk: reduce idle balance; prioritize transparency (PoR + liabilities + governance).
- Security: 2FA/MFA enabled; strong passwords; seed well stored and tested.
7) Conclusion
At the beginning we recommend using only the exchange for the first weeks, without moving funds to your own wallets until you’re familiar with the crypto ecosystem and terminology. Start small — small amounts, simple operations, and a focus on security — so you can scale consistently and avoid errors/losses. When you master the basics (security, seed, addresses), gradually move to a non-custodial wallet (ideally a hardware device) to store medium/long-term value, keeping on the exchange only the operational balance.
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