Crypto Wallet vs Exchange: Where to Stash Your Crypto

You've purchased some Bitcoin, Ethereum, or Cardano (or maybe you're about to pull the trigger), and now you're wondering where to keep it. After all, your Bank of America account isn't an option.

Storing your crypto isn't as straightforward as stashing your cash in a savings account. You can keep it in the crypto exchange where you bought it, but that can leave it open to cyber attacks, theft, and loss. Or, you could move it to a safer crypto wallet, but that can make it harder to access.

If you're going to invest in crypto, whether casually or with the hopes of retiring on a mountain of Dogecoin, you need to make sure you're storing your future fortune safely and securely. When it comes to deciding between your two options, a crypto wallet vs exchange, here's what you need to know.

A cryptocurrency exchange is a platform where you can buy, sell, and trade various cryptocurrencies. These crypto exchanges will store your crypto for you unless you decide to withdraw it. For example, you can buy Bitcoin with US dollars on a crypto exchange, and you can keep your Bitcoin on that exchange. You could also convert some of your Bitcoin to another cryptocurrency, like Ethereum, or you could eventually withdraw it to an external wallet or convert it back to USD. 

Different crypto exchanges charge different fees for each transaction and not all cryptocurrencies are supported, although the biggest crypto exchanges support hundreds of different tokens. Some of the most popular crypto exchanges include Coinbase, Binance, Kraken, and Gemini.

When you buy tokens on a crypto exchange, you can leave your crypto on that exchange. This is the easiest storage option, but it can be risky. When you keep your crypto on a crypto exchange you don't actually own it—the exchange does.

Crypto lives on the blockchain technology it uses, and you access it using private and public keys. Your private key, which is an encrypted code, is like the locked safe to your crypto that keeps it secure. Crypto enthusiasts like to say that the holder of the keys is the real owner of the crypto they correspond to, because that's who controls how securely that crypto is stored. 

When you keep your crypto on a crypto exchange, your crypto is still stored in a wallet, but the wallet is owned by the exchange. That means you don't get the keys to your crypto either—the exchange keeps them. If that exchange is compromised, your crypto could be too. According to the BBC, at least $2.1 billion in crypto kept on crypto exchanges has been stolen by hackers since 2014. There's also a risk of internal mismanagement within the crypto exchange.

That said, keeping your crypto on a crypto exchange is convenient in more than one way. Not only do you not have to worry about going through the process of opening a crypto wallet and moving your crypto, but you have immediate access to using your crypto balance on the exchange. If you're actively trading, for example, the crypto you want to trade will need to be on your crypto exchange account.

A crypto wallet stores the keys that allow you to access and manage your crypto. It's less like a physical wallet and more like a highly secure bank account. There are many different types of crypto wallets, including both software and hardware wallets.

Hardware wallets are widely considered to be the most secure way to store crypto because they aren't connected to the internet and therefore aren't vulnerable to cyber attacks. These small portable devices cost around $40 to $180. There are also paper wallets, which are simply printed pieces of paper with your keys on them, often in the form of a QR code. These are one-time use and have largely been replaced by hardware wallets.

Software wallets include web-based wallets, mobile wallets, and desktop wallets. Of these three, desktop wallets (which are downloaded to your desktop in the form of a software program) are typically preferable. You don't need to connect to the internet to access your crypto with a desktop wallet, so they're more secure.

While crypto exchanges will keep your crypto in their own wallets, you can also open your own crypto wallet if you prefer to hold those keys yourself. After all, that's the only way to have full control over how securely your crypto is stored.

That said, crypto wallets aren't foolproof. They're still vulnerable to theft and hacking—particularly "hot wallets," which are those that rely on an internet connection. Using your own crypto wallet means you're in charge of the safety of your crypto, so if you don't trust yourself to keep your crypto secure, you might be tempted to leave it on an exchange.

Accessing your crypto can be a bit trickier with a crypto wallet vs exchange as well. There are a number of hoops you have to jump through to open the wallet and transfer your crypto to it, and once it's there, you generally can't just spend or trade it in minutes. Some wallets, like mobile wallets, make spending and trading your crypto easier and faster than others. However, convenience is usually inversely related to security, and mobile wallets are one of the less secure methods for storing your crypto.

The crypto community is big on taking your crypto out of crypto exchanges and putting it in your own crypto wallet. When done properly, this is far more secure than leaving it on even the best crypto exchanges. While this requires jumping through a few extra hoops, they're worth it if it means your investment isn't at risk of being stolen.

However, keeping your crypto in a crypto wallet does make it a little harder to access if you want to spend or trade it. If you plan on making a purchase with your crypto in the near future or you want to actively trade crypto, you can keep a small amount of crypto on the crypto exchange of your choice and store the rest in a secure external wallet.