Bitcoin Wallet vs Exchange

How Non-Custodial Wallets Compare to Online Exchanges
By 
Coin Cloud Team
, published on 
June 4, 2021
Bitcoin Wallet vs Exchange

When trading Bitcoin, it’s common knowledge that you need somewhere to store it. Often, new users gravitate towards “online exchanges,” because they do almost everything for you. So a new Bitcoin user doesn’t really have to learn or do much to buy their first piece of Bitcoin. While that might be appealing at first, there are a few potential problems down the road, especially if you intend to use your bitcoin as an investment or form of payment.

Online Exchanges

Online exchange wallet systems are usually “custodial wallets.” Imagine that the online exchange (or the company that owns it) is the “custodian” in this situation. They basically manage your wallet for you. So, while you do have the ability to send, receive, purchase or sell bitcoin, the custodian is still in possession of your private keys. You’re just given access to your funds by logging in to your online account. Meaning you don’t have full control over your Bitcoin wallet, can’t import it to a different platform, and it often takes days just to move your money.

This method of Bitcoin storage can pose some long-term problems. For one, your coin is more susceptible to being stolen when it’s stored by a third party. There have been a few hacking incidents on popular online exchanges that led to the loss of user funds. While the online exchanges usually restore these funds after some time, they cannot refund the stress and time that comes with having your digital currency stolen.

Non-Custodial Wallets

Non-custodial wallets exist on their own. While they might be offered as an optional download from an online exchange company, they are not tied to your account in the same way. With this type of wallet, you have full access to and control over your private keys. So you are the “custodian” for your own wallet rather than a third party filling that role.

Using this type of wallet isn’t as complicated as it might appear at first. Most non-custodial wallets come in the easy-to-use format of a phone or computer application. All you have to do is download the app and get your wallet address, along with its private key and recovery phrases. Some wallets, like the Coin Cloud Wallet, even give you step-by-step tutorials on how to set up your new Bitcoin wallet.

How Do Non-Custodial Wallets and Online Exchanges Compare?

Both bitcoin storage options provide a place for you to keep your digital currency. Both usually let you buy and sell, as well as potentially send and receive. But one gives you the power to drive while the other just lets you ride in the passenger seat.

Some people believe online exchange wallets are easier to use, which isn’t always true considering the wide variety of user-friendly options for non-custodial wallet applications. What a non-custodial wallet does that a custodial one can’t is provide full control of your funds and where they are stored.

For some people, that responsibility might be a bit scary, but there are plenty of easy ways to protect your wallet, prevent loss of your funds, and even restore them if you do.

Disclaimer: The information and views supplied on the Coin Cloud blog are for educational and entertainment purposes only. We are not financial advisors, so please do your research and consult with a trusted financial specialist before investing your money.

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