Covering Disruptive Technology Powering Business in The Digital Age

Written by: Khairul Haqeem, Journalist, AOPG

The demise of FTX, the second-largest cryptocurrency exchange, and its CEO, Sam Bankman-Fried, has had a negative impact on the cryptocurrency industry. A report revealed that Bankman-Fried’s firm, Alameda Research, had a USD $5 billion stake in FTT, FTX’s native coin. This sparked concerns about the exchange’s solvency and liquidity, leading to users seeking withdrawals totalling USD $6 billion. FTT lost 80% of its value in just two days. The collapse of FTX calls into question the safety of cryptocurrency exchanges and brokerages. The incident is also expected to have a negative impact on the broader cryptocurrency market.

In this article, the goal is to assist the reader in understanding the distinction between a cryptocurrency exchange and a cryptocurrency wallet. The article aims to clarify the purpose and function of each, as well as to provide guidance on where one should store their cryptocurrency securely. First up, let’s take a look at crypto wallets and what they stand for

Crypto Wallets: Do You Like It Hot or Cold?

Just what is a crypto wallet? Are you looking at your worn-out wallet right now?

A cryptocurrency “wallet” is a piece of software where an individual may keep all of their cryptocurrency. Each individual has the option of using either a “hot” or “cold” wallet.

A “hot wallet” is an online wallet that may be used to transfer, receive, and store cryptocurrencies like Bitcoin. Hot wallets are online cryptocurrency storage solutions offered by third parties. As they are always online, hot wallets make it simple to make instantaneous purchases from anywhere.

After setting up a hot wallet, users are provided with a public wallet address, which can be used in the same way as a username or bank account number to receive digital currency from other people. In addition, a private key is supplied for the wallet, which may be used in much the same way as a password. Last but not least, a recovery seed phrase is supplied; this is a series of random words that may be used in place of the answer to a secret question when resetting a forgotten password.

Hot wallets, despite the name, do not hold cryptocurrency in the same manner cold wallets do. Hot wallets are used to store the little amounts of cryptocurrency that are often transferred, traded, or purchased. These wallets make it possible to adjust a cryptocurrency’s transaction history on the distributed, blockchain-based ledger.

Popular examples include:

Metamask is a popular desktop wallet

• Desktop Wallet

The term “desktop wallet” refers to a digital wallet that may be managed entirely through a computer or smartphone app. A desktop wallet’s public address may be used to transmit and receive bitcoin, while the wallet’s private key is used to secure the user’s cryptocurrency holdings.

• Mobile Wallet

A mobile wallet is a digital payment system that functions like a traditional wallet but is built to be used on portable electronic devices like smartphones and tablets. Touchless payments and transfers made using mobile wallets and QR code scanning are now possible at brick-and-mortar establishments. And again Metamask seems to be quite popular among the crypto holders in this region.

A cold wallet, in contrast to a hot wallet, is not connected to the internet. Since cold wallets are more resistant to hacking and other security threats, they are often preferred. The term “cold wallet” refers to a specific type of digital wallet that may be used to store digital money outside of a network. In order to transfer or receive money, the wallet only communicates with an online device. Because of this, it’s a very safe choice for those who keep cryptocurrency.

Cryptocurrencies are decentralised and so the user has complete control over their money, unlike fiat currencies which are stored and secured by a bank or central governing body. To solve the problem of not having a central location to store one’s bitcoin, wallets were developed.

Some popular examples include:

Ledger Nano, A Hardware Wallet

• Hardware Wallet

A cryptocurrency can be stored in a “hardware wallet,” which is a digital wallet that can be removed from the user’s computer. The hardware wallet can’t be synced with anything else, thus it can’t be transferred digitally or physically while it’s not in use. The cold storage wallet communicates with a personal computer through a USB connection when the user needs to transfer or receive cash. Even with that, the private key, which is produced outside of the wallet, is required to access the wallet. The existing robust encrypted security protocol benefits from this additional protection.

Courtesy of Ellipal Malaysia

• Offline Software Wallet

In many ways, offline software wallets are identical to hardware wallets but they need more work to get up and running. By design, an offline software wallet splits a wallet into two distinct platforms: One in which the private keys are stored, and another in which the public keys are stored, either online or in a physical location. Both the online and offline wallets may begin new transactions but only after the user manually processes each one in turn. This protects the offline wallet’s private keys by preventing it from ever connecting to the internet, even as it sequentially processes transactions.

Understanding How to Keep Your Digital Assets Safe

In the context of cryptocurrency, a wallet is a digital storage tool that allows an individual to hold, send, and receive digital assets using a combination of private and public keys.

Private keys are unique, secret codes that are associated with a specific wallet. They are used to “sign” transactions and provide proof of ownership of the digital assets stored in the wallet. It is essential to keep your private keys secure and never share them with anyone, as anyone who has access to your private key can potentially access and spend your digital assets.

Public keys, on the other hand, are not secret and can be shared with others. They are used to receive digital assets and are typically represented as a long string of alphanumeric characters or a QR code.

While a wallet allows you to store and manage your cryptocurrency, you do not have full control over the wallet itself. This is because a wallet is just a tool that interacts with the blockchain, and the ultimate control over your digital assets lies with the blockchain network. To access and manage your cryptocurrency, you need to have both your private and public keys. Without your private key, you cannot spend your digital assets, and without your public key, you cannot receive digital assets from others.

As we explore the pros and cons of various wallet designs, this is an essential piece of information to have at your disposal. Even while most people use wallets to store, receive, and send cryptocurrency, some wallets have extra features. It is possible to use a wallet to buy and sell cryptocurrency, trade tokens, and connect with a variety of decentralised apps (dApps).

Wallets are designed so that the user only needs to enter their details and make a few clicks to utilise them. Users are not required to understand the inner workings of cryptocurrencies because they are taken care of automatically in the background. When it comes to the user experience, many wallets have varying degrees of similarity. The preferences of the individual user will determine the optimal variety.

It helps to have a basic understanding of how computers and software work in order to successfully set up a cryptocurrency wallet. Depending on the wallet, this may or may not be a simple process.

Crypto Exchange: What You’re Willing to Take as A Risk

Exchanges for trading digital currency are known as “crypto exchanges.” Cryptocurrency exchanges facilitate trading and the discovery of market prices through trading activity and provide secure storage space for cryptocurrencies. Once upon a time, the only ways to earn cryptocurrency were by mining or by arranging trades in different online and offline communities. There are now hundreds of cryptocurrency exchanges to choose from, each with its own set of fees and level of security for storing and exchanging digital assets.

It’s important to note that not all cryptocurrency exchanges provide a wide range of services, some focus only on the trading aspects of cryptocurrencies. When deciding on an exchange, it’s important to think about your own financial goals and level of comfort with risk.

The need for cryptocurrency exchanges persists despite the fact that they’ve been the subject of initial criticism and carry with them some degree of inherent danger. Rates in a cryptocurrency exchange market might vary like those in a stock market. All of your cryptocurrency account details are conveniently stored on an exchange. Having access to account balance information facilitates both the buying and selling of cryptocurrency.

An exchange is commonly understood to be a form of electronic banking. The concern about security stands out as the most significant drawback of an exchange, as was already mentioned. The loss of access to the exchange would mean the loss of the user’s cryptocurrency holdings. For example, the private keys for the cryptocurrency exchange Coinbase are held by Coinbase. Therefore, the cryptocurrency cannot be accessed if the Coinbase account is lost.

Wallet or Exchange, Which Should You Choose?

There is no right or wrong answer as to whether cryptocurrency should be kept in a wallet or an exchange. You risk losing all of your Cryptocurrency if the exchange you’re using is hacked or if the proprietors sell off all of the Bitcoin and disappear (all eyes on you FTX). The sole benefit of keeping your cash on an exchange is a more hassle-free experience since you won’t need to worry about making regular backups or keeping your account secure. You can keep your digital money safe and secure without trusting any third party when you use a wallet. You will, however, be responsible for managing your own private wallet, including backing it up, keeping it secure, and monitoring its activity.

But should you completely trust an exchange with your hard-earned cryptocurrency?

No!

Storing cryptocurrencies in a personal wallet, as opposed to keeping them on an exchange, is typically seen as a safer option. Due to the fact that exchanges are centralised platforms housing the digital assets of several users, they are frequently targeted by cybercriminals. To the extent that an exchange is hacked, the digital assets of all its users are also affected.

However, when you engage in cryptocurrency trading, you are often not holding your funds for the foreseeable future. Instead, you are participating in the market by buying and selling cryptocurrency in order to profit from price fluctuations. Since you want to sell your cryptocurrencies rather than keep them as an investment, storing them on an exchange may be appropriate in this scenario.

Though, keep in mind that even while trading cryptocurrencies, you still need to take precautions to safeguard your digital assets. Examples of such measures include making use of robust passwords, switching on two-factor authentication, and always utilising the most recent versions of both software and security protocols. It’s also a good idea to move any earnings or leftover cash from the exchange to a separate wallet on a regular basis.

Doing What’s Right for Your Crypto Wealth

In conclusion, the term “crypto wallet” is used to describe a piece of software that an investor may use to keep their cryptocurrency. In contrast, a cryptocurrency exchange is a platform that facilitates the buying and selling of cryptocurrencies as well as the exchange of fiat currencies into digital ones.

A cryptocurrency investor must weigh the pros and cons of security and ease of access when determining where to keep their assets. It’s up to you whether or not you want to keep your cryptocurrency in a wallet or on an exchange. If an exchange is compromised or its proprietors trade the money and disappear, you might lose all of your digital currency. There are additional considerations to make while holding digital money in a wallet, such as backup, security, and management. Always weigh the potential downsides before choosing a wallet or an exchange.

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