Crypto Wallets and Exchanges: Their Origins and Difference

by in Crypto 101, Cryptocurrency For Beginners

crypto wallets and exchanges

The space of blockchain and cryptocurrencies offers various tools to manage user activities. Among the most essential ones are crypto wallets and exchanges.

Are they both necessary and what is the difference between them?

What is a cryptocurrency wallet?

A cryptocurrency wallet is a tool that enables users to store their holdings and carry out transactions.

Wallets for cryptocurrencies can be classified:

  • according to their accessibility and working method. They can be software, hardware, and paper types.
  • according to the employed mechanism. They can be hot or cold.

The first crypto wallet

Bitcoin creator Satoshi Nakamoto started to work on the first Bitcoin wallet along with the development of the BTC network. The coin was launched on January 3, 2009. As for the wallet, it was released in February 2009 and was named Bitcoin-Qt.

The primary bitcoin wallet was a full client, meaning that a user needed to upload the whole blockchain history for synchronization. In the early stages, the download wasn't a big problem as there was a little history. However, the synchronization period quickly expanded.

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Bitcoin-Qt was a secure wallet with private keys stored in a file on the users' desktop. Nevertheless, an unplanned delete or malware would cause the loss of coins.

The wallet continued its development. In March 2014, version 0.9.0 was launched and it was renamed Bitcoin Core wallet. Its latest 0.21.0 version was launched on January 14, 2021.

What is a cryptocurrency exchange?

With the help of crypto exchanges, users trade cryptocurrencies for other assets both digital and fiat. They can be centralized and decentralized. Among the leading cryptocurrency exchanges are Coinbase, Binance, Huobi, and others.

The first crypto exchange

Initially, when Bitcoin was created, there were two ways to acquire it: mining and trading on forums of Internet Relay Chat (IRC). Few escrow services were operating that time with parties fulfilling their sides of the deal. The first cryptocurrency exchange went live on March 17, 2010.

It was called Bitcoinmarket.com, which doesn't exist now. The suggestion to bring out a site was made on the Bitcointalk forum by the trader "dwdollar”. Those posts were saved and they are available now.

This was a great move as back then there wasn't a particular source informing about the price of the coin. The earliest price charts appeared in the summer of 2010. They indicate that the coin was worth $0.05. When Bitcoinmarket.com was launched in March, the price was lower than that, about $0.003.

Initially, Bitcoinmarket.com accepted Paypal for exchanging Bitcoin to fiat. The system worked for some time, but with the coin becoming more popular, the number of scammers increased.

As a result, on June 4, 2011, PayPal was removed from the exchange. On the same day, a user wrote about Bitcoin's unexpected surge, which reached from $20 to $23.99.

All this resulted in the closing of the exchange.

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In July 2011 the second exchange known as Mt. Gox went public. It handled 70% of entire bitcoin activities and functioned till 2014.

Crypto wallet vs exchange

For crypto operations management, wallets and exchanges are essential. Note that these two can belong to the same company, which might be confusing. The major distinction between crypto wallets and exchanges is their purpose. Wallets are for keeping the assets secure, while exchanges help to organize the trading process among various cryptocurrencies.

Here are their objectives more in detail:

  • Exchanges are used to trade crypto, while wallets make the holdings more secure.
  • Exchanges help to convert fiat to crypto, while wallets allow accessing the tokens anytime.
  • Exchanges support sending crypto to a wallet, while the latter provide their long-term storage.

In short, the function of exchanges is trading. Additionally, they can serve for short-term storage. The function of wallets is the administration of funds including security and backing-up.

Although it is viable to save crypto holdings both in wallets and exchanges, one principal differentiation between the two is the method of fund control.

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Wallets present complete authority over the use and transactions of funds with the possibility to have passwords and private keys.

If a user chooses to keep capital in an exchange account, otherwise called exchange wallets they agree to give part of the total control to the network. The command of the wallet's private keys belongs to the platform.

Final thoughts

Everyone interested in cryptocurrency trading will need to use cryptocurrency wallets and exchanges. It is necessary to study the market deeply and be aware of the differences and risks.

There are innovations created every day, along with the development of already existing tools.