11
May

Crypto Wallets & Exchanges | A Simple Introduction for Beginners

This article is here to help you understand a little more about this cryptic world of crypto wallets, exchanges, centralized and decentralized finance. 

Understanding what wallets and exchanges are and how they function differently can give you a good sense of how to navigate through the blockchain.

DISTINGUISHING BETWEEN CRYPTO WALLETS AND EXCHANGES

​​Simply put, a crypto wallet is where we store our fiat money and cryptocurrency.  A crypto exchange is where we can trade, swap and diversify our cryptocurrencies with greater ease and lower rates.

Wallets are like bank accounts and exchanges are like the marketplace. 

Crypto wallets are for HOLDING, to allow investments to mature. Crypto exchanges are for TRADING and are geared towards shorter term gains and diversifying portfolios.  Exchanges have the added benefit of allowing us to access multiple blockchains. 

It is important to note that not all wallets are made equal. This is because usually wallets have a limited number of cryptocurrencies available.

You can send and receive money to a wallet. Wallets also hold your private keys. Private keys come in the form of a special phrase that only you know (and store offline) to access your cryptocurrency.  This seed phrase can be used to seed a new wallet so it is important to NEVER give it out or reveal it online.

A wallet does not technically store your cryptocurrency; your cryptocurrency actually lives on the blockchain. The wallet simply holds the key to accessing it. That’s the technical side. On a user interface side, many wallets allow you to send money from your bank or credit card to your crypto account, allowing you to trade cryptos, stake cryptos for interest and send crypto to other people.

THE DIFFERENT TYPES OF CRYPTO WALLETS

There are three different types of crypto wallets to consider when beginning your crypto journey:

  • Online/Browser Wallets
  • Paper Wallets
  • Hardware Wallets

Generally, we start with online wallets that exist on either our phone or desktop until we get more experienced.  Once we begin to accrue crypto that we wish to hold for longer periods of time, we can make the switch to using a hardware wallet.  Paper wallets have become less common as the crypto space has developed over time.

With online wallets, your keys are stored in an app or software. This gives the feel of an online banking experience and is most familiar for new users. When using this type of wallet, it is important to find wallets that offer 2-step authentication for added security.

Online wallets can also provide us with a seed phrase that is written down on a piece of paper and stored in a safe place. You enter the special phrase and you have access to your wallet with an online interface.  It is very important to keep your seed phrase secure as anyone with this phrase can access your wallet.

Hardware / cold wallets are physical USB thumb drives that store the keys to your crypto. The idea is that you can access your crypto when you want and store your wallet to keep it safe when you are not online.

WHAT MAKES FOR GOOD CRYPTO WALLETS?

There are four crucial aspects to consider when setting up a Crypto Wallet.  Trading and holding Crypto on the right platforms can make the difference between a secure, private investment and complete loss due to an external breach. Let’s take a further look into these 4 crucial considerations.

A Crypto Wallets Security

First and foremost, use crypto wallets that secure your data and have track records with no security breaches. A wallet that offers good security such as 2FA, allows you to hold your private keys, while encoding with secure encryption.

A Crypto Wallets Ease of use

Initially, you will want to work with wallets that are easy to use. There’s nothing more discouraging than a confusing and overwhelming user interface and a bunch of advanced features when you are just starting to learn about crypto!

A Crypto Wallets Privacy

KYC (“know your customer”) is becoming more common as people have to ‘verify’ themselves with ID documents and photos. This information can be linked to various governmental organizations depending on the laws in your county. Decentralized finance wallets operate on anonymity.

Low fees

A good wallet should be transparent about fees and offer you low fees on all fiat exchange and crypto transactions. Typically, wallets are 1-2% on fees and exchanges can be as low as 0.25% – 1%

CRYPTOCURRENCY EXCHANGES

If wallets are secure places to store your crypto, exchanges are like the marketplace. You do not hold private keys on exchanges. They have admin keys and this has led to problems with security breaches in the past.

The benefit of exchanges (such as Coinbase, Binance, & Kraken) is that they allow you to buy a variety of different fiat currencies and cryptocurrency tokens with very low fees.

Crypto exchanges give us the broadest access to a wide range of tokens. It is fairly easy to  buy/sell  tokens.  Additionally, exchanges often allow an assortment of other options that are just not possible in a wallet, such as setting automated price limits where we can buy, sell, take profit and prevent loss on our crypto invest-ments.  Many exchanges offer the ability to stake crypto earnings for extra earnings and borrow crypto to make leveraged trades (this is much more advanced).

Some exchanges (like Binance) allow users to buy/sell crypto from other people  using  the  exchange  as  a  secure  3rd  party. This is tremendously helpful in countries where the banks do not allow the purchase of crypto-currencies.

Centralized Exchanges

Exchanges like Binance, Coinbase and Kraken are centralized.  The primary issue with centralized exchanges is  that they hold admin keys which means that you are not in control of your private keys.  In a sense, they own your crypto and can limit your access to crypto at any time.

Additionally, centralized exchanges are often more under the watch of governments and centralized authorities and they often require identity verification (KYC – know your customer). This can lead to identity theft or potential identity tracking at a later stage. Therefore, new users should consider waiting until they are comfortable using wallets proficiently before moving onto working with exchanges.

We have discussed centralized exchanges, decentralized ones are a bit different.  They do not require any KYC.  Instead, you plug your existing wallet into a decentralized exchange to enjoy lower fees or a wider access to coins and then plug-out when you are done.

There are benefits and drawbacks to both centralized and decentralized exchanges. At this point in time, many crypto traders use both. Even investors/traders who prefer a more decentralized approach often find it difficult to escape using some of the powerful tools we find on centralized exchanges. Centralized exchanges were the first type of exchange in the crypto space. They often have the look and feel of traditional equities trading platforms. 

Additionally, since they are controlled by a centralized company, they are often for profit and benefit from a higher production value. Decentralized exchanges are a relatively new feature in the crypto space. The first decentralized exchange (also called a ‘DEX’) was built on the Ethereum network in 2020. Since that time, many new DEXs have appeared on other blockchains including Solana, Cardano, Fantom, and Avalanche. DEXs are still relatively new and since they are supported by a decentralized community, they usually do not have the bells and whistles of centralized exchanges.

CRYPTO WALLETS & EXCHANGES AND HOW TO GET SET THEM UP

Metamask www.metamask.io

Metamask is one of the most popular decentralized wallets out there. It runs off of Ethereum by default, however, it allows you to switch to other networks such as Fantom, Matic, Avalanche and Binance Smart Chain; which have much lower fees and are much faster than the default Ethereum network.

Metamask is available in all countries, since it’s a decentralized, anonymous wallet. It is very simple to obtain a Metamask wallet and it offers on-ramping of fiat into crypto via two third party options: Wyre and Transak. Metamask does ask you to add tokens manually and requires that you are able to supply the correct coin to cover the fees (also called ‘gas fees’). It is probably the most user-friendly decentralized wallet, and can be used over different networks, except for non-Ethereum chains like Terra or Solana.

To set up a Metamask wallet, follow the steps set out in this video:

Luno – www.luno.com

Luno is available in most countries, and is one of the most user friendly and easy-to-use wallets out there available for African, European and Southeast Asian crypto clients.  It is a centralized wallet that will make you complete various ID verification processes in order to on and off ramp greater amounts of crypto and fiat currencies.

The fees associated with Luno are not great, but it is still a suitable option for on-ramping your crypto until you feel more comfortable to use an exchange. Luno is friendly for beginner users, although it does require a KYC (know your customer) to set up.

To set up a Luno account, follow the steps set out in this video:

To deposit funds from your bank, follow the steps set out in this video:

Coinbasewww.coinbase.com

Coinbase is the largest and most well-known wallet out there.  Unfortunately, it is not available in all countries and regions, although it is a good start for US, UK and European crypto users as it is secure, easy to use and the pro version offers decent rates/low fees.

Coinbase is a centralized wallet that allows you to connect your bank account for on and off ramping of fiat/crypto.  However, this also means that you will need to complete a KYC process.

To set up Coinbase account, follow the steps set out in this video:

Exoduswww.exodus.com

Exodus is a very slick looking, user-friendly cryptocurrency exchange which is great for holding Bitcoin and is available in all countries, since it’s a DeFi wallet. This wallet is set out with a minimalist look and feel, which makes it a great option for beginners. Exodus does not have the same variety of cryptocurrencies as other exchanges, but what it lacks in variety, it  makes up for in staking options.

This exchange allows many enticing options to obtain rewards for staking their cryptocurrency for a period of time. In short, Exodus is great for a minimalist, efficient feel and people who want rewards for holding cryptocurrency.

Set up Exodus wallet:

Trust – www.trustwallet.com

Trust wallet is an excellent, secure choice for a decentralized wallet. It will ask you for minimal information to sign up and it is available for users in most countries. Trust Wallet does, however, have a couple complexities that beginners should know about.

Trust is powered by the Binance Smart Chain (BSC) and the BNB token. It depends on the network you are using (yikes!). Trust also needs a KYC process. Trust includes some incredible features such as being able to stake certain coins for up to 11% APR and allowing you to plug into various decentralized exchanges to find the tokens you want for the rates that work for you, and is available to use through a phone App!

How to use Trust wallet app:

Binance – www.binance.com / www.binance.us

Binance is the largest and most used cryptocurrency exchange, offering an impressive selection of cryptocurrencies. Additionally, Binance has created its own tokens (BNB and BSC) and smart chains (BEP2 and BEP20) which the decentralized space uses extensively.

Binance works extremely well and offers some extremely powerful tools for trading and  great incentives for trading.

On the downside, it is also in the crosshairs of regulators and the exchange has been implementing more stringent KYC and anti-money laundering policies that affect user’s privacy

Binance.com is accessible for all countries except USA/Canada, where you will need to use Binance.us to access the exchange.

Set up Binance account:

How to do KYC on Binance:

Bitvavowww.bitvavo.com

Bitvavo is a Crypto Exchange based in The Netherlands, and is only available to use in most European countries. This Exchange offers many payment options to buy crypto, however you need a KYC in order to use this exchange.

Set up Bitvavo account:

https://support.bitvavo.com/hc/en-us/categories/360003867557-Create-account

Set up account (Dutch):

Kraken www.kraken.com

Kraken is an exchange that is accessible in most countries. As they are based in the USA, in order to trade crypto on this exchange you will need a KYC.

Set up Kraken account:

Kucoinwww.kucoin.com

Kucoin is available in most countries although they are not advised for use in the USA. When you open a Kucoin account you do not always need a KYC.

Set up Kucoin account: