There's always been a gray area when it comes to knowing where to hold crypto assets and where to trade them. This confusion is oftentimes due to the lack of sufficient knowledge in distinguishing which is which. Although often intertwined, wallets and exchanges are not the same thing.

Crypto Wallets can be anything from accounts on centralized exchanges to hardware (cold) wallets, and they are designed to present a record of your account and holdings on the decentralized ledger in a comprehensive interface.

They can be split broadly into two types: custodial wallets and non-custodial wallets. Recovery phrases and private keys for non-custodial wallets belong to the wallet owner. This guarantees that owners of non-custodial wallets maintain complete control over their wallets and assets because the keys are not kept on any database and can only be obtained by the owner.

Non-custodial wallets on the other hand, take the form of software wallets that can be installed on smartphones, personal computers, or specialized hardware devices. Mobile wallets are convenient and enable holders to perform transactions from the comfort of their devices. The fact that software wallets are internet-connected and thus more vulnerable to phishing and data sniffing poses a serious security risk.

Two most popular non-custodial software wallets with a mobile app are MetaMask and Trust Wallet.

MetaMask facilitates simple access to cryptocurrency assets with its interoperability with Ethereum and its associated network, as well as the ease of use provided by its mobile application.

In addition to any EVM network that the user explicitly adds, MetaMask provides storage for Ethereum's native coin, ETH, and ERC-20 tokens on the Ethereum network.

MetaMask also offers liquid staking options, where users can deposit their ETH with a Pool, receiving a token of equal value which they can then use in other DeFi activities

Trust Wallet is a multi-chain wallet, built with support for different cryptocurrency networks with markedly different modes of operation. From established smart contract Layer 1 blockchains to blockchains hosting payment solutions, its support is expanding.

It also enables Web3 enthusiasts to connect to decentralized applications through an in-built browser and the “WalletConnect” protocol. In addition to the mobile app, desktop browsers can utilize the Trust Wallet extension and access Trust Wallet on personal computers.

Some benefits of non-custodial crypto-wallets include:

⚠️Blockchain- level security: provided the account doesn't fall prey to internet phishing activities,the account is well preserved in every case where the owner keeps their details safe and doesn’t expose their wallet to conditions that give an attacker a way into the wallet.

🏷️Data privacy: unlike centralized exchange, personal details are not required to create a wallet or to import them into the wallet applications when using non-custodial wallets. Transactions are anonymous as they can’t be traced to a specific sender using only the information provided by the transaction hash.

📮Absolute Right to ownership: By blockchain convention, a rightful wallet owner is anyone who holds the private key or complete passphrase to the wallet. Therefore, full ownership of the wallet and all of its contents are granted to any party that meets the requirements.

However, the major downside to storing your crypto assets in a crypto wallet is the incidence of misplaced seed phrase or wrong login detail. Since you're your own bank, you're also held accountable for any losses, security control and damage prevention. And given that personal wallets operate completely at blockchain level, even the identity of an attacker is also hard to trace because in most cases, there is hardly enough info to make an attempt at tracing the attack and victims have to resort to counting their losses and letting go.

Crypto Exchanges

Cryptocurrency exchanges can be centralized or decentralized, and they provide an avenue for investors to swap their assets for other (supported) assets.

Centralized Exchanges

Centralized exchanges are also known as custodial exchanges for their user asset management strategy. They create a hub for selected assets and allow users to swap between these assets regardless of the asset type or parent blockchain, without requiring a bridge/middleman.

Users can deposit assets from their personal wallets or wallets from other exchanges using centralized exchanges, which enable several blockchain networks. The exchange verifies withdrawal requests from user wallets and keeps the keys to them.

Investors must typically register an account on the exchange and successfully complete the KYC process in order to trade assets on centralized exchanges.

Decentralized Trading Systems

The function of decentralized exchanges is asset swapping, just like centralized exchanges. Yet, they have different asset management and fundamental operation strategies. The assets of users are not stored by decentralized exchanges. Without opening an account on the exchange, investors can exchange their assets directly from their personal wallets by using automated market makers (AMMs) to fulfill trade requests from assets that are locked in the liquidity pool.

Keeping cryptocurrency on centralized exchanges has the following major advantages:

1. Convenience and ease of operation:

The tedious procedure of continuously signing transaction permissions and bridging assets when it's necessary to use a different blockchain for transactions is entirely eliminated by centralized exchanges, which serve as a one-stop shop.

2.Third-Party Support

If you forget your password, a centralized exchange will be able to restore access to your wallet after verifying your identity. As opposed to when you lose your password and your seed phrase for a non-custodial wallet; you’ll have lost access to your funds permanently.

Exchanges holding funds for custodial purposes are expected to answer for them. Thus, in the event of fraudulent activity or simply incorrect transactions, they are probably going to offer assistance to users. In certain situations, exchanges have proven useful in tracking down the flow of funds following a hack. This is so that the exchanges are easier to identify the individuals involved by maintaining a repository of user IDs and wallets associated with them.

3. Little to no transaction fees required

Users can trade every supported asset regardless of their parent blockchain without bridging or paying transaction fees at each point. For transactions that must be completed quickly, custodial exchanges reduce time even though they may have trading fees that are similar to those on centralized exchanges.

Now that we’ve looked at some reasons why users may choose to store their funds on an exchange, let’s look at some of the drawbacks involved.

1. Data Breach and Leaks

User information from KYC programmes or routine registration processes that the custodial exchanges maintain in their database may be vulnerable to deliberate mismanagement or external assault. Any of these instances could result in the loss of user information that could be exploited against the exchange user in a number of ways.

2. Risk of losing your assets is higher

In the end, if you don't have the private keys to your wallet, you run the danger of losing everything you own in the event that the centralized exchange fails—as was the case with Celsius and FTX. This is due to the fact that the custodial institution is in possession of your cryptocurrency's private keys, and granting them access to them effectively gives them total authority over your holdings.

3.Transaction Limitations and Delays

On custodial exchanges, withdrawal or deposit transactions are verified twice: once on the blockchain and once at the exchange. In certain situations, further levels of confirmation, such as external confirmations, might be necessary. These confirmations typically result in a delayed transaction; in the worst-case scenario, the transaction may be fully flagged and the assets withheld until all interested parties have been identified.

Finally,

Crypto wallets are used for storing, receiving and sending crypto, while exchanges are market places for users to buy, sell, and trade crypto.

As a Cryptocurrency investor, you can choose to use a non-custodial crypto wallet to hold the private and public keys of your personal wallet. This gives you full custody of assets stored in your wallet and the right to these assets as long as you hold your private keys.

Better still, you can keep your trading funds on the exchange for convenience while storing your savings offline.