To hold crypto in the wallet, or to hold crypto on the exchange…that is the question. Spoiler alert, there is no clear cut answer. The answer will depend on your frequency of trading, risk tolerance, trading strategies, investment time horizon, and many other factors. We will break down some of the most important considerations you should make when determining whether to hold your assets in a crypto wallet vs exchange.
Holding in Crypto Wallet
A crypto wallet stores your private keys, which allows you to have safe and secure access to your cryptocurrency and allows you to freely transact. Crypto wallets can come in the form of a physical hardware USB device (also known as cold wallets), such as our favorite the Ledger Nano X, or a web, app, or software wallet such as Metamask.
Cold Wallets like the Ledger Nano X are not connected to the internet which by nature means they are at less risk of being compromised. In order to access your assets on a cold wallet, you need possession of the physical device along with a password which you will use to unlock your private keys, which are unique to your Ledger Nano X.
If you clumsily lose your physical cold wallet (tsk…tsk…), you can recover your wallet with a 24-word recovery phrase (also known as a mnemonic phrase) and PIN. We’ve done an entire breakdown on how secure wallets with mnemonic phrases are and how they work here. If you lose your physical cold wallet AND lose your recovery phrase…well, it’s not looking too good for you in getting your hands on your crypto.
Web wallets like Metamask can also support connecting to decentralized exchanges (DEX) such as Uniswap or 1inch, in which you can trade paired assets which are supported by each exchange. While these DEXs might offer trading pairs for a specific alt coin you are looking to trade for, you might find better liquidity and pricing by trading at a larger exchange such as Binance.US or Coinbase.
- ✅ Cold wallets are not connected to internet, and therefore less risk of being compromised
- ✅ Web wallets like Metamask can connect to decentralized exchanges for trading
- ✅ 12-word and 24-word mnemonic phrases are considered highly secure by cryptographers. See Mnemonic Phrase, Seed Phrase, Recovery Phrase, and BIP39: How they Work
- ✅ Better for long term holding
- ❌ Might incur transfer fees if frequently trading / moving funds to exchanges
Holding in Crypto Exchange
While Crypto wallets are great for securing your assets safely. But if you’re looking to trade some Ethereum for the next hot alt coin that’s going to the moon which cousin Ronnie told you about, odds are you’ll either need to move some Ethereum to an exchange. Keeping some assets on an exchange might be better for those who are frequent traders, or waiting to capitalize on a timely market move or entering/exiting your position at a specific time.
- ✅ Readily available to buy, sell, and trade your cryptocurrency without having to transfer first
- ✅ Large exchanges typically have higher liquidity and higher trading volume, which can get you better prices to trade at
- ✅ Convert fiat currency into cryptocurrency, and cryptocurrency into fiat currency
- ✅ Better for short term holding and frequent trading
- ❌ At risk of exchange being hacked and loss of assets
- ❌ At risk of the exchange being solvent, compliant, and a good actor
Conclusion
Both holding your cryptocurrencies in a crytpo wallet vs exchange have their benefits and drawbacks. If you’re a long term holder (HODLer), it’s probably best to hold your assets in a safe and secure wallet in which you have control of protecting and safeguarding your private keys. If you’re frequently day trading, you might prefer to hold some of your assets on an exchange. Spreading your assets across a cold wallet, web wallet, and an exchange might also be a good idea to diversify your risk of having one of them compromised.
Regardless of where you keep your assets in a crypto wallet vs exchange, make sure you do your own research and due diligence on the specific wallet and exchanges you are holding assets on. Our recommendation would be to use a cold wallet such as Ledger Nano X (or check our full review of the Ledger Nano X) is hereto safely secure your cryptocurrencies. And make sure you take care of it!
