Crypto exchanges are essentially digital marketplaces that let you use real money ($AUD) to purchase cryptocurrency like Bitcoin and Ethereum, trade one type of crypto for another, and convert your crypto back into cash.
Most popular exchanges like Binance, Coinbase, CoinSpot and eToro are run like any other online platform (that is, they don’t leverage the blockchain and are considered ‘centralised’). This is also why they’re popular: they’re user-friendly and convenient. Decentralised exchanges that support direct peer-to-peer transactions do exist, but are often more complex to use.
Your account on a centralised exchange may be described as a wallet. However, storing your crypto on exchanges usually means the business retains control (or ‘custody’) of the assets and users can’t access the private keys. This is what’s known as a custodial wallet, or sometimes a hosted wallet. You have to trust the company running the exchange to take care of your assets and run a tight ship.
Unfortunately, while many exchanges are ethical and vigilant, it only takes one bad exchange to cause havoc across the entire industry. As was the case with Sam Bankman-Fried’s FTX, which has since filed for Chapter 11 bankruptcy: thousands of investors entrusted their crypto holdings to his company, which were later found to be propping up his Alameda Research hedge fund. Bankman-Fried is now facing criminal charges of fraud.
Hot Crypto Wallet
Hot wallets are online, software-based crypto wallets. Your account on a crypto exchange can be classed a hot wallet because it’s connected to the internet.
Specifically, non-custodial or self-custody hot wallets are internet-connected wallets where you control the private key and seed phrase for your crypto assets. The private keys are stored within the app/software itself.
Being able to access a non-custodial wallet via a web browser or app is convenient, but like everything online, it does make these wallets vulnerable to cybersecurity threats, hacks, scams and fraud.
Offline wallets are called cold wallets. Nowadays that generally means a physical device—which can range from a USB drive through to specifically designed hardware with custom security and accessibility features. Cold storage can also include paper-based documentation but it’s an approach that’s out of favor because of paper’s fragility.