What Are Crypto Exchange Wallets? 

Your First Crypto Wallet is Likely an Exchange Wallet

While there are other ways to purchase crypto, many people acquire crypto on cryptocurrency exchanges. Upon making a purchase, the cryptocurrency you acquired is automatically stored in your exchange-hosted wallet, which is typically custodial, meaning the exchange has control of your private keys. 

By holding your keys for you, crypto exchanges give you easier access to your funds via a more familiar username and password configuration, which allows you to trade seamlessly on the exchange. However, you always have the option to withdraw your crypto by using your exchange-hosted private keys. Most reputable crypto exchanges invest heavily in ensuring that your keys, and thus your cryptocurrency, are held securely because private keys are what prove that you in fact own the crypto you purchased on the exchange. 

While we’ll be discussing standard custodial crypto exchanges, it is important to note that a new type of exchange, called a Decentralized Exchange, or DEX, allows you to maintain custody of your private keys.

An Exchange Wallet Is Typically A Hot and Cold Wallet

In addition to being a custodial wallet, your crypto exchange wallet is almost certainly a “hot” wallet. A hot crypto wallet is constantly connected to the internet, which may leave it vulnerable to hackers but has the benefit of facilitating faster trades. Conversely, a crypto “cold wallet” remains offline and much more secure against hacking, but transferring funds into and out of cold storage takes more time and effort. Since most exchange wallets are hot and custodial, it’s vital that you trust the exchange you use to store your crypto. 

While there have been malicious hacks that saw millions of dollars of cryptocurrency drained from exchange wallets in the past, reputable, regulated, and security-minded crypto exchanges have learned from these incidents and have developed robust measures to ensure the security of their customers’ funds. 

Though the exchange wallet you would use to trade or withdraw funds is technically a hot crypto wallet, most reputable crypto exchanges store the majority of customer funds in cold hardware wallets, ensuring these funds are held securely offline. While crypto exchanges host hot wallets as well, these typically contain crypto needed to handle daily withdrawals. With exchange crypto wallets structured in this way, were a hack to occur, only the hot wallets would be vulnerable, with the majority of funds safe in cold storage. Reputable crypto exchanges have extensive security measures in place and some even insure millions of dollars of cryptocurrency against potential losses caused by hacks.

Exchange Wallet Security and Precautions

Some lesser-known crypto exchanges may give you better market prices for certain cryptocurrencies, but they may also have lax security measures. These exchanges may cut corners with security protocols, equipment, and staffing.

Some crypto exchanges have “exit-scammed” their customers by shutting down without notice and disappearing with their customers’ assets. While some victims of these scams have recuperated a portion or even all of their funds through legal action, many have lost large amounts of cryptocurrency. Fortunately, to date no major U.S. exchange has experienced a significant security breach or tried to defraud customers.

Even if you are using a crypto exchange with a rock-solid reputation, you still should take precautions to secure your individual crypto wallet account. To avoid a breach of your account, you should follow the exchange’s security recommendations, which may include:

• Using a strong password unique to the crypto exchange

• Storing the password offline or using a password manager

• Maintaining up-to-date antivirus software

• Using a virtual private network (VPN)

• Enabling two-factor authentication (2FA) 

• Using a new dedicated email address

How to Withdraw Funds From a Crypto Exchange Wallet

While some choose to keep large amounts of cryptocurrency on exchange wallets, others choose to withdraw the majority of their funds after making crypto purchases. These withdrawn funds may be sent to non-custodial wallets, which give you complete control of your private keys. These wallets could be on your phone, your computer, or a specialized device that looks like a USB stick called a hardware wallet. 

To move your funds, you typically paste the public address destination of where you want to send your funds into your crypto exchange account. You must make sure the cryptocurrency you are sending and the crypto wallet you are sending it to match up: bitcoin goes to a bitcoin wallet address and ether goes to an ether wallet address, and so on. Not doing so will lead to lost funds. It’s advisable to send a small test transaction prior to sending the full amount if you’re new to moving crypto.

It’s worth noting that you can transfer ownership of cryptocurrency to your non-custodial wallet without it ever having to be “online,” with just the wallet’s public key. In fact, the copy of the corresponding private key could be sitting in a safe and you would still be able to transfer crypto to your wallet with your public key.

Balancing Security and Flexibility

Crypto exchange wallets offer a straightforward way to purchase and store crypto. While many feel comfortable storing significant amounts on crypto exchange wallets, others might prefer to withdraw their funds to a cold hardware wallet. 

At first, try to get comfortable sending and receiving funds, and then decide on your storage strategy. Many will use several wallets: a crypto exchange wallet, a mobile wallet, and a hardware wallet to securely store large balances. You may decide to keep smaller amounts on mobile wallets for convenience, but the decision is yours. Regardless of the amount of cryptocurrency and types of crypto wallets you choose, security must remain a focus for your holdings.