Updated: Jan 3, 2022
New to the cryptocurrency world? The difference between a cryptocurrency exchange and a cryptocurrency wallet is explained, as well as how to choose cryptocurrency wallets and cryptocurrency exchanges to help you mint an NFT.
You will need to own some cryptocurrency before you can create and mint an NFT, and you will need to purchase this cryptocurrency on an exchange and store this cryptocurrency in a wallet. But what's the difference between these two? And how do you choose which one to use?
First you need to know that while the protocol and security of cryptocurrency is based on blockchain, the way in which it is exchanged and traded is similar to fiat, the legal tender currencies (paper currency) that most of us use every day. To explain the difference between exchanges and wallets, let's use the example of US Dollars.
In the non-digital world, you store your money in a bank account. Your bank account has a unique code (account number) related to the bank. The bank itself also has its own unique code that is standardized throughout the international banking system. You can hold your money in this bank account, or send it to others in exchange for goods and services. You may also have tools like debit cards that store your account information securely and facilitate transactions for goods and services while still protecting your data.
Cryptocurrency wallets are like these bank accounts. They hold your digital assets and contain a unique code that allows you to exchange digital assets for other digital assets. Some cryptocurrency wallets allow you to hold assets such as NFTs, and others only allow you to hold assets such as certain cryptocurrencies. For cryptocurrency wallets, the address is the most similar to the bank account number. This is a string of numbers and letters that allows someone to send digital assets to you or to receive digital assets from you.
Cryptocurrency wallets can either be hot wallets, which means they are connected to the internet in some way, or cold wallets, which means the data is stored offline. Wallets are protected with private security keys that act as high-quality passwords to give permission for accessing, buying or selling assets within the wallet.
Here's some examples of cryptocurrency wallets (not all are NFT-compatible):
Fiat (paper currency) is not all equivalent to each other. 1 USD is not equal to 1 Euro at all times, and neither are equal to 1 GBP or 1 JPY. Therefore, as part of the international financial ecosystem, it is necessary to have currency exchanges that change one type of paper money to another type of paper money based on the value of that money to purchase the same good or service. International exchanges can be physical (cash to cash) or electronic, but the exchange rate is determined through the international market and fluctuates based on a number of different factors related to that currency's financial ecosystem and stability.
Cryptocurrency exchanges work in a similar way. These trading platforms allow different types of cryptocurrency coins to be traded for each other based on a number of factors such as supply, demand and competition. The cryptocurrency coin exchanges are much more volatile than foreign exchange (FOREX) markets, however, as the blockchain system generally works to reduce the number of coins in circulation, therefore increasing value over the long run. Most cryptocurrency exchanges use interfaces that are similar to stock exchanges, making them easy to use even for beginners.
Here's some examples of cryptocurrency exchanges. Many of these currency exchange platforms also have wallet options where the storage of cryptocurrency is possible from the same login:
Which wallets and exchanges to choose?
As a beginner to NFTs, it is overwhelming to sift through all of the wallets and exchanges available. In reality, you will need to hold multiple wallets and have accounts through multiple exchanges to best protect your digital assets. It is advised not to store all of your assets in one place in case you are hacked.
But to get started, here are a few questions to ask yourself when deciding on a wallet:
Does the wallet support the coin I want to use to mint, buy and sell NFTs?
Does the wallet allow me to hold NFTs?
What are the security protocols for my wallet?
Do I want a hot wallet or a cold wallet?
Has the wallet company faced any legal challenges in my country?
What are the tax and reporting requirements for the wallet to my tax authorities, if any?
And here are some questions when thinking about exchanges:
Does the exchange platform convert my paper currency (fiat) to the cryptocurrency I want to use?
Does the exchange platform include a built-in wallet?
What is the reputation of the exchange in my country?
What is the security reputation of the exchange?
What are the tax and reporting requirements of the exchange to my tax authorities?
What is the process and limitations for converting cryptocurrencies back to fiat?
Not to fear, we are going to test out a suite of cryptocurrency wallets and exchanges and document the pros and cons of each. Let us know in the comments which wallets and exchanges you want us to review!
At createurnft, we are on a journey to create, mint, sell and buy NFTs and are sharing what we learn along the way. This is not financial advice, please take the time to verify our information before making any financial decisions. We may benefit financially off of affiliate links in this blog.