Cryptocurrency exchanges are the heart of the crypto ecosystem. They enable most of the day-to-day trading in the digital currencies by acting as the intermediary for traders.
This article will look at what these exchanges are, the different types that exist, and what to look out for. It will also provide a few prominent examples of exchanges to get you started on your investments or trading journey.
What Is A Cryptocurrency Exchange?
Cryptocurrency exchanges are digital marketplaces. They act as locations for traders to buy and sell bitcoin or altcoins based upon their market value. This can be done using either altcoins or a range of fiat currencies. In effect, cryptocurrency exchanges are online platforms that perform the role of intermediary between potential buyers and sellers of cryptocurrencies. What these exchanges do is match potential buyers and sellers of cryptocurrencies, much like a standard stock exchange.
Transacting with cryptocurrencies on an exchange requires potential traders to register on the chosen platform. Thereafter, they must go through a range of verification steps in order to authenticate the identity of the user. Once these processes are completed, funds must be transferred into the account to start trading.
As there are a vast number of exchanges out there, it’s worth taking note that they choose their own type of payment and withdrawal methods. These methods can include direct bank transfers, bank wires, credit and/or debit cards, PayPal, and a few others. This is all dependent upon what the chosen exchange has provided as options for the trader to use.
Types Of Cryptocurrency Exchanges
There are a couple of types of cryptocurrency exchange out there worth looking into, which are entirely dependent upon the needs of the user.
The most well-known crypto exchanges are centralized exchanges. These are often the first port of call for traders new to the world of crypto due to their better user experience. However, they are popular amongst all types of users. Cryptocurrencies can often be traded for fiat currencies, and the interfaces are more user friendly than other types of exchange.
The positives of using centralized exchanges lie in the higher liquidity afforded by the potentially higher user base. This higher liquidity is directly coupled to the higher trading volume. These exchanges often provide faster transaction speeds as well, which enable a better user experience.
The negatives of centralized exchanges lie in the very things that make them a go-to in the first place. Firstly, as exchanges have custody of your private keys to enable trading, this lowers your sense of control and agency with regards to your own assets.
Secondly, due to the size of the assets on centralized crypto exchanges, they are more consistently maliciously targeted by third parties.
Thirdly, it’s worth doing your research before joining an exchange, as several of the centralized cryptocurrency exchanges have been accused of abusing their position of authority. Manipulation of numbers as well as insider trading have occurred, and are worth watching out for.
There is another variant of crypto exchange known as the decentralized exchange. They are those that function without a centralized authority monitoring day-to-day trading. The point of these exchanges is that they allow peer-to-peer trading of cryptocurrencies without an arbiter facilitating each potential transaction.
There are a few legitimate reasons and benefits for choosing to use decentralized platforms. Firstly, many traders feel that these decentralized exchanges more closely adhere to the decentralized nature of the cryptocurrencies that are being traded on the platform. The notion of a centralized cryptocurrency exchange seems to go against the ethos of using these currencies in the first place. Some decentralized exchanges also relax the need for excessive personal information as a result.
Secondly, there is a potentially reduced risk of asset theft via hacking or other types of fraud from third parties. If users trade their crypto assets directly to other traders on the platform, there isn’t any worry about vulnerable cryptocurrency sitting on the exchange.
Thirdly, these decentralized exchanges are potentially less predisposed to fraudulent activities, such as price manipulation and the like.
There are, however, risks with these platforms. Much like other exchanges, a sufficient baseline of user interest must be maintained in order to sustain them. This is necessary to ensure sufficient trade volume and liquidity, and is, therefore, something to keep in mind when joining a new or flagging exchange.
While the above can be avoided with sufficient research, a further negative when using decentralized exchanges is potentially more worrisome. If a trader were to be a victim of theft or some other form of fraud, the nature of these exchanges means that there won’t necessarily be the fall back of a central authority to rectify the problem.
Some Things To Be Aware Of
Be sure to do your research to find out the reputation of any exchange you use, as well as the geographical restrictions that may apply. Below are a further two points worth noting.
Cryptocurrency exchanges and cryptocurrency wallets are distinct from each other. Wallets are the service that facilitates the secure digital storage of a user’s cryptocurrency. More precisely, they store the user’s private keys that enable access to the user’s cryptocurrency and also authorize transactions.
Most cryptocurrency exchanges provide their own crypto wallets for users, contributing to a better user experience. This service is usually provided at a nominal fee. However, this does mean that the exchanges will have secure possession of a user’s private keys. This isn’t usually a problem, but it could be an issue in the case of external influence as some exchanges don’t treat security as their main concern.
If you feel confident in doing so, you can set up your own wallet for long-term or large investment sums.
A user must take note of the fees built into the structure of the cryptocurrency exchanges. If a user makes deposits or withdraws fiat or cryptocurrency, fees are payable depending on the method of payment. If there is a higher risk of chargeback, the fees are higher. Using PayPal, or a credit or debit card means you’ll need to pay more due to the ease with which funds can be reversed.
Furthermore, there are currency conversion fees to be aware of. If an exchange deals exclusively in a particular currency, and you are transferring another currency into the exchange, this conversion accrues extra fees on top of the regular transfer fees. This is why transacting on an exchange that accepts your preferred currency will be your best bet.
Transaction fees are another type of fee built into the ecosystem of the crypto exchange. Every completed sell or buy order on the exchange is accompanied by a fee that is based upon the volume of the transaction. Therefore, taking note of an exchange’s transaction fees is important for any user.
Some Popular Exchanges
We’ll take a look at three well-known and popular exchanges below.
Coinbase is the most widely used cryptocurrency exchange in the US. It’s fully regulated and has a high user base.
It is also amongst the safest exchanges out there, with very high liquidity and an easy-to-use interface. Coinbase also offers all available payment options. For this reason, it’s a good starter exchange for those new to the world of crypto.
This exchange also comes with its own wallet, although this means that the private keys aren’t in the sole ownership of the user. Furthermore, there are higher premiums on transactions on this platform and no extensive altcoin offerings.
Some also find the regulation and security to be excessive according to their tastes. Despite these negatives, the regulation and security of Coinbase are worth the increased investment for many.
Binance is the largest exchange in the world, as of writing this, and specializes solely in the trading of altcoins.
Despite not dealing in fiat currency, Binance has a high user base with large liquidity. A significant amount of the world’s daily crypto trading is done on this exchange alone.
Binance has lower fees than other popular exchanges, with an incredibly large variety of altcoin options. The downside is that it’s pitched toward more advanced users, and subsequently has a less friendly user interface.
Kraken is amongst the oldest exchanges out there. It’s a popular exchange that has a range of trading tools and an advanced order system.
Kraken accepts common fiat currencies along with cryptocurrencies. While it’s aimed toward advanced traders with options such as margin and futures trading, beginners will also find it accessible. Furthermore, the fees are relatively low.
While there have been historic issues with its security, it has improved this aspect considerably over time, and is currently considered a safe bet.
This article has provided an overview of cryptocurrency exchanges, their types, what to look out for, and listed a few prominent examples.
Remember to research before jumping on board a cryptocurrency exchange. There is a range of exchanges out there that can suit your particular needs, whether you are new to crypto or an experienced trader.