A cryptocurrency exchange is a platform that allows one to purchase and sell various cryptocurrencies. An exchange can also be used to trade one type of crypto for another.
It is also possible to convert crypto back into a currency like the U.S. dollar and leave it like cash in the account or withdraw it to a traditional bank account. Other than allowing trading, the exchange also supports other services like crypto storage and price analysis via trading activity.
In today’s time, there are a number of crypto exchanges, and each one of them offers multiple digital assets, various degrees of security, and related fees. For professional traders of cryptocurrencies, crypto exchanges are counted among the safest options when it comes to storing digital currencies.
As you are no stranger to cryptocurrency exchanges now, let us discuss everything important about them.
How does a crypto exchange work?
Basically, a cryptocurrency exchange matches buyers with potential sellers. Registration is the first step for both purchasing as well as selling on a crypto exchange.
After completing the KYC (know your customer) process and being verified, the account is opened. With this, it is now possible to transfer funds (no matter if they are in fiat or digital currency) on the platform. And that’s all. The funds can now be utilized for purchases.
Trading on a crypto exchange
Trading requires funding the crypto exchange account or wallet, which is offered by the particular platform.
Trading prices of various cryptocurrencies can be viewed on the exchange. It is worth knowing that these prices are decided by the market. Usually, the latest pricing is shown; however, slight differences are possible among exchanges owing to the decentralized nature of cryptocurrencies.
A buy order can be placed to purchase the desired cryptocurrency. The order is added to the order book with various other purchase and sale orders.
Keep in mind that based on the platform, a certain amount of fee is charged in exchange for the services.
Different crypto exchanges
There are three kinds of cryptocurrency currency exchanges, as explained below:
A third party enables transactions in these exchanges. With a centralized exchange, purchasing a cryptocurrency is quite easy. The only risk here is the fact that these are held by a single entity; hence, are open to attacks.
The absence of a central entity or server that can be hacked makes DEXs secure and eliminates the possibility of stealing cryptocurrencies. However, a little technical skill is required since transfers from bank accounts/debit cards for the purchase of crypto are not easy.
Also, a few decentralized exchanges don’t provide fiat currency changes, and the only option available is trading one cryptocurrency for another.
Hybrid exchanges strive to offer users the best of both worlds, i.e., the ease of a centralized exchange and the safety and freedom provided by a decentralized exchange.
Although not quite popular currently, these exchanges are focused on coming up with strategies to keep crypto enthusiasts pleased in the future.
Factors to consider when choosing a crypto exchange
To find a cryptocurrency exchange that suits the needs and fulfills the crypto strategy, here are some important points to consider:
The exchange must offer services in the region where one lives since certain crypto exchanges are confirmed for specific areas. The jurisdiction of an exchange not only tells about its target market but also the location or area in which it is allowed to do business owing to cryptocurrency regulations.
Crypto beginners need to learn all about various types of digital assets, coins and blockchain. For instance, Coinbase has a Coinbase Earn program to provide rewards for learning about the latest coins.
After completing quizzes and watching videos about coins, users get a portion of the cryptocurrency.
Exchanges with higher volumes of trades as well as ample amounts of money changing hands are usually the ones that work in the favor of an investor.
An exchange that has several users or has users with a high quantity of assets who trade often is the way to access higher liquidity.
Liquidity is crucial during high volatility, and less liquidity affects volatility to such an extent that prices either go up or down tremendously.
Exchanges that enable users to store their cryptocurrency in their online account are a good choice. After the user becomes familiar with various storage options later, the cryptocurrency can be moved to other secure wallets. It is for this reason, exchanges that enable crypto storage only on their platform must be avoided.
Most of the exchanges support higher-market-cap coins. Those who are interested in lesser-traded coins should opt for smaller exchanges. Checking the available coins to find the desired cryptocurrency is easy.
Choosing an exchange and understanding its terms carefully regarding the fee structure is important. At times, an exchange has a native token to allow traders to pay less fees.
Exchanges that are in the business since long and have several customers are the ones with least issues. The security practices of an exchange is mentioned on its official website.
Also, some exchanges provide insurance, which protects investors from losses if anything goes wrong.
Best crypto exchanges
Here’s a list of some of the most popular cryptocurrency exchanges.
The most known and often the best exchange, Coinbase has an easy-to-use interface, offers educational material, intact security and has an extensive range of cryptocurrencies.
The exchange has several layers of protection against attacks and frauds. To keep the cryptos of users secure, the platform has different techniques. Multi-factor identification and a wide selection of cryptocurrencies are other great features.
This exchange has low fees and is known as the largest crypto exchange in terms of trading volume. The competitive maker and taker fee is the highlight, as the fee begins low and gets even lower with increase in the trading volume.
Pros & cons of a crypto exchange
The goods and bads of a cryptocurrency exchange are a must to know while considering them. Check out some of them in the table below.
|Cryptocurrency exchanges are both easy and suitable for new users.||A cryptocurrency exchange is open to fraudulent activities, hacking and theft.|
|Tax forms are offered by some exchanges which allow them to calculate crypto taxes.||Traders with the custodial exchange wallet don’t own private keys.|
|In a cryptocurrency exchange, buying and selling is done in a regulated environment.||It is impossible for users to access funds or engage in trading if the exchange goes down.|
Difference between crypto exchange and crypto wallet
A cryptocurrency exchange is the platform to trade crypto, while a cryptocurrency wallet is the platform to store cryptocurrencies.
A few exchanges have their own personal wallets, but keeping assets in such custodial wallets is not considered safe. This is because keeping assets on the custodial or native wallet of a cryptocurrency exchange means allowing the exchange to control the assets.
For the safety of assets, they must be transferred to a hot or cold wallet that a user can control.
Crypto exchange partnerships
Some of the most popular cryptocurrency exchange partnerships include:
In June 2021, Circle announced its collaboration with Crypto.com.
In August 2021, Bybit partnered with UNICEF.
In August 2021, Astralis announced collaborating with Bybit.
Cristiano Ronaldo announced a partnership with Binance in June 2022.
In November 2022, Huobi shared a strategic partnership with Poloniex.
No matter how simple or easy the concept of a crypto exchange looks, it has its share of complications, thanks to the crypto world being unregulated. Also, each exchange has its own security levels and fees, which push the need for careful research further.
Though things are evolving with time and more and more services are being offered, it is recommended to invest ample time to understand every side of a cryptocurrency exchange. After all, one shouldn’t forget how the FTX exchange fell abruptly and shocked the crypto world.