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What is a Cryptocurrency Exchange?

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What is a Cryptocurrency Exchange?

In this article, we are going to give an insight into what a cryptocurrency exchange platform is and also show you what to look out for before selecting one to trade with.

As the cryptocurrency trend keeps growing every year, the thought of investing in it might have crossed your mind. Cryptocurrencies are digital currencies, unlike the traditional local fiat currencies.

If you are a beginner and are curious about cryptocurrencies and how to purchase them, you must have heard of the term “cryptocurrency exchange” or “crypto exchange” and might be wondering what it is.

What is a Cryptocurrency Exchange?

If you have been wondering where and how to buy cryptocurrency, then using a crypto exchange is the first place to start. A cryptocurrency exchange is an online platform or marketplace where you can buy and sell cryptocurrencies.

Apart from buying and selling cryptocurrencies, you can also trade one crypto for another on these platforms. They serve as a middleman or intermediary between the buyer and seller.

A cryptocurrency exchange also displays live prices of the crypto that are available for trading on their platform. Bear in mind that there are lots of exchange platforms out there and each of them has its trading fees, some higher than others.

Also, it is worth knowing that not all exchange platforms are beginner friendly. Some are easier to use than others, so it is quite important to know and understand the difference between each of the platforms before making a final decision on which one to use.

Crypto exchanges also come with a built-in wallet where you can save your purchased digital assets, (look at it like your local bank account where you store your money). Also, you can convert your crypto to U.S dollars in case you want to save it up in your account or withdraw it to your local bank account.

I would say no exchange platform is better than another, all you have to do is look for the one that fits what you want to do and offers what you want to buy. You just have to do extensive research and comparison to know which one suits your need.

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Also, Tyrone Ross (a financial advisor and CEO of Onramp Invest) shares the same view. He had this example to give;

“Am I looking for something like Casa, because Casa does a lot of work for me and I don’t have to worry about a public and private key? Am I going to Gemini, because Gemini has this weird coin that I want and they’ll allow me to buy it? Or am I going to Coinbase because Coinbase has these cool tools that allow me to learn and earn crypto?”

“Casa,” “Gemini,” and “Coinbase” mentioned above are all names of crypto exchanges just in case you are wondering. As you can see from his example, these three platforms have different things they offer aside from general buying and selling. So in summary, it is always advised to know what you want thereby making it easy to streamline your search for a particular platform.

How does a Cryptocurrency Exchange work?

Using a crypto exchange for purchasing assets is as easy as walking into a bank to open a bank account and depositing cash I find it even easier. There is just a decision and a few steps you have to follow as listed below:

  1. Pick an exchange and create an account with it
  2. Add funds to your account
  3. Buy crypto with a fiat to crypto trade
  4. Keep your crypto in account
  5. Move it to a crypto wallet
  6. Start trading

Related: The Best Cryptocurrency Exchanges for Beginners

  • Pick an exchange and create an account with it: This is where the decision-making comes in. After doing your extensive research, the next thing will be to select the one that fits your goal. Once you select from the long list of the ones available out there, the next thing to do is create an account on it.
  • Add funds to your account: Now, depending on the exchange platform you end up selecting, you will have to add money to your account through one of the accepted methods listed on the exchange. Some accept funding with a debit card, some with direct bank transfers, others with Paypal, and even through wire transfer.
  • Buy crypto with a fiat to crypto trade: Once funds have been loaded into your account, you are now ready to make your first purchase. Locate the “marketplace” on the exchange app and then select the coin you want to buy and then pay for it.
  • Keep your crypto in account: After buying your desired crypto, you can either keep it in your exchange account or you can move it to a crypto wallet. If you want to move it, then follow the next step below:
  • Move it to a crypto wallet: A crypto wallet is more like a purse where you save your purchased asset. There are different types of wallets with different levels of security. For example, there is the hardware wallets, paper wallets, online wallets, and mobile wallets, all having a different levels of security.
  • Start trading: After getting your coin and you don’t want to just save it or leave it lying around in your wallet, the next best thing to do is to trade it. You can trade by giving crypto for crypto or fiat for crypto.

Types of Cryptocurrency Exchange

As we said earlier, it is important to do your research before deciding on the particular exchange platform you want to work with, and knowing the different types of exchange is a very good place to start.

There are two types of cryptocurrency exchange, namely;

  • Centralized
  • Decentralized

Centralized Cryptocurrency Exchange

Some users might find this misleading since cryptocurrency itself is paraded as a decentralized asset. That notwithstanding, it is also the most common type of exchange platform out there. This type uses a third party to monitor and offer security and also helps to connect trading partners.

Decentralized Cryptocurrency Exchange

This is a less common type of crypto exchange. Unlike the centralized one, this one does not require a third party to help provide security or monitoring, instead, it uses blockchain technology for this purpose, and also transactions are done in a P2P (peer-to-peer) form using smart contracts.

What to look out for in a Crypto Exchange

When choosing the crypto exchange platform to work with, after understanding the two types of exchange there is, the next thing is to know what to look out for in an exchange before deciding.

  • Accessibility
  • Security
  • Fees
  • Liquidity
  • Available Coin
  • Storage

Accessibility: Some crypto exchanges are only available in limited locations. Not knowing the one that works well in your country might be a problem. As we know, not all countries have accepted the concept of cryptocurrencies, it remains banned in some countries. In places like China, citizens have been banned from accessing any crypto exchange at all.

Even in the United States, there are certain regulations around cryptocurrencies that some states have even implemented their regulations. You can visit the website of your preferred exchange and go through the terms of service page to find supported countries and also the type of local currencies accepted.

Security: This is also another very important detail to look out for in an exchange before making any move. Nobody wants to trade on a less secured platform where you stand a high risk of losing your assets.

As you know, cryptocurrency isn’t backed by any central body (that’s why it is a decentralized asset) like your money in the bank. Some top exchanges like Coinbase and Gemini keep any U.S Dollars balances you hold with them in FDIC-insured bank accounts.

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Also, some exchanges have insurance policies to protect users’ assets in case of a hack. Some like Coinbase have an insurance policy worth $255 million, which means in a case where the platform gets hacked and assets worth up to $255 million are stolen, users can be protected.

As reported in 2022, there was a total of about 25 attacks on crypto exchanges that were recorded and the largest amount that was stolen was about $200 million from KuCoin – a Singapore-based crypto exchange.

So this is one very important thing to look out for before making a decision on which to sign up with. In my personal opinion, I would say it is better to choose an already established exchange that has a good name and reputation to itself, instead of going with a less familiar one.

Fees: Fees are another thing to consider, but mind you, that a platform offers less trading fee than another doesn’t mean it is better. Exchange fees may be fixed sometimes, but are a percentage of your trade.

Some exchanges charge a lower fee than others. There can be different fees depending on whether you are a buyer or a seller and also it can depend on the currency you choose to trade.

Make sure you understand the fee structure of the exchange you choose and try to know how and when you are to be charged for your transactions.

Liquidity: Make sure to choose an exchange with very good trading volume to ensure that your assets are liquid which means you can sell them anytime you choose to. Most times, the more popular an exchange is, the more trade volume they have.

According to CoinMarketCap (a crypto price tracking website), Binance, Coinbase, and Huobi are the top exchanges by volume worldwide.

Available Coin: There are thousands of coins available in the market and not all exchanges have them available on their platform. So if there is a particular coin you have in mind to purchase, you should make your research and find the platform that offers that coin.

If you are interested in the popular coins like Bitcoin, and Ethereum, you will find them on every exchange platform out there, but if you want another altcoin with a lesser market cap, then you might require a little more digging around.

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Storage: Storage is one good thing to consider especially for beginners who are not very familiar with the different ways or options to store their cryptocurrency. Typically, going with an exchange that allows you to store your purchased assets within your account is a very good choice. You can decide to move your holding to your wallet when you have learned more about the different types of wallets available or when you choose to increase your holdings.

Some popular crypto exchanges available include:

  • Coinbase
  • Binance
  • Huobi
  • Kraken
  • Gemini
  • Kucoin
  • Robinhood

Check out this content on The Best Cryptocurrency Exchange in 2022

Conclusion

A cryptocurrency exchange is a platform where you can buy, sell or trade your cryptocurrencies. There are lots of exchange platforms available out there, but there are things you should look out for before choosing one to choose.

First, try to get familiar with the two types of exchanges available and then check out for features and do your comparison. Make sure you learn as much as possible before putting your money into it.

Consider things like fees, security, coins available, liquidity, and accessibility before making a decision. There are lots of cryptocurrency exchanges available, but a few of the popular ones are Binance, Coinbase, Kraken, KuCoin, Huobi, and Robinhood.

Thank you for reading this article. Please help share on your social media profile and also with friends who you think might be interested in posts like this.

Victor Nnamdi Igbor "Swaezy" is a crypto enthusiast and founder of 36crypto. He is quite experienced and has been in the blogging industry for 8 years. He is an easy person and when not working, loves to have a good time.

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