What is a cryptocurrency exchange?
Cryptocurrency exchanges are one of the most popular places to buy and sell cryptocurrencies online. You can exchange one cryptocurrency for another, or you can purchase cryptocurrency using fiat currencies like pounds (GBP) or dollars (USD).Think of it like a stock exchange for cryptocurrencies instead of stocks and shares. The value of one cryptocurrency against another rises and falls based on supply and demand. It can also be influenced by fundamental factors like industry news – good or bad – regarding a particular cryptocurrency.
Types of cryptocurrency exchanges available
There are three different types of cryptocurrency exchange you can useto trade cryptocurrencies for one another or fiat currency:
Trading platforms are considered the ‘traditional’ form of crypto exchange. They operate in the same manner as a conventional stock exchange. Buyers and sellers of cryptocurrency trade based on the rise and fall of a coin’s market value – with the exchange acting as the intermediary. These exchanges typically take a commission for every trade to cover their costs for initialising transactions.There are centralised trading exchanges as well as decentralised trading exchanges. The former will typically allow for both crypto-crypto and fiat-crypto trading due to users’ increased identity verification measures. Coinbase Pro, formerly known as GDAX, and Kraken are two popular exchanges that offer both types of trades. Decentralised tradingplatforms operate exclusively using code rather than a centralised teamof intermediaries. For example, IDEX utilises smart contracts to facilitatetransactions for the most part.Using a decentralised application (dapp) to operate the front end of the exchange, all transactions are coded directly onto a blockchain. Although this can be a more efficient process, the decentralised nature means that transactions can take a long time to be processed if there is an unforeseen bottleneck and there is no way to reverse such transactions by an intermediary.
A direct trading exchange for cryptocurrencies focuses on peer-to-peer (P2P) trades between buyers and sellers. Sellers of cryptocurrencies set their own rates for buyers and aren’t governed by a fixed market value. Buyers can find sellers using direct P2P platforms by filtering sellers thatmatch their criteria.Decentralised cryptocurrency exchanges suit direct trading platforms given the clarity of their services. The seller sets their sale price and thebuyer must meet the sale price or the transaction does not compute.Note: It’s worth checking the market value of the cryptocurrency you wish to buy or sell at Coinread first. It will give you a rough idea of how much you can expect to buy or sell cryptocurrency via a direct trading exchange. However, supply and demand will often dictate whether it’s possible to sell for more.
A cryptocurrency broker operates much like a currency exchange you find at an airport. Their front end allows users to buy and sell cryptocurrency at a price determined by the individual broker. It’s important to find a broker that buys and sells as close to the market value as possible.The exchange of fiat-crypto or crypto-crypto is made between the user and the broker, not the buyer and seller. Coinbase is one of the most popular and most trusted cryptocurrency brokers. Its interface is simple and intuitive, so you can expect to pay a premium for using a platform like Coinbase rather than buying via a trading exchange.
How to choose a cryptocurrency exchange to trade cryptos
- Consider trading feesThese fees are an exchange’s primary source of revenue. Exchanges will charge trading fees for every fiat-crypto and crypto-crypto transaction made. Some exchanges will be cheaperthan others. If you are prepared to be a ‘market maker’ i.e. set a price you are willing to sell or buy a cryptocurrency, your exchange may offer reduced trading fees as an incentive for providing liquidity.
- Accepted payment methodsIt’s important to select an exchange that accepts the methods of payment you wish to use for deposits and withdrawals.Note: Buying cryptocurrencies using a credit card requires full identity verification, as well as increased processing and transaction fees. Wire transfers tend to take significantly longer than payments via debit card or e-wallet.
- Industry reputationIt’s a good idea to seek independent third-party reviews of cryptocurrency exchanges that catch your eye. Pop the exchangeinto Google News and you should be made aware quickly of any issues regarding its security or illegitimate operations. At Coinread, we will soon be reviewing cryptocurrency exchanges for our users too, so keep your eyes peeled!
- Identity verificationChoose a cryptocurrency exchange which takes the identity of itsusers seriously. Don’t be afraid of verifying your identity. This ensures that all active users of an exchange are legitimate, and you are less likely to be the victim of a scam or money laundering. You may be asked to upload copies of personal identification to meet the Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) regime that all exchanges registered with the UK Financial Conduct Authority (FCA) must abide by.
- Rates of exchangeDon’t forget that the same cryptocurrency may be available at different rates of exchange on different platforms. Make sure youdo your research and find the cheapest place to buy cryptos or an exchange that will offer you the best value when selling cryptos.
- 6.Geographical limitationsSome countries will be prohibited from accessing certain exchanges. Ensure the exchange you wish to use offers full functionality to users in your country.
Cryptocurrency wallets Vs exchange wallets
It’s also important to bear in mind that as you begin to invest in cryptocurrencies via an exchange, you will need to choose between storing your funds in a cryptocurrency wallet or an exchange wallet. Although both types of wallets will accept most crypto coins, each has their own nuances which may or may not suit your needs.On the face of it, exchange wallets appear like a rather convenient option. They are integrated within the exchange’s functionality and are easy to use. However, experienced cryptocurrency investors would argue that their risks outweigh their benefits.That’s because you never have 100% control of an exchange wallet. Your chosen cryptocurrency exchange will have oversight of your wallet’s private key, which means that you aren’t the only individual that can access your crypto funds. In the event of a cyber-attack on your chosen exchange, it’s possible that cyber-criminals could gain access to your private key and transfer your cryptocurrency to another wallet without knowing.However, an exchange wallet can still be a useful starting point for beginners to trading cryptocurrency. If you are only investing small sums, the financial risk of using an exchange wallet is minimal compared with those who trade cryptos in higher volumes for a living. Just make sure you choose a reputable exchange that is registered with the Financial Conduct Authority (FCA) if you live in the UK.If you intend to invest serious sums of money in cryptocurrency, it’s highly recommended that you opt for a cryptocurrency wallet that givesyou total control of your private key. There are two types of cryptocurrency wallets you can use to store the cryptos you buy and sellvia an exchange:
- Hot wallets Any cryptocurrency wallet that is connected to the internet is considered a ‘hot’ crypto wallet. Exchange wallets are therefore aform of hot wallet. They are usually accessed via web browsers or within your desktop. Hot wallets are typically cheaper to obtain than cold wallets. In fact, the majority are free to use.
- Cold wallets Storing cryptocurrency in ‘cold storage’ means storing your wallet’s private keys offline on handheld devices specifically designed for this process. Cold wallets like the Ledger Nano S aresmall and discrete, making it easy to transport. Be mindful that some cold wallets only support a limited number of cryptocurrencies. They aren’t cheap either, with the Ledger NanoS retailing at between £54 and £109.