Cryptocurrency exchange refers to any mechanism that trades digital cash for other assets. To facilitate the buying and selling of these digital assets, as well as others, a cryptocurrency exchange operates similarly to a regular financial market.
What Is Cryptocurrency Exchange?
A cryptocurrency exchange is a website where you can buy and sell cryptocurrency. You can use exchanges to convert one crypto to another, such as Bitcoin to Litecoin, or to buy crypto with regular currency, such as the US dollar.
Exchanges display the current market value of the cryptocurrencies they provide. You can also exchange cryptocurrencies for US dollars or other currencies to keep as cash in your account (if you want to trade back into crypto later) or withdraw to your regular bank account.
How Crypto Exchanges Work
Crypto exchanges connect buyers and sellers. To buy and sell on most crypto exchanges, you must first register, just like with a traditional bank account.
After completing the Know-Your-Customer (KYC) process and being authenticated, your account will be opened and you will be able to transfer funds (fiat or digital currency) onto the platform, which you can then use to make purchases.
Types Of Cryptocurrency Exchange
To start your cryptocurrency trading journey, you should first learn about the different types of crypto exchanges. There are two main types of cryptocurrency exchanges;
Centralized Exchange
The most common type of exchange platform is a centralized crypto exchange, which employs a third party to facilitate transactions. Users rely on this third party to provide security, monitoring, and assistance in locating trading partners. Some investors believe this concept is deceptive because cryptocurrencies are decentralized and do not require a central authority.
A centralized exchange operates in the same way that modern banking institutions do. They are dependable and secure; additionally, these exchanges adhere to strictly enforced rules and regulations for optimal results. However, a third-party service provider will store all of your cryptocurrencies and digital assets. As a result, certain risks must be considered.
In a centralized cryptocurrency exchange system, there are chances where it can be hacked quite easily, leading to traders losing all of their digital assets and funds within a very short period. An entire centralized cryptocurrency exchange can also disappear into thin air overnight.
Decentralized Exchange
Decentralized cryptocurrency exchanges, unlike centralized exchanges, do not use a middleman; instead, they rely on blockchain technology or distributed ledgers. The currency is not held by a third party in this less common type of exchange, and transactions are done peer-to-peer using smart contracts.
The decentralized exchange can help traders mitigate the aforementioned risks and provide them with a new level of peace of mind.
In recent years, the decentralized nature of cryptocurrency exchanges has become the unique selling point that drew a ton of attention from the general public. Here are a few reasons why:
- No deposits or withdrawals are required to use the service. All peer-to-peer transactions are managed by smart contracts that may be programmed.
- There is no one (single) point of control, regulation, or failure that is responsible for potential problems.
- Due to the lack of registration requirements or KYC processes, there is an increase in privacy.
In a decentralized cryptocurrency exchange, you will be the true owner of all your assets. However, you will need to have a lot of responsibility to keep your digital assets safe.
Choosing The Right Cryptocurrency Exchange
Everyone has an opinion about the best place to buy cryptocurrency. There are important options to consider before committing to a cryptocurrency exchange, whether you’ve made a decision or are still deciding.
Accessibility
Consider which cryptocurrency exchanges are available in your country and state, regardless of where you are in the world. Looking at the platform’s website or terms of service can help you figure out if it’s available to you.
What Coins Are Offered
It may come as a surprise that many cryptocurrency exchanges do not support all cryptocurrencies. New coins with lower market capitalizations may be restricted to specific platforms. It’s a good idea to decide which cryptocurrencies you want to buy ahead of time, and then choose an exchange that sells them.
Fees
Although some people lean toward the option with lower fees, it’s important to understand what those fees are for and how they are charged. Sometimes a higher fee will provide you with more security and make the process of exchanging cryptocurrencies easier. You may come to find out that paying a higher fee might give you a better overall experience than a platform with a lower fee.
Security
One of the main reasons people choose cryptocurrency is for its security, so selecting a secure platform is just as important as keeping your money safe. Some platforms offer insurance policies to protect your digital currency against the event of fraud or hacking. When selecting an exchange, consider other security features such as a two-factor authentication system.
Liquidity
One characteristic of crypto exchanges that can be overlooked is whether they have liquidity. You want to make sure you’re able to sell your cryptocurrency whenever you want and at the best price. This requires the exchange to have enough trading volume, and often the more popular crypto exchanges will have higher liquidity.
Storage Options
Whether you’re a beginner or have dipped your toes in crypto investing before, it’s important to take into account the storage options available for that platform. It’s worth mentioning that there are conflicting opinions between keeping your cryptocurrencies in your own hardware wallet or storing them on the exchange.
Tax Information
Just like investing in stocks, whenever you make capital gains while trading cryptocurrencies, you have to report it in your taxes. Some platforms provide you with Form 1099-B, which tracks your gains and losses, making it easier to file taxes later on. Since taxes can be tricky, especially for beginners, finding a platform that provides you with that information can make filing taxes less stressful.
Extra Tools
Many crypto exchanges will also offer different kinds of tools or benefits. Take into consideration how the platform works and how it looks, as well as if it’s easy to use and if it connects to your personal investment tracking app, such as the Mint app.
Conclusion
A cryptocurrency exchange is a marketplace for buying and selling cryptocurrencies. Some cryptocurrency exchanges provide a variety of products and services, whereas others exist solely to buy and sell digital assets. When deciding which exchange to use, keep your personal financial goals and risk tolerance in mind.
