What’s a crypto exchange?
A crypto exchange, or cryptocurrency exchange, is a marketplace where cryptocurrencies are bought and sold. Crypto exchanges provide a platform for users to store crypto and discover market pricing on various cryptocurrencies.
Before the advent of cryptocurrency exchanges, users could only purchase cryptocurrency by mining or setting up transactions in online and offline forums. Today, hundreds of cryptocurrency exchanges provide a wide range of crypto assets, security measures, and transaction fees.
How does a crypto exchange work?
Users can buy and sell cryptocurrencies like Bitcoin (BTC), Ethereum (ETH), Tether (USDT), Dogecoin (DOGE), Litecoin (LTC), and more. To trade crypto, users must create an account on a crypto exchange. Depending on the platform, users can exchange one type of cryptocurrency for another or buy cryptocurrency using traditional fiat money, such as the U.S. dollar or the euro. They can also convert existing cryptocurrencies to fiat money, hold it in trading accounts, and withdraw it as cash.
Large crypto exchanges tend to offer a broader range of cryptocurrencies. However, if you have your mind on a specific cryptocurrency, check whether the platform you're signing up to has it before you create an account. The services offered might differ based on the crypto exchange or app used. For instance, you may not be able to transfer your cryptocurrency from a given platform to your crypto wallet if the exchange doesn't allow it.
Crypto exchanges are open 24/7, unlike traditional stock market exchanges with fixed trading hours. As a result, the cryptocurrency market is always active.
Unlike other currencies, which do not have to deal with such extreme volatility issues, cryptocurrencies function on decentralized blockchains with multiple digital assets like non-fungible tokens (NFTs), decentralized apps (dApps), decentralized finance (DeFi), and more. Therefore, beginners must understand how crypto markets operate to ensure they traverse them securely.
How to trade in a crypto exchange
Before you start trading on a crypto exchange, you have to have funds in your crypto wallet. Crypto wallets provide a method of storing cryptocurrency, with many crypto exchanges providing their wallet services. However, experts recommend creating a personal crypto wallet for an added layer of security.
Once you've made a crypto wallet, you can log in to your preferred crypto exchange and see the market values of various cryptocurrencies. Because cryptocurrencies are decentralized, there may be minor fluctuations across different exchanges, but it's important to remember that crypto exchanges aren't responsible for market values; instead, the market dictates prices, and most exchanges represent live pricing.
After you've selected a cryptocurrency, you can submit an order to buy it. The crypto exchange will add your order to the order book, which is a list of offers from buyers and sellers for specific crypto. Depending on the exchange, you may have to pay transaction fees or broker fees for services. Compared to traditional stock markets, where several fees have recently been reduced, crypto trading is often more expensive.
How to choose a crypto exchange
Cryptocurrencies are volatile assets. As a result, it's essential to factor in several variables when choosing a crypto exchange, such as:
- Deposit and withdrawal caps
- Limitations and regulations
- Payment methods
- Transaction and trading fees
The best cryptocurrency depends on your goals, budget, risk tolerance, and security requirements. Additionally, it's essential to understand that different crypto exchanges have different degrees of security and related costs, some of which are only available on mobile devices. Other exchanges may require robust computational power for specialized use cases.
Is it accessible?
Due to domestic or international laws, you might not be able to buy or sell cryptocurrency, depending on your country of residence. Some countries, like China, have imposed bans on using cryptocurrency exchanges.
A crypto exchange will often have rules or other accessibility-related criteria in its terms of service.
How secure is it?
Although no crypto exchange is entirely safe, one must consider its operational time, reputation, number of users, and any issues or controversies. A simple Google search should answer most of these questions. In fact, crypto exchanges often provide information regarding their security protocols.
Some exchanges even provide partial or full insurance. In a market catastrophe, an exchange that provides insurance might protect its investors from damages, although such plans are uncommon and often not comprehensive. As a result, it’s essential to do your homework before selecting any crypto exchange.
How much liquidity does it have?
Liquidity is crucial during volatile periods in the crypto market. Reduced liquidity can worsen crypto volatility, causing prices to move in more extreme directions than they usually would.
Crypto exchanges with more traffic tend to have higher liquidity. Such exchanges generally have frequent traders with large amounts of cryptocurrency. Additionally, the cryptocurrencies being traded also play a role, as some are more liquid than others.
What are the fees?
Most cryptocurrency exchanges impose transaction fees and processing costs. These fees can vary depending on the exchange, so ensure you read and understand all the terms and conditions before selecting an exchange you're comfortable trading on.
Are educational tools provided?
Another factor that appeals to newcomers seeking a crypto exchange is the educational tools it offers. This enables users to learn about crypto and its related technology.
For instance, Coinbase's Coinbase Earn program pays users to learn about coins. You'll receive a tiny amount of cryptocurrency from Coinbase for watching videos and answering quizzes about various coins, which you may keep or swap for other items. Others, like Gemini's Cryptopedia or Binance Academy from Binance, provide courses and materials on their websites to help you understand how cryptocurrency, its history, and how markets work.
What are the storage options?
Newcomers may be better off storing their crypto in wallets offered by various platforms. Once you've learned more about storage, you can transfer your crypto to a personal wallet of your choice.
Centralized vs. decentralized crypto exchange
Crypto exchanges come in two forms––centralized and decentralized. Let’s look at how both function, along with the pros and cons of each.
Centralized crypto exchange
A centralized crypto exchange (CEX) provides a neutral, third-party platform for two parties to perform a transaction. A centralized organization often manages centralized exchanges. In centralized exchanges, users’ funds do not actually interact with the blockchains and are usually stored as a database entry. This is because it costs money to interact with the blockchain. A majority of crypto transactions use centralized crypto exchanges, although volume is shifting to decentralized exchanges over time.
Centralized exchanges are usually more user-friendly and similar to traditional financial applications. This means that they are simpler to use and usually have a better user experience. Because transactions do not interact with the blockchain, there may be cheaper transaction fees because all fees offered are pure profit, especially in situations where gas fees are high.
However, because these are for-profit, there’s a chance that the transaction fees are higher. Additionally, users don’t maintain custody of their funds, leaving them vulnerable to censorship and asset seizure, which cryptocurrencies attempt to solve. They also require know-your-customer (KYC) verification and may be slower as things are more regulated and aren’t open-sourced, so users don’t know what happens behind the scenes.
Decentralized crypto exchange
A decentralized crypto exchange (DEX) provides a platform for users to perform transactions on a peer-to-peer network without the oversight of any regulatory body or central authority. Many users prefer DEXs, thanks to the freedom they offer. However, DEXs don’t allow users to exchange fiat currencies for crypto as users have to use a CEX or dedicated provider for that on-ramps money from the fiat world to the crypto world.
DEXs may offer higher or lower fees depending on the blockchain and the CEX they’re compared with. They run in a permissionless and open-sourced manner, meaning users control their money throughout. They also allow users to be pseudonymous, meaning their names aren’t shared, but all transactions tied to the same wallet are known to be from the same account.
DEXs are usually more difficult to use for non-technical individuals. They also provide little-to-no investor protection if funds are lost or the user makes a mistake. Because of this, they’re better suited for people who are more advanced in their knowledge.
Other crypto exchange options
When choosing a crypto exchange, consider your unique financial objectives, risk tolerance, and security preferences. Here are some types of crypto exchanges you may come across:
- Brokers: Although they aren’t crypto exchanges, certain conventional stock brokerages can serve as intermediaries between buyers and sellers on the crypto market.
- Traditional crypto exchanges: These online marketplaces make it easier to trade crypto based on current market rates. However, they frequently impose transaction fees. Some platforms solely deal in digital currencies, while others let customers convert fiat currency into cryptocurrencies like bitcoin or ether.
Different types of cryptocurrency trading
To trade, you must decide whether to dive into long-term trading or participate in short-term trading. Let’s outline both for a more precise understanding:
- Long-term trading: This involves users buying and holding cryptocurrencies for an extended period in the hope of turning a profit. Long-term investors could hold crypto for months or even years.
- Short-term trading: Short-term traders benefit from constant fluctuations in market value by buying crypto at lower prices and selling them when the value skyrockets. This is riskier.
Largest crypto exchanges
Crypto exchanges are relatively new to the market, so it’s essential to weigh the pros and cons of each exchange—centralized or decentralized—before selecting one for trading. Here are the largest cryptocurrency exchanges on the market right now, by trading volume, market share, and average liquidity:
Largest centralized crypto exchanges
- Huobi Global
- Coinbase (Pro)
Largest decentralized crypto exchanges
- Uniswap (V2)
- 0x Protocol
- Curve Finance
- 1inch Exchange
Store a new type of cryptocurrency in Worldcoin
Crypto exchanges offer trading platforms to store the most popular cryptocurrencies, like bitcoin and ether. However, newer cryptocurrencies are entering the fray and contributing to the crypto ecosystem. One such cryptocurrency is Worldcoin.
At Worldcoin, we aim to put a share of our crypto in the hands of everyone on the planet. We believe we can empower individuals to a new technological divide through the world of cryptocurrency. Our cryptocurrency is free—yes, free—all while staying anonymous and private. To know more about Worldcoin, subscribe to our blog and stay updated on the latest news in the cryptocurrency world.