Cryptocurrency exchanges are gaining importance around the globe. Just a few years ago, there were only a few projects around in the industry. They were the cutting edge of financial technology and built for early adopters. Now, the industry has matured, and more and more people are starting to learn how to buy bitcoins. Here’s a guide on all the basics you need to know about cryptocurrency exchanges.
Table of contents
First of all, what are they?
First and foremost, an exchange is a place where you can trade cryptocurrencies for other currencies. Depending on which one you go with, you can trade between government-issued currencies (e.g. US Dollars, Euros, Yen, Pounds, etc.) and cryptocurrencies (such as Bitcoin, Ethereum, Ripple, etc).
The idea of an exchange is to bring together those who want to buy and sell different currencies. You could get and sell cryptocurrency directly from the exchange itself. Or, it could be a destination for being linked with other traders who want the opposite of what you want. In this case, if you want to buy Bitcoin, you will be connected to someone who wants to sell Bitcoin.
Why do we need crypto exchanges?
You don’t need a bitcoin exchange to buy and sell cryptocurrencies. You could just purchase cryptocurrencies from someone you know. But, finding people to buy and sell bitcoin without special platforms is very difficult. Plus, trading on your own, without you will face a lot of scammers.
Exchanges provide a way of exchanging between currencies that easy and safe. They often also offer all sorts of tools to make the experience easier and more efficient, such as mobile apps, learning resources, and trading tools to make bigger and faster trades.
Are all they all the same?
To a beginner, it might seem like all the exchanges out there are pretty similar. But, there are some important differences you need to know to use cryptocurrency exchanges effectively. The most important ones are:
- Which are the currencies available on the platform;
- Fees and commissions: how much you’ll pay for different types of trades on the exchange platform;
- Trading tools: trading products you can use to get more out of your trades, such as margin trading, staking, etc.;
- Identification requirements;
- Buy and withdrawal limits;
- Security protocols;
- Trading volume (the total amount of what’s bought and sold on the platform per day);
- Legal status in different jurisdictions;
- The type: centralized vs decentralized.
The combination of these factors determines the suitability of the exchange for you. For example, if you want to practice day trading often, then exchange with lower fees will be useful to you. Or if you want to buy a lot of cryptocurrencies, you need to find one with higher trading limits.
While all mentioned points are important, centralization is massive enough to be described in a separate paragraph. Read on to know more.
Centralized vs Decentralized
The most important distinction in the crypto exchange industry is between a centralized exchange and a decentralized exchange. Everyone who uses crypto exchanges should understand what each one is.
A centralized exchange is a type of platform that’s familiar to most people. They are usually privately-owned companies that match buyers and sellers on a website and take fees and commission to earn a profit. The exchange platform itself is centrally controlled by the owners and can be changed at any time without input from the customers. The funds that are being exchanged back and forth on the exchange are usually held in accounts owned privately.
The problem with this type of exchange is that everything is controlled and priced by a private company for profit. Essentially, you have to hand over your money to the exchange to use it. This is similar to a bank or traditional financial exchange.
Decentralized exchanges operate in a fundamentally different way. They typically don’t have any private owners and aren’t usually run for a profit. Instead, they offer clever use of blockchain technology (the technology underpinning most cryptos) to create an exchange that is owned and operated by all users collectively, in a decentralized way.
The effect is that there are usually very low fees and minimal identity requirements. However, the user experience is usually not as good as with centralized exchanges. Also, users of decentralized exchanges are noticeably less protected from fraudsters.
Which one should you choose?
In this industry, you have lots of options. Therefore, it can be overwhelming to choose one to go with. You’ll need to go through all of the exchange characteristics mentioned above and find one that suits your requirements best.
A simple guide for a beginner is to go with one of the large trusted centralized exchanges that operate in many parts of the world. One good example of this is CEX.IO. It’s an exchange that’s been around for a long time and has proven to be a good option if you’re just starting. The setup process is quite straightforward and there are good tools for more advanced trading when you get the hang of things.
If you want to go with decentralized exchanges, things get a little more complicated. Do some Google searching to find out what’s suitable for your requirements and safe at the same time.
Things are evolving rapidly every year in crypto. Just a few years ago, there were only a handful of exchange options available to traders. Now, exchanges are popping up all over the place. This is great for you, as it means more competition, which means better services.
For this reason, it’s important to keep up with what’s going on in the industry. Technological developments and legal developments can strongly impact the way exchanges work, which may change the way we use them.
Vitally, the safety of your finances should always take priority when using crypto exchanges. Make sure to only invest what you can afford to lose, and don’t let a silly mistake wipe away your crypto investments!
Learning about cryptocurrency exchanges doesn’t have to be a complicated issue. Determine what your needs are, and you’ll be able to find a platform that suits you and your trading needs.