What Are Crypto Exchanges?
You can no longer buy crypto from an investment firm or a traditional banking institution.
So, after deciding you want to purchase cryptocurrencies such as Ethereum or Bitcoin, you will need to create an account on a crypto trading platform to exchange your currency for digital assets.
But what exactly are crypto exchanges? And how do they work?
If you want to get the answer to either of these questions about crypto exchanges, this article has got you covered.
A Brief Summary
To begin purchasing and then selling any form of cryptocurrency or digital asset, you must be familiar with crypto exchanges. These are privately-owned platforms that facilitate the active trading of any form of cryptocurrency for other assets such as NFTs and fiat currencies.
What Are Crypto Exchanges?
These are platforms that enable users to buy and sell different types of cryptocurrencies. You can use these platforms to trade one crypto for a different type – such as converting Bitcoin into Litecoin – or buying crypto with regular currency.
Different cryptocurrency exchanges accurately reflect the total market prices of the cryptocurrencies that are on offer. Better yet, they can also be converted back into regular currency to have as cash in your account, and you can even withdraw into your generic bank account.
We’d recommend taking a look at this crypto exchanges overview for more specific information.
Types of Crypto Exchanges
There are three notable types of crypto exchanges that you must know about whether you’re a crypto expert or new to the process. We have outlined these for you below.
Centralized Cryptocurrency Exchanges (CEX)
These are an intermediary between buyers and sellers. They also make all of their money via transaction fees and commissions. If you cannot comprehend that, think of a CEX as a sort of stock exchange solely for digital assets.
Some of the most popular crypto exchanges include Kraken, Coinbase Exchange, and Binance, all of which allow users and investors to both buy and sell their assets at the spot market (the prevailing price). Such applications also limit orders when the asset reaches the investor’s final desired price target.
CEX operates on an order book system that lists and sorts buy and sell orders by their intended price. The engine will then match buyers and sellers based on the desired lot size and the best overall price for the unit.
Decentralized Cryptocurrency Exchanges (DEX)
This is a different type of exchange that permits peer-to-peer cryptocurrency transactions directly from a digital wallet on online platforms without needing to go through an intermediary. Popular DEXs are Kyber, Uniswap, and PancakeSwap.
They rely on self-executing code on a blockchain and smart contracts instead of a third party which allows for higher amounts of privacy and reduced slippage (transaction costs) than a CEX.
By moving operations into a blockchain, technology can help to eliminate points of failure which grants users far more control over their assets. It also provides transparent trading.
Due to the difficulty of smart contracts and the lack of an intermediary third party, users are often left to their own devices when it comes to DEXs. Because of this, they are far more suited to sophisticated investors.
Hybrid Cryptocurrency Exchanges
As a result of the limitations of DEX and CEX exchanges, the hybrid cryptocurrency exchange was born.
This addresses the shortcomings of other types of cryptocurrency exchanges and combines the best elements of CEX and DEX and provides these directly to customers.
Some notable benefits of the two types of crypto exchanges include the transactions and high liquidity of centralized exchanges and the protection and anonymity of decentralized exchanges.
It gives users real-time service access and also incorporates different solutions that are based on types of blockchain technology. Users also have total control over their funds and do not need to hand them over to a custodian with this scalable platform.
Overall, this is likely going to become the crypto trading marketplace of the next generation.
How Do You Open a Cryptocurrency Exchange Account?
To open a new account, a lot of crypto exchanges will require you to provide some personal information including your name, email, and address. They will also ask you to provide some form of proof of identity.
You may be asked to answer some additional personal questions and proceed to verify your identity via a third-party application, although this does depend on the specific exchange that you have chosen.
After your account has been approved, you can then start to deposit your funds and begin purchasing as much cryptocurrency as you want to.
Do You Have To Use Just One Crypto Exchange?
No, you don’t. The best part is that no crypto exchange is universally used or accepted by every single user. Instead, it’s in your best interest to evaluate your interests when it comes to crypto to find an exchange that best aligns with your overall goals.
Factors To Look For In A Cryptocurrency Exchange
There are a few key things you must keep an eye out for when it comes to selecting a cryptocurrency exchange. If you want to learn more, read on!
Crypto is not backed by any type of central institution, meaning your cryptocurrency is not protected in the same way as money in a traditional bank.
Some exchanges go the extra mile and have some insurance policies to fully protect digital currencies that users have within an exchange from fraud or hacking. If an exchange has an insurance policy worth $250 million, account holders would be protected up to this total amount.
If you’re planning to buy, sell, or trade any crypto, your chosen exchange must feature a lot of volume to make sure your holdings are liquid. This means you can sell them whenever you want. Popular trade exchanges tend to be those that have larger trade volumes.
When multiple trades are occurring in a crypto exchange at any given time, the chance of buying or selling crypto at the best possible price is significantly increased.
Your location plays a huge role in the way a cryptocurrency exchange runs. Your location might prevent you from buying or selling crypto on specific exchanges because of national or state regulations.
In places like China, all citizens are banned from accessing any form of crypto exchange at all!
You’ll be able to find all the necessary information about the geographic limitations associated with cryptocurrency exchanges either in the terms of service or on its official website. You will also find it relatively easy to find any related accessibility factors such as the types of national currencies that are accepted.
You should not let a higher fee structure turn you off from pursuing a specific crypto exchange. That being said, it is important to stop and think about the fees associated with using an exchange.
The easier it is to buy, the higher the fee will be for you to pay. Higher fees also typically come with more insurance and protection, which is a pretty good tradeoff.
Fees tend to be charged for each individual transaction and tend to differ depending on whether you are a seller or buyer of different types of cryptocurrency.
That concludes this informational article about crypto exchanges, what they are, and how they work.
Crypto exchanges are online platforms where users can safely and securely buy and sell different types of cryptocurrency, including Bitcoin and Dogecoin. It also offers price discovery via trading activity and storage for crypto.
What Are Crypto Exchanges?