Cryptocurrencies have gotten so popular that they are being created almost daily. There’s a crypto coin for everything and anything. Coins have been made for football clubs, pets, mythical creatures, and even people.
However, for these coins to gain wide adoption and increase in value, they have to be onboarded onto a platform where they can be traded easily. This platform is called an exchange.
A crypto exchange is a digital platform on which users can buy and sell cryptocurrency easily.
They are used for trading one crypto coin for another, buying crypto using regular money, and converting crypto to regular money.
Exchanges usually show the current market value of the cryptocurrencies they offer. They have charts with records that date back years to help crypto traders and investors make informed decisions.
Types of crypto exchanges
Based on their mode of operation, there are three types of crypto exchanges.
Centralised exchanges (CEX)
Centralised exchanges are established and governed by a company that offers the options of both crypto-to-crypto trading and fiat-to-crypto conversions.
They have great user interfaces and are generally easier to use. Users have to verify their identity and add important information before freely using these kinds of exchanges.
Most centralised exchanges offer their users multiple crypto wallets, peer to peer trading, and derivatives trading. They also offer crypto savings and investment plans.
However, centralised exchanges are risky because if hackers get into the system, they can also access the assets of every user.
Decentralised exchanges are focused on fostering individual transactions between two parties (users), with minimal interference by a central third party or governing system (usually the company that owns it).
Decentralised systems are optimised for peer to peer transactions, mostly crypto trading, and do not require users to provide a lot of personal information.
While extra processing fees are not charged in decentralised exchanges, the fees to trade cryptocurrencies are quite high due to network congestion on the blockchain.
However, there are also a lot of risks involved as the security of the system is left to the individual user. All users on decentralised exchanges are completely anonymous and cannot be traced by the system.
As the name suggests, hybrid exchanges pair the best features of both centralised and decentralised exchanges.
They allow users the anonymity of decentralised exchanges while making them as easy to use as centralised exchanges.
They also completely remove the need for third-party fees and are generally very fast when processing transactions.
What to look out for in an exchange
As one who wants to start investing in cryptocurrencies, you have to be careful of the kind of exchange you pick. Most beginners are advised to use centralised exchanges because they’re usually more beginner-friendly.
Some of the features you should consider and research before picking an exchange are listed below.
Exchanges, especially centralised ones, are susceptible to hacks and security breaches. You must pick one with a strong security team and doesn’t have any history of being illegally accessed.
Cryptocurrencies aren’t backed by any traditional institution, so they cannot be insured or protected on an individual basis.
Crypto exchange, Coinbase has an insurance policy worth $255 million. If Coinbase is hacked and any amount of crypto up to $255 million is taken, account holders will be protected.
To be safe, it is advised that you go with popular exchanges. Their large user base and the liability it represents force them to tighten security more than smaller exchanges.
Opening some crypto exchanges can feel like solving PhD grade calculus. You should generally avoid platforms like this as a beginner.
Go with an easy-to-use platform that is seamless, intuitive, and, if possible, has descriptions of features and what they do.
Fees differ from exchange to exchange. Some crypto experts have said that “the easier it is to use a platform, the higher its fees.”
Crypto exchanges charge differently based on the chosen criteria. Some of them charge a fixed percentage on all transactions, while others focus on the exact cryptocurrency being traded.
You should really consider the fees before settling for an exchange. Those tiny decimals can be annoying.
Liquidity means the amount of hard cash that the exchange has in circulation and storage.
The liquidity of an exchange determines if and when they will pay you after you make a trade from crypto to cash.
Crypto exchanges give everyday individuals access to cryptocurrencies and other derivatives. They help store value and are a powerful wealth-building tool if paired with the right expertise.
Deciding what exchange to use as a crypto beginner is a task that should not be taken lightly. It can lead to a lot of financial loss if done carelessly. When in doubt, use highly recommended ones based on your preferences.