If you are interested in investing in cryptocurrencies, you will need to find a suitable cryptocurrency exchange. Cryptocurrency exchanges are like online share trading accounts; they allow you to deposit fiat money, then buy, sell, hold or trade crypto assets. You can also withdraw fiat currency to a bank account, and transfer cryptocurrency from the exchange into a wallet. Transactions between parties are anonymous, but you will need to verify your identity with the exchange.
Each exchange is different, so it’s important to understand how an exchange works before committing to use it. For starters, not all cryptocurrencies are available on all exchanges; each exchange has a small subset of all the available coins and tokens. New cryptocurrencies are often added, and occasionally removed. Also, the commission or fee on each transaction can vary significantly. But the main difference between exchanges is how they facilitate a sale.
Best Cryptocurrency Exchanges
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Types of Cryptocurrency Exchanges
1. Centralized Exchanges
Centralized exchanges are the most common means for investors to buy and sell cryptocurrency assets. The idea of centralization refers to the use of a third party, essentially just the online platform which serves as a broker, to help facilitate transactions. Just like an online share trading platform, the exchange provides current buy and sell prices for each cryptocurrency, and takes a small fee on each transaction.
The world’s most popular centralized exchange is Binance, but it is a little daunting for those new to the crypto space. Coinbase is the next most popular, and much easier to use for a beginner. Other popular centralized exchanges include Kraken, Gemini and Bittrex.
2. Decentralized Exchanges
Decentralized exchanges take a different approach to buying and selling digital assets. They operate without middle man, relying instead on self-executing smart contracts to facilitate trading. This dynamic enables instantaneous trades, often at a lower cost than on centralized crypto exchanges.
The world’s most popular decentralized exchange is Uniswap. Other popular decentralized include MDEX, PancakeSwap and Sushiswap.
3. Hybrid Exchanges
Both the centralized and decentralized cryptocurrencies exchanges have limitations, which led to the creation of the hybrid cryptocurrency exchange. This specialized exchange combines the usability and liquidity of centralized platforms and the anonymity and security of decentralized exchanges. It’s early days, and time will tell how these platforms will fair, but the prospect is nothing short of positive.
Examples of hybrid exchanges include Qurrex, Eidoo and Legolas
Comparing Cryptocurrency Exchanges
As well as the three types of exchanges, there are a number of features to take into account when comparing exchanges. Obviously, the first question you should ask is does the exchange offer the currency you want to purchase? But there are some other aspects of trading that you should keep in mind.
Restrictions
Not all cryptocurrency exchanges accept funds from all locations. Some countries do not allow cryptocurrencies at all, and you will not be able to trade cryptocurrencies within those countries. In fact, if you’re located in the U.S., the laws can vary from state to state. It can be hard to determine beforehand, but when trying to sign up for the first time, you will quickly learn whether the exchange will accept you.
Verification
Most cryptocurrency exchanges now require you to verify your identity. In the past, this was purely to illegal activity on the exchange. Nowadays, exchanges have corporate regulations that they need to adhere to, primarily around tax reporting. They will be reporting to your country’s taxation body about your activity on the exchange.
Fees
Fees are primarily associated with centralized exchanges, and they can vary significantly. Fees are often attached to both buying and selling, but you can also be charged to deposit or withdraw fiat currency. All of these factors need to be taken into account when determining the viability of a trade. Note, there may also fees attached when transferring a cryptocurrency out of an exchange and into a wallet.
Payment Methods
You should consider what payment method you wish to use, and whether the exchange accepts payment in your local currency. Otherwise, there will be a foreign currency fee as your payment gets converted into U.S. dollars. Nearly all exchanges accept credit cart payments, but other methods include bank transfer, eWallets, Paypal, and even cash deposits are local locations.
Exchange Rate
Cryptocurrency exchanges also differ in exchange rates between cryptocurrencies. You can usually see what a coin or token is selling for on an exchange before signing up, so compare the prices of what you’re looking to purchase before committing to an exchange. Keep in mind, the more people on an exchange, the more agile the price movements, and the more likely the price on the exchange matches the market price.
Summary
- Cryptocurrency exchanges are used to invest and trade in cryptocurrencies.
- Cryptocurrency exchanges allow you to buy, sell, hold, or transfer cryptocurrencies, while still ensuring safe transactions and anonymity.
- Cryptocurrency exchanges can be centralized, decentralized, or hybrid.
- Before investing through cryptocurrency exchanges, you should first be aware of the transaction fees, payment methods, verification requirements, exchange rate, as well as the popularity of the cryptocurrency exchange.