A cryptocurrency exchange is a platform for buying, selling, and storing cryptocurrencies. Before crypto exchanges came about, people could only acquire crypto through mining or by organizing transactions in various online and offline forums. There are hundreds of crypto exchanges today with tens of thousands of cryptocurrencies and tokens on offer. Let us explore the various types of exchanges.
Types of Crypto Exchanges
Some cryptocurrency exchanges offer a variety of products and services such as launchpads for IEOs/IDOs, staking platforms for yield farming, and educational resources such as the one you are reading right here. Others exist purely for buying and selling cryptocurrencies and tokens. Crypto exchanges are generally classified according to their organizational structures - centralized or decentralized.
- Traditional Crypto Exchanges: Trading platforms that facilitate the buying and selling of cryptocurrencies based on market prices. These exchanges often charge fees for each transaction on their platforms. Some exchanges deal only in cryptocurrency while others allow users to trade fiat currencies (i.e. government-issued currencies) for cryptocurrencies.
- Centralized Cryptocurrency Exchanges: A centralized crypto exchange (CEX) is overseen by an exchange operator such as Binance or Coinbase. These third parties help to ensure that customers sign up and that trading runs efficiently on the platform. These exchanges make it quick and easy to link your bank account or debit card allowing investors to buy and sell digital assets with both fiat currency and other cryptocurrencies.
- Decentralized Cryptocurrency Exchanges: Blockchain and cryptocurrency were designed with the belief that currency should not require a central authority to oversee its movement and usage and that networks should not have a single point of failure. Decentralized cryptocurrency exchanges (DEX) follow this vision by removing centralized third parties to transactions, by being open source, and by facilitating peer-to-peer (P2P) trading.
- Brokers: Some traditional securities brokers, though not pure crypto exchanges, can act as intermediaries between the cryptocurrency markets and investors who want to buy and sell digital assets. An over-the-counter (OTC) broker is typically used when executing a large buy or sell order preventing slippage (variance between price of the asset when the order was submitted and the ultimate realized price) that may happen when creating a market order on an exchange.
What to consider in choosing an exchange that is right for you
Crypto exchanges match buyers with sellers by offering a variety of trading pairs in the instance of CEXs and liquidity pools on DEXs. It is important to do your own research (DYOR) and consider a variety of factors when selecting an exchange. These variables include:
- Withdrawal limits - related to CEXs, most of them have maximum amounts that you can remove from the platform within a certain time period, typically 24 hours.
- Fees - the main source of revenue for exchanges is the money they garner on trades. During times of high blockchain activity, the fees on DEXs can reach very high figures.
- Payment methods - Most DEXs do not offer a fiat on-ramp (the ability to purchase cryptocurrencies directly with government-issued currencies), however, CEXs typically offer many options for token purchase such as through the use of debit and credit cards.
- Regional restrictions and regulations - many exchanges restrict access of people from non-approved jurisdictions where crypto trading may be illegal or the country may be subject to international sanctions.
- Reputation - Users can feel more secure trading on a platform that is held in high regard and has a sterling track record for putting its users first.
- Security - Exchange hacks are all too common in crypto, therefore, it is critical for an exchange to abide by the highest safety standards to keep users’ funds safe. DEXs are also prone to having scam tokens listed on their platforms due to their decentralized nature and the ability of anyone to list any kind of token.
Another key consideration is the amount of liquidity on the exchange. Liquidity is a broad and very important topic for cryptocurrency investors so continue to the next lesson to learn all about it.