The past decade saw cryptocurrencies taking the world by a storm, providing a whole lot of investment opportunities to the interested people. This phenomenon also led to the emergence of more and more cryptocurrency exchanges with each passing year.
Today, a great multitude of traders use these platforms to trade in their preferred cryptocurrencies. This article will discuss what a cryptocurrency exchange is, important aspects you must look for in one, how these platforms work and differ from cryptocurrency brokers, their pros & cons, different types and the best cryptocurrency exchanges in 2021.
Our List of the Top Cryptocurrency Exchanges
Considering the vast variety of cryptocurrency exchanges operating in the market today, choosing the right one for your needs is not a simple task by any means. To make this process simpler, below is a list of some of the best cryptocurrency exchanges along with their features and benefits.
What Is a Cryptocurrency Exchange?
A cryptocurrency exchange can be termed as an online marketplace where you can freely indulge in buying and selling of a cryptocurrency, in exchange for fiat currencies or other cryptocurrencies. The platform functions as an intermediary between the buyers and sellers, and normally charges a commission for its services. Unlike as in case of stock exchanges where traders buy/sell assets to profit from their changing prices, at cryptocurrency exchanges, people make use of fiat or crypto trading pairs to bank upon the volatility of cryptocurrencies.
How Do Cryptocurrency Exchanges Work?
To use a cryptocurrency exchange, you will need to register with it first and comply with its verification process to authenticate your identity. The verification process might vary from one exchange to the other. While some crypto exchanges won’t ask you for anything more than your email ID, others might require you to complete stringent KYC (Know Your Customer) checks such as photo upload, id verification, address verification etc. before onboarding you to their platform. This is basically to comply with their KYC (Know Your Customer), CFT (Combating the Financing of Terrorism) and AML (Anti-Money Laundering) measures.
Please note, even though it’s entirely up to you whether you use non-KYC or KYC exchanges, the latter can prevent you from dealing with antisocial elements and also reduce the risk of fraud.
Your account will get opened after completing the verification process. Thereafter, you can deposit funds into it, using a currency and payment method permitted by the platform. Cryptocurrency exchanges normally allow multiple deposit/withdrawal methods including debit cards, credit cards, bank drafts, wire transfers, e-wallets, Paypal, wallet transfers etc. Once you’ve deposited funds into your exchange account, you can use them to trade cryptocurrencies available on the platform. The funds can be withdrawn anytime either in crypto or in fiat by placing a withdrawal request.
Crypto exchanges facilitate crypto trading via ‘Buy’ or ‘Sell’ orders that are matched by the platform’s software.
Using an Exchange Vs a Broker
When it comes to trading cryptocurrencies, you can do it in two broad ways–on a cryptocurrency exchange or through a broker. Not many people are aware of the finer differences between the two. Let’s throw some light on them and clear the air once and for all!
As explained earlier, a cryptocurrency exchange is essentially an online marketplace where you can buy/sell cryptocurrencies from/to other traders, based on their current market price. The exchange works as an intermediary between the buyers and sellers and charges a fee for its services.
On the other hand, a cryptocurrency broker is also an online platform which works as an intermediary between you and the cryptocurrency markets. The crypto prices are set by the broker and include a small premium on top of the market price. The exchange happens between the buyer/seller and broker, and not between the buyer and seller, which is the case in cryptocurrency exchanges.
Where crypto brokers score over the exchanges is that they allow you to indulge in leverage trading using derivative products like Futures, Options, Contracts for Difference (CFDs), Exchange-Traded Funds (ETFs) and Spread Bets. You can get major exposure and trade bigger positions without tying up a lot of capital. If you were to seek the same level of exposure on a cryptocurrency exchange, which mostly facilitates unleveraged trading, you’d need to invest/block a lot of capital. The key advantage of broker platforms is that you can speculate on market movements and take long or short positions accordingly. The core difference between the two lies in the type of trading they facilitate.
Types of Cryptocurrency Exchanges
There are different types of cryptocurrency exchanges catering to different trader types. Below are the four main types of cryptocurrency exchanges you will find in the market:
- Centralised Exchanges (CEX)
These work quite like conventional stock exchanges, with a central authority having complete control over the product, function and service. Interestingly, the concept of a centralised exchange is quite contradictory to why cryptocurrencies were invented in the first place, which was to free the financial world from the authoritative, and singular rule. The funds are held by the exchange and the available trades can be crypto-crypto, fiat-crypto or both.
- Decentralised Exchanges (DEX)
These are crypto exchanges which facilitate peer-to-peer trading of cryptocurrencies. All functions of the crypto exchange, including asset exchanges, order matching, order books and capital deposits are decentralised, in the true spirit of cryptocurrency. There is no central server and no possibility of a single point of failure.
- Local Exchanges
These are websites which function more like local dealers that can buy/sell cryptocurrencies from/to you against your local currency. Whilst many of them provide automatic buy/sell orders, they don’t offer trading facilities.
- Fiat vs Pure Exchanges
Fiat-Crypto exchanges are the ones where you can purchase a cryptocurrency using a fiat currency. Extremely popular amongst starting-out crypto investors, these enable easy access to cryptocurrencies to the general populace. On the contrary, Crypto-Crypto or Pure Exchanges are the kinds where you can trade only in cryptocurrencies, with no provision for fiat-crypto exchange.
Key Things to Consider When Choosing the Best Cryptocurrency Exchanges
Opting for the right cryptocurrency exchange can be the most critical step you take as a beginner cryptocurrency trader or investor. It’s very important to understand your expectations from a platform and how you wish to trade cryptocurrencies. We can’t stress enough on the significance of thoroughly examining the unique offerings of every exchange you shortlist. Let’s look at some of the key points you should keep in mind:
Customer support - It should offer 24/7 (preferably) customer support through all popular communication channels including email, phone, social media and live chat.
Fees – The overall cost of trading cryptocurrencies should not be higher compared to other platforms, and the exchange should clearly explain its fee structure.
Security - The exchange should use all possible and updated security measures, including two-factor authentication (2FA), asset insurance, ID verifications etc. to safeguard the traders’ interests.
Ease of use - The crypto exchange shouldn’t be very difficult to use and have a straightforward and simple UI (user interface).
Payment methods – A crypto trading platform would be of no use to you if it doesn’t offer a deposit/withdrawal method of your choice. Make sure it does before signing up with any.
Supported coins – All reputed exchanges offer a large variety of cryptocurrencies to cater to all types of traders. Ensure that the exchange you have in mind allows trading in the cryptocurrency that you are interested in.
Privacy – If you’re someone who desires a high degree of anonymity, you should go with an exchange that doesn’t ask for a lot of personal details.
Pros and Cons of Using Cryptocurrency Exchanges
The best cryptocurrency exchanges make it extremely easy to buy/sell cryptocurrencies and are contributing greatly to the world’s changing perception of crypto trading, money and finance as a whole. Furthermore, these platforms continue to be the most preferred means for buying/selling coins for the majority of people. This guide helped to look at how they’re different from brokers, key points you should keep in mind while choosing them and the best cryptocurrency exchanges in 2021.
Frequently Asked Questions
Yes, the majority of crypto exchanges offer their own apps and also allow you to trade from mobile web browsers.
Unfortunately, yes. It’s not your profit/loss, but the invested amount which determines the fee.
Not at all. Majority of the cryptocurrencies are highly divisible and it’s easy to buy/sell even a small part of them.
No, if you use a reliable and reputed cryptocurrency exchange that insists on KYC norms.
The rates on these exchanges are set by themselves, derived mainly from the buyers and sellers’ trades.
Yes, crypto exchanges have been legalised in various countries across the world, including the US. Nevertheless, you must check your country’s laws to confirm their legality.
Different exchanges offer different numbers of cryptocurrencies. While some might list only a few of them, others can list hundreds.
They have multiple revenue streams like commissions, listing fees, market-making etc.