If you want to buy cryptocurrency, you’ll need to open an account with a cryptocurrency exchange. There are about 500 exchanges to choose from .
What is a cryptocurrency exchange?
A cryptocurrency exchange is a marketplace where you can buy and sell cryptocurrencies, such as Bitcoin, Ether, or Dogecoin. Cryptocurrency exchanges work much like other trading platforms you may be familiar with. They provide you with accounts where you can create different types of orders to buy, sell, and speculate on the cryptocurrency market.
Some cryptocurrency exchanges support advanced trading features like margin accounts and futures trading, though these are less commonly available to users based in the United States. Others offer features like cryptocurrency staking or cryptocurrency loans that allow you to earn interest on your cryptocurrency holdings. The best exchanges have educational offerings to keep you up to date on all things cryptocurrency.
How do cryptocurrency exchanges work?
Cryptocurrency exchanges work very similarly to brokerage platforms. Each offers a portal where you can create different types of orders to buy, sell, and speculate on cryptocurrencies with other users.
Cryptocurrency exchanges can be centralized or decentralized:
Centralized cryptocurrency exchanges. Cryptocurrency exchanges can be centralized, meaning they are run by a single corporate authority, such as a brokerage firm that facilitates secure transactions, or decentralized.
Decentralized cryptocurrency exchanges. Decentralized exchanges typically distribute verification powers to anyone willing to join a network and certify transactions, similar to cryptocurrency blockchains. This can help increase accountability and transparency and ensure that an exchange can continue to operate if something happens to a company that runs an exchange.
Different Types of Cryptocurrency Exchanges
Generally speaking, there are two categories of cryptocurrency exchanges: centralized exchanges and decentralized exchanges. Each category has its own advantages and disadvantages.
Centralized Exchanges
Centralized cryptocurrency exchanges (CEXs) are run by a single organization. Centralized exchanges make it easy to start trading cryptocurrencies by allowing users to convert their fiat currency, such as dollars, directly into cryptocurrencies. The vast majority of cryptocurrency trading takes place on centralized exchanges.
Some cryptocurrency enthusiasts oppose centralized exchanges because they go against the decentralized ethos of cryptocurrencies. Even worse in the eyes of some cryptocurrency users, the company or organization may require users to follow know-your-customer (KYC) rules. These rules require each user to disclose their identity, as you would when applying for a bank account, in order to combat money laundering and fraud.
Another problem with centralized exchanges is hacking. With a CEX, the exchange holds the cryptocurrencies traded on its platform (at least in the short term, while the transactions are being processed), which increases the risk of assets being stolen by hackers.
To address this risk, centralized cryptocurrency exchanges have been beefing up their security in recent years. Among other strategies, they now store most of their customers’ assets offline and purchase insurance policies to cover cryptocurrency losses in the event of a hack.
If you like the convenience of a centralized exchange, you can reduce your risk by transferring cryptocurrencies to a separate hot or cold wallet off-exchange.
Decentralized Exchanges
Decentralized crypto exchanges (DEXs) distribute the responsibility for facilitating and verifying cryptocurrency exchanges. Anyone who wants to join a DEX network can certify transactions, similar to how cryptocurrency blockchains work. This can help increase accountability and transparency, as well as ensure that an exchange can continue to operate regardless of the status of the company that created it.
The problem is that decentralized exchanges are much less user-friendly, not only from an interface perspective, but also in terms of currency conversion. Decentralized exchanges, for example, don’t always allow users to deposit dollars and exchange them for cryptocurrencies. This means that you either have to already own cryptocurrencies or use a centralized exchange to obtain cryptocurrencies that you will then use on a DEX.
You will likely also engage in direct peer-to-peer transactions. This means it may take you longer to find someone willing to buy what you’re selling, and if liquidity is low, you may have to accept price concessions to buy or sell low-volume crypto quickly.
Global Cryptocurrency Exchanges
There are nearly 600 cryptocurrency exchanges worldwide that invite investors to trade bitcoin, ethereum, and other digital assets. But costs, quality, and security vary widely. With a focus on regulatory compliance.
Cryptocurrency Exchange Fees
You pay two types of fees when you buy and sell cryptocurrency: trading fees and withdrawal fees.
Trading Fees
Trading fees can be charged as a fixed percentage of the amount of cryptocurrency you buy or sell, or an exchange can differentiate between orders that are makers and those that are takers, charging a different percentage accordingly.
At the most basic level, makers are orders that add liquidity to an exchange, meaning they don’t execute standing orders. Takers, on the other hand, remove liquidity from an exchange by executing orders that are waiting for a transaction. Depending on the exchange, maker fees are usually slightly lower than taker fees, although this isn’t always the case.
While you’ll ideally choose an exchange with the lowest fees, it can be counterproductive to dwell too much on the ins and outs of maker and taker fees. That’s because you can’t choose whether your order is processed as a maker or taker. Instead, you’re better off considering the overall fees and discounts available for trading a certain amount each month or holding an exchange’s native cryptocurrency.
Important note: Some crypto investment apps claim to charge no fees, but that’s not entirely accurate. Instead of charging you directly, they charge a spread, which is the difference between the rate at which they buy or sell cryptocurrencies. Spreads can, and often do, end up being much more expensive than if you were paying a percentage-based trading fee.
Withdrawal Fees
Many exchanges charge fees to withdraw cryptocurrencies from their platform. This can be a problem if you prefer to move your cryptocurrencies to a secure third-party wallet or another exchange. Withdrawal fees typically vary by cryptocurrency.
If you plan to move your cryptocurrencies off an exchange, you should choose a platform that allows a certain number of fee-free withdrawals, like Gemini.
Other Fees
If you’re using more advanced trading strategies, like margin trading, there are additional fees associated with borrowing money. Beginner-friendly exchanges like Coinbase and Gemini offer quick-buy features that charge higher fees. You can avoid these by learning how to buy and sell on an exchange’s trading platform.
If you’re making purchases with a credit or debit card, you may be charged additional fees by the exchange and your card issuer. That’s why it’s best to buy cryptocurrencies with cash or a bank transfer.
How to Choose a Cryptocurrency Exchange?
Beyond fees, when choosing the best cryptocurrency exchange for your needs, consider factors like:
- Security
- Trading volumes
- Educational resources
Whether the exchange lists the cryptocurrencies you want to buy
- Security
Cryptocurrencies have become increasingly popular and valuable, and have become a prime target for hackers. Top exchanges like Binance and KuCoin have been hacked, resulting in tens of millions of dollars in losses. While exchanges often reimburse those whose coins are stolen, no one wants to find themselves in that situation.
You can minimize your risk by spreading your cryptocurrency purchases across multiple exchanges. You can also get into the habit of moving your cryptocurrency holdings from an exchange’s default wallet to your own secure “cold” wallet. These are storage options that are not connected to the internet, making them nearly impossible to hack, although you will need to carefully record your password or risk losing access to your cryptocurrencies forever.
- Available Coins
Carefully review the cryptocurrencies available on a given exchange. You may well use a cryptocurrency exchange that only trades a few coins. Conversely, if you are a crypto enthusiast, you may want to access all of the 600+ cryptocurrencies available on Gate.io.
- Trading Volume
Coin availability alone is not enough if there are no active trades. Ideally, you will want to verify that there is sufficient trading volume in your target coins to ensure liquidity, so you can easily trade your coins and dollars.
Low-volume markets can cost you sales. If there isn’t much volume and you place an order, this is called slippage. You may find yourself buying at a higher price or selling at a lower price than you’d like.
If you’re an experienced cryptocurrency trader, you may want to make sure your preferred exchange offers the types of trading (like limit orders, which can prevent slippage by setting a fixed price) and margin that you want. Keep in mind that the types of trading involving these are still evolving in the United States, so the offerings of different exchanges may vary over time.
- Educational Resources
If you’re new to cryptocurrency, look for an easy-to-use platform with plenty of educational resources to help you understand this complex and rapidly developing market.
- Accessibility
Finally, don’t assume that an exchange is available in your country, or even your state, just because you can access its website. Many state and federal governments are still figuring out how exactly they want to treat cryptocurrencies from a legal and tax perspective.
