Many people are curious about cryptocurrency but aren’t sure where to begin. A key part of the cryptocurrency ecosystem is the crypto exchange and it’s important to know how the various parts of crypto trading interact with each other so that you can pick the right exchange and avoid getting scammed – just like it’s important to know how to pick the right online casino for a guaranteed good time.
Keep on reading to learn all about what a crypto exchange is, the different types of exchanges, how you should choose an exchange and which exchange may be a good option for you. That way you’ll be able to easily get your hands on some crypto if it ever becomes the default way to pay for online casinos or other online services.
What is a crypto exchange?
Investopedia defines an “exchange” as a “marketplace where securities, commodities, derivatives and other financial instruments are traded. The core function of an exchange is to ensure fair and orderly trading and the efficient dissemination of price information for any securities trading on that exchange. Exchanges give companies, governments, and other groups a platform from which to sell securities to the investing public.”
Simply put, an exchange is a place where people can buy or sell financial items in a fair manner.
In light of this information, it’s clear that a cryptocurrency exchange is simply an app or website where people can trade cryptocurrencies. In other words, a crypto exchange is basically a digital crypto trading platform.
How do crypto exchanges work?
As we’ve already mentioned, a crypto exchange is a digital platform that provides people with the tools they need to sell and buy crypto. However, there are two types of exchanges that operate slightly differently.
1. Centralized crypto exchanges
The first and most commonly used type of crypto exchange is a centralized exchange, also known as a CEX. This type of exchange charges fees for its services and is, relatively speaking, the easiest type of exchange to get started with.
You begin by creating an account with the CEX. This account allows you to deposit money in order to purchase crypto or even use crypto you already own to trade for other types of cryptocurrency.
In order to create an account and start trading, you’ll need to provide your personal and financial information so that the exchange can verify your identity, following which you will be able to deposit and withdraw money or crypto from your account. Once you have created an account, you’ll be able to use it to trade in cryptocurrencies such as Bitcoin, Ethereum and Tether.
As with any other online service, be careful when sharing your information since the service may be run by scammers who are only interested in stealing your personal and financial information or maybe even defrauding you. Make sure the service they are running is legitimate and that the exchange has security systems and insurance in place to ensure that you are protected if anything were to go wrong.
2. Decentralized crypto exchanges
The second type of crypto exchange is a decentralized exchange or DEX. The DEX does away with the “middleman” and operates entirely on a peer-to-peer basis. This peer-to-peer system is managed by smart contracts which are part of the blockchain.
It is harder to start trading using this type of system because it has a higher barrier to entry. Using a DEX requires additional technical knowledge that makes it harder to use compared to a CEX platform. DEX platforms are also far more anonymous than CEXs since there are no laws that require them to register their users or monitor their transactions. Another important difference is that, since all transactions take place directly between traders, there is a much lower risk of a third party gaining access to your private key. Finally, each trader is responsible for their funds and has no protection from the exchange if they lose their private keys or accidentally send their funds to the wrong crypto wallet.
How to choose a crypto exchange
If you are a newcomer to the crypto space, you should start trading with a CEX. Even then, there are various criteria you should keep in mind before you sign up at a centralized crypto exchange:
- The reputation and history of the exchange: The reputation and history of an exchange are vital in separating long-running, well-established exchanges from fly-by-night operations that are likely only interested in stealing your crypto before they disappear. Be sure to do your homework so you can be sure you choose an exchange that has a good reputation and has been operating for a reasonable period of time. However, as demonstrated by the collapse of FTX, this in itself is no guarantee that you are protected. FTX was once one of the most popular crypto exchanges in the US and had over a million users before it had to file for bankruptcy in 2022.
- If they are licensed for operation in your region: Another way to protect yourself is to ensure that the exchange is licensed to operate in your region. If they are, that means they will have undergone all the regulatory checks to verify their legitimacy and that they will operate using crypto regulations for your region, providing you with an additional layer of legal protection.
- Their Know Your Customer policy: An exchange must have a thorough Know Your Customer, or KYC, policy to ensure they can identify their users. This is an important mechanism for identifying any individuals who may be involved in financial crimes and which makes it less likely for you to get scammed during your trades on the exchange.
- Where the exchange is situated: Is the exchange situated in your country or another part of the world? If it’s not a local exchange, it’s less likely to be held accountable by your country’s laws, making it difficult to pursue legal claims if the exchange is the cause of something going wrong in the process of using their platform.
- The security features they have in place: Does the platform offer two-factor authentication? Is information exchanged via an encrypted connection? Do they undergo security audits to make sure the platform is secure? Considering money is involved, it’s vital that you pick a trading platform that has security as one of its highest priorities.
- The exchange’s fees: All centralized exchanges charge fees, which may vary wildly between different platforms. Be sure to review these costs before you start trading.
- The types of cryptocurrency available: This will be a purely subjective factor, but you still need to check what cryptocurrencies are supported by the exchange so you can make the trades you want to. If you want to keep trading in these cutting-edge virtual currencies in the long term, you may also want to review whether they regularly add new types of crypto.
- The different currencies they accept: If you want to exchange cash for crypto, you’re going to need to make sure the exchange accepts your currency.
If you are a more technically minded person and an experienced crypto trader, you can take advantage of the benefits of a DEX, but be aware that you will have no support if you have any issues with a trade. With a decentralized exchange, you manage all aspects of your trades.
Best recommendation for crypto exchanges
If you are looking for recommendations for the best crypto exchange, there are many financial resources that contain valuable suggestions. For instance, Investopedia’s “Best Crypto Exchanges” article offers the following recommendations based on a variety of criteria:
- Best for Low Fees and Best for Experienced Traders: Kraken
- Best for Beginners: Coinbase
- Best Mobile App: Crypto.com
- Best for Security: Gemini
- Best for Altcoins: BitMart Exchange
- Best for Bitcoin: Cash App
- Best Decentralized Exchange: Bisq
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