In today’s post, we’re going to dive deep into how Crypto exchange works.
Cryptocurrency, or digital currency, is a medium of exchange that uses encryption to secure transactions and control the creation of new units.
There are many different types of cryptocurrencies with Bitcoin being the most popular one. All can be purchased and traded and on various exchanges.
This blog post will give you a comprehensive overview of how cryptocurrency exchanges work and what factors influence the price of Crypto on these exchanges.
We will also provide some tips on how to buy your first crypto coins on the popular Crypto exchanges available today.
What is Cryptocurrency Exchange?
A cryptocurrency exchange is a platform that allows you to trade or exchange cryptocurrencies with another or exchange crypto for other assets.
A cryptocurrency is a digital form of currency created and stored electronically on the blockchain, an online database that uses encryption to record transactions.
They are not tied into the banking system, unlike fiat currencies such as dollars and euros.
When trading one type of coin for another, traders rely heavily on their knowledge about various exchanges in order to make money out of any price volatility at both ends during trades (both when buying coins from sellers by paying with more expensive ones than they sold it for previously and vice versa).
Cryptocurrency exchanges allow traders to speculate on price fluctuations without the need to have a large capital stake (investment).
The main advantages of trading in crypto exchanges are:
- fast execution time
- 24/7 system operation
- Irreversibility of the transactions
- access from anywhere with internet connection
Key disadvantages include:
- lack of liquidity across markets
- risk arising from an error in the system’s design
- vulnerability to cyber-attacks which could affect private key security
On any given day, 24 hours a day and 7 days a week, you can find cryptocurrency exchanges open for business.
Compare that to other types of exchanges (stock markets) which have set trading timeslots during the course of the workday or weekends.
Cryptocurrency exchanges are always on-duty – they never close.
Types of Cryptocurrency Exchange
There are 3 different types of Crypto exchanges namely:
- Centralized cryptocurrency exchange
- Decentralized cryptocurrency exchange (DEX)
- Hybrid cryptocurrency exchange
1). Centralized Cryptocurrency Exchange (CEX)
A centralized cryptocurrency exchange is an online platform that allows the purchase and sale of cryptocurrencies through different fiat currencies or other digital coins.
The exchanges are typically powered by a third-party company, which charges a fee for each transaction.
Centralized exchanges enable traders to trade one type of coin for another (for example: exchanging bitcoin with ether).
These transactions are recorded on an immutable public ledger called the blockchain.
Centralized Exchange Example:
- Kraken etc.
Digital assets and coin types traded on this type of exchanges: Bitcoin, Ethereum, Litecoin, Ripple, etc.
Fiat currencies are supported for trading on this type of exchange: USD, Euros, or your local currency.
Pros Of Using A Centralized Cryptocurrency exchanges:
- High Liquidity
High liquidity for popular coins through the trillions of dollars in currency trading volume.
This means that you will be able to sell your cryptocurrencies faster than on an Exchange with low liquidity, which could lead to a better return on investment.
- Allows fiat-to-cryptocurrency trades
Centralized crypto exchanges lets you trade fiat currencies like USD, EUR, and more for cryptocurrencies.
- Offers high trade volumes compared to DEX
When it comes to trading volumes, centralized exchanges have significantly higher volumes than decentralized crypto exchanges.
- Offers a variety of order types
Users can place limit or market orders, stop-loss, and take profit orders to ensure their trades are profitable as well as liquidate cryptocurrency holdings in the event of an emergency without any losses (thanks to liquidity).
It works by giving traders specific conditions for fulfilling their trades — buying when prices fall below a certain point, selling when they’re above it.
- Allows cross-chain trades
Centralized exchanges are able to offer these features because they maintain a centralized order book of all the offers from sellers on their platform.
This allows them to match buyers with sellers, across different cryptocurrencies and assets that would otherwise be independent blockchains.
Cons Of Using A Centralized Cryptocurrency exchanges:
- High Risk Of Hackers And Scams
The centralized exchanges are high-risk targets because they hold billions of dollars worth of cryptocurrency on their servers.
This is a big risk as hackers could steal your funds by hacking into the exchange’s system or stealing from individual wallets stored on the exchange.
- Government Sanctions
Centralized exchanges make it easier for governments or other entities to shut down these exchanges at their discretion (or otherwise impose sanctions).
This is because centralized exchanges must follow the policies of their home country, not just in terms of how they interact with customers but also what assets they can offer to customers.
2). Decentralized Cryptocurrency Exchange (DEX)
Decentralized exchanges are exchanges that work through the use of smart contracts.
The decentralized exchanges typically don’t rely on a third party to hold the customer’s funds, instead of relying only on themselves and their own code (which is open-sourced).
This means that even if one part of the system goes offline or has been hacked, it doesn’t affect your money because it’s not being held by someone else.
These types of exchanges are usually peer-to-peer (P2P) marketplace that connects cryptocurrency buyers and sellers.
Unlike CEX, DEX users control their private keys during transactions.
Decentralized crypto exchanges examples:
Pros Of Using Decentralized Cryptocurrency exchanges:
- You don’t have to trust a third party with your money
On decentralized exchanges, you don’t need to worry about a hacker trying to steal your personal information nor trust a third party with your money.
This is because decentralized exchanges don’t keep any of your funds, and you control your private keys.
It’s almost impossible for a hacker to gain access to the system because it doesn’t rely on one server or exchange like centralized ones do.
And if they ever did get into the decentralized network then there would be no central point where all information is stored.
- Use of smart contracts
The decentralized exchanges use smart contracts, which are immutable and irrefutable automated processes that can only be changed by the person who initiated them in the first place.
This means these transactions cannot be tampered with once they’re on there unless someone hacks into the blockchain itself (meaning you’ll need to upgrade every single node).
- No single point of failure
Decentralization is the key to many of these exchanges.
They are not centralized so they do not have a single point of failure or target for attack from hackers and thieves.
This means that even if one exchange gets hacked, it won’t cause major damage to your crypto portfolio because you can always move your assets elsewhere in an instant without waiting on slow withdrawal times.
- Decentralized exchanges offers lower fees
Plus, decentralized exchanges typically offer lower fees than their centralized counterparts since there isn’t as much overhead when it comes to transferring funds between wallets (which saves money).
The fees on decentralized exchanges are typically set by the person who is trading.
And because you’re not paying an intermediary to hold your assets on their behalf like with centralized models, there’s no fee for depositing or withdrawing currencies.
This type of system also protects users from getting hit with high withdrawal fees that may be charged when cashing out at CEXs.
- Free from government monitoring sanctions
Finally, decentralization makes it harder for governments or other entities to monitor your activity.
Centralized exchanges are a threat to this privacy.
As they must hand over personal information about their users when required by law and if the government wants access to it that way then there’s not much you can do about it.
Decentralization is essential for maintaining (or achieving) financial freedom – meaning being able to make transactions without anyone watching or listening in on what we’re doing with our money.
As such, decentralized cryptocurrency exchange platforms offer more security and anonymity than centralized ones because all the data isn’t stored in one place where hackers can get into it.
Making them safer so long as people use common sense practices like storing passwords offline and using two-factor authentication whenever possible.
Cons Using Decentralized Cryptocurrency exchanges:
- Not beginner friendly
Users have the responsibility of controlling their private keys and passwords which can be difficult for beginners; also, if you forget or lose them there is no way back.
It’s much easier on centralized exchanges with an accounting system where users only need to remember one password.
- Requires a bit technical knowledge
Decentralized exchanges require more technical knowledge then centralized exchanges do because of their complexity.
If you want to trade all types of cryptocurrencies or realize complex trading strategies, this is going to take some research.
They are also less user-friendly than centralized ones.
Because they require you to have an understanding of how wallets and transactions work in cryptocurrency before you can buy anything from them.
- Higher transaction fees
They also usually carry higher transaction fees when trading bitcoin as opposed to other cryptocurrencies such as Ethereum or Litecoin since there are no arbitragers helping to match buyers and sellers.
- Lacks limit orders
DEXs also lack “limit orders.”
Limit orders let you purchase or sell cryptocurrency at a specified price on autopilot.
But, there’s more to these types of order than meets the eye.
A limit order is an exchange-specific type of trade that lets you buy or sell cryptocurrencies like Bitcoin and Ethereum on centralized exchanges such as Coinbase with your desired pricing in mind.
You can’t do this on decentralized crypto exchanges.
3). Hybrid Cryptocurrency Exchange
Hybrid exchanges are those that offer both centralized and decentralized options for trading.
They allow you to trade crypto on their platform in a more traditional way while also giving you the option of accessing an exchange similar to Binance from within their interface (and without having to sign up).
There’s still risk associated with using these types of platforms since they can be hacked.
But it may be worth it depending on what type of trader you are.
You get the best of both worlds by being able to access your assets through centralization as well as being rewarded with high liquidity if you decide to take advantage of decentralized trades when possible.
List of Cryptocurrency Exchange
A cryptocurrency exchange (or crypto exchange) is a business that allows customers to trade cryptocurrencies or digital currencies for other assets, such as conventional fiat money, or different digital currencies.
Most traders use the term “exchange” to refer exclusively to those who allow fiat currency to be used in trading, and these are sometimes referred to as “traditional” exchanges.
The following is a list of cryptocurrency exchanges:
Binance is the world’s largest cryptocurrency exchange (bitcoin and altcoin crypto exchange) as of this writing.
It was created in 2017 by Changpeng Zhao and Yi He and has grown to become a giant in the crypto market
As of when updating this, Binance had a reported 24-hour trading volume of USD 36.41 billion.
Binance has its own coin called the BNB token that can be traded on other exchanges including their platform.
You can buy and trade over 300 cryptocurrency coins and tokens listed on the Binance exchange.
Binance’s customer service is also very responsive and communicative, which helps keep customers happy when they need help with something or have a problem that needs resolving.
Coinbase was founded in 2012 and is based in San Francisco.
It provides a user with the ability to purchase Bitcoin, Ethereum, Litecoin, and other cryptocurrencies by linking their bank account or credit card to an online dashboard.
As of May 2021, Coinbase has more than 56 million verified users around the world that are able to trade cryptocurrencies on its platform.
Coinbase currently supports 108 crypto-assets (as when writing this). Quite lower than that of Binance.
3). Kraken Exchange
Kraken was founded in 2011 and is based out of San Francisco.
It offers a variety of cryptocurrencies to trade, as well as Bitcoin futures trading for those that want to be more involved with the market whilst not needing to buy any cryptocurrency.
For people new or inexperienced with crypto markets, Kraken provides an extensive range of options from beginner-friendly features on their website such as stop orders and one-touch trades.
I highly recommend Kraken for Crypto experts involved in day-to-day trading. But not so much if you’re starting out.
Coinmama is considered one of the most trustworthy crypto exchanges in the market.
They are a global service and allow users to buy coins using their local currency with credit card, debit card or bank transfer just like other crypto exchanges on this list.
Gemini is the newest crypto exchange on this list. The exchange was founded by Tyler and Cameron Winklevoss who are well known for their involvement in Facebook with Mark Zuckerberg.
The features of Gemini are narrowly focused on day-to-day trading which makes it perfect for experienced traders that want to be more involved with the market whilst not needing to buy any cryptocurrency.
CAKE is a cryptocurrency exchange that not only offers the buying and selling of coins but also has its own coin.
PancakeSwap is a decentralized exchange for swapping BEP-20 (Binance Smart Chain) tokens.
Just as Pancakeswap – Uniswap is a decentralized exchange for trading ERC-20 (Ethereum) tokens.
Other Cryptocurrency exchanges:
- Huobi Global
How Do Crypto Exchanges Make Money?
Crypto exchanges are profit-driven companies that make money by providing a centralized marketplace for their users to buy and sell cryptocurrencies.
Here are ways crypto exchanges make money:
1). Transaction and Trading Fees
Crypto exchanges charge a fee on each transaction done by their users.
This is one of the ways they make their money.
The fees raise funds that are used by the crypto exchange to operate its platform, acquire new cryptocurrencies, provide customer support services, etc
Some exchanges also charge some kind of deposit fee that can
2). Listing Fees for the token to be listed
Crypto exchanges charges listing fee from cryptocurrency developers in order to list their tokens on its platform and make it available for trading with other coins.
This is one of the ways exchanges make money.
Listing fees can vary depending on the size of the transaction (for example $500K) or percentage basis (%) which are often negotiable.
Some listings usually carry an expiration date after which they must either get re-listed or taken down by the developer’s request
Some Exchanges may also charge some kind of deposit fee that can range between 0% – 20%.
The Deposit Fee has now become common practice amongst many major crypto exchanges as a way to offset potential losses.
3). Market Making (for advanced traders)
Market making is a strategy that entails buying and selling on both the buy-side as well as the sell-side.
It’s often done to maintain liquidity in order for an exchange to facilitate trading analysis of crypto assets since it helps ensure trades can happen quickly.
The market maker takes up inventory risk.
But they profit from higher prices when buyers are scarce or lower prices when there’s more demand than supply so it benefits them financially.
There’s usually no charge for this service unless you want your orders executed immediately rather than at a later point in time which would incur additional fees depending on how long you’ve been willing to wait before executing your trade.
Since crypto exchanges facilitate the trade of cryptocurrencies, they usually rely on lending services from other firms in order to generate additional revenue.
Most major crypto exchanges have a partnership with a company that provides cryptocurrency-backed loans.
And this is typically one of their most profitable streams since there’s always someone who needs money for short periods of time but doesn’t want to pay high-interest rates so it offers an alternative solution.
5). Sponsored Advertising
Sponsored advertising is another cool way for crypto exchanges to generate revenue by selling the digital space on their site and apps.
This means that if some crypto-related business wants to promote themselves, they use sponsored ads with some of the major crypto exchanges in order to raise awareness about what they’re offering or how good their service is.
What to Look out for Before Joining Crypto Exchanges
If you are new to the world of cryptocurrency, then joining a crypto exchange can be an intimidating process.
You need to carefully research exchanges before choosing one that best suits your needs and requirements on how much trading activity it hosts as well as how many coins or tokens they support.
Here are some things too look out for when choosing crypto exchange:
- Two Factor Authentication
Always opt for exchanges that offer two Factor Authentication (Google Authenticator) if possible – this is especially important when withdrawing funds from their platform
Be aware that sending Bitcoin or other cryptocurrencies to another wallet address could mean the funds are lost forever.
- KYC process
Be careful to check if the exchange has a Know Your Customer (KYC) process before you sign up.
If they do, know that this information may be stored in databases and on paper records which could result is hacking or theft of your identity.
- Trading and swapping
What currencies can be traded on the platform? For example; would I be able to trade in Ethereum for Bitcoin or vice versa.
- Accepts multiple payment gateways
Also make sure that your choice of crypto exchange accepts a variety of payment gateways such as Visa or Mastercard, PayPal, and local bank transfers.
- Transaction fees
One thing to look out for when choosing a crypto exchange is the transaction fee that it charges its user.
Some exchanges offer maker-taker trades in order to save on these fees, but be careful before you start using this trading strategy as not all are created equal and have different transaction fee rates.
- Fast sign up process
You should also keep in mind that some exchanges may have a fast sign-up process, while others require you to provide more information about your identity.
- Amount of customer support
Another thing to consider before opening an account with any cryptocurrency exchange is the amount of customer support it offers when something goes wrong with your account or transactions are being processed.
Which are the Best Cryptocurrency Exchanges for Beginners?
With over 300+ crypto exchanges available in the market right now, the best crypto exchange for beginners is:
While Coinbase Pro is for advanced users. The next on the line for beginners is Binance.
FAQs and Other Things to Know About Crypto Exchanges
What are the risks of buying and selling cryptocurrencies?
Cryptocurrencies are not currently regulated by any central bank, so there is no insurance if the exchange goes out of business or gets hacked.
That’s one of the risks involved.
You cannot get your money back if something happens to your cryptocurrencies on an exchange.
This leaves you exposed to significant risk and potential loss in value.
Why should I trade in cryptocurrencies instead of stocks or forex?
Crypto is becoming more and more mainstream every day.
Whether it’s Bitcoin, Ethereum, Cardano or any other coin in the market today, they all have something that sets them apart from traditional investments like stocks or forex trading.
Here are some of the top reasons why you should consider trading cryptocurrencies instead:
- You can trade cryptocurrencies 24/hrs a day, 365 days a year
- There is no upper limit on how much you want to invest in the market
- All transactions happen instantly and trades cannot be reversed once they are made
- Operates based on anonymity. you don’t have to reveal your identity
- Can’t be manipulated by the Central Banks and Government
- Crypto generates larger returns than Forex and Stocks
Which crypto exchange is with most coins?
The Cryptocurrency exchange with the most Crypo coins and tokens and is Binance. With a total of 362 crypto coins as at when writing this.
Which crypto exchange has lowest fees?
From my reasearch and experience buying and trading coins on various platforms, Binance has the lowest fees among all exchanges.
Crypto exchange vs wallet – which is better?
Crypto exchanges allow you to trade your cryptos for other coins or fiat currencies.
While crypto wallets allow you to store your cryptos securely and carry out transactions.
So they both serve different purposes.
When it comes to storing your coins or tokens for the long term, I highly recommend using a wallet and NEVER store coins on exchanges.
However, when it comes to trading/investing you might want to use a crypto exchange because of its liquidity and features like margin trading which are not available on wallets.
Is Coinbase a cryptocurrency exchange?
Yes, Coinbase is a crypto exchange. It can be used to purchase cryptocurrencies like Bitcoin, Ethereum, and Litecoin and etc.
Are there any 0 fee crypto exchange?
One of the ways crypto exchanges make money is by charging a little $ or coins when you perform transactions – that’s why it’s really hard to find crypto exchanges with a $0 fee.
However, in the cause of my research, I learned KuCoin offers a $0 exchange.
Crypto exchange vs broker – what’s the difference?
One main difference between a cryptocurrency exchange and a broker is how they facilitate trades.
Crypto exchanges are websites that allow you to buy or sell cryptocurrencies.
They charge transaction fees for the service of exchanging one cryptocurrency for another, and they store your private keys on their servers which gives them access to your funds.
In the case of brokers, you are trading either currency pairs or buying stocks.
A broker provides an intermediary service for investors who want to buy and sell on behalf of other traders by matching up orders from buyers and sellers in what is known as over-the-counter (OTC) trading.
Is Robinhood a cryptocurrency exchange?
Robinhood is not a fullfledged crypto exchange, but they are crypto broker that facilitates transactions and lets users purchase stocks, altcoins, and tokens.
However, these trades can’t be withdrawn directly from Robinhood’s system, users must sell their coins and transfer the balance to their external accounts.
What is the best crypto exchange in U.S.A?
No cryptocurrency exchange is the best for everyone.
The choice of an individual’s crypto exchange depends on what they need it to do for them.
That said, from my research, the best cryptocurrency exchange for residents in the U.S.A is Coinbase and Coinbase PRO. A high-quality and trustworthy exchange for Americans.
What is the best crypto exchange in South Africa?
Many people are looking for a crypto exchange in South Africa. The most popular and official one for South Africans is eToro.
What is the best crypto exchange in Nigeria?
Despite the recent ban in Crypto transactions by Nigerian financial institutions, you can still buy and trade coins and tokens as a Nigerian. The best exchange to do this is through Binance’s peer-to-peer network.
Or through Luno.com.
But I give it Binance as they offer the most friendly and lowest fees for Nigerians.
What is the best crypto exchange in Germany?
There are many options when it comes to choosing a crypto exchange in Germany, but not all of them look seamless for Germans.
The best so far (from my extensive research) is eToro and Coinbase.
What is the best cryptocurrency exchange in Japan?
Japan is a hotspot for crypto trading and therefore it’s no surprise that there are so many exchanges in Tokyo.
The best and the most popular exchange in Japan is bitFlyer.
What is the best exchange to short crypto?
There are exchanges for shorting crypto that uses a market maker to determine the price.
Some of these types of exchanges include Bitfinex, Binance Kraken and, Bitfinex BitMEX.
Why are bitcoin prices different on different exchanges?
It’s worth noting that bitcoin prices are never the same across exchanges.
This discrepancy in pricing is due to two factors:
- (i) how markets work and
- (ii) how exchanges set their prices
Exchanges, or market makers in more traditional markets, typically enter the marketplace to ensure that there is enough liquidity for buyers and sellers.
They do this by adjusting supply accordingly so as not to allow either party from taking advantage of the other side’s willingness to trade at a certain price point.
Which crypto exchange has stop loss?
From my research so far, the ONLY crypto exchange that allows stop loss is Kraken.
They offer some advanced trading options like Stop loss. Stop limit. etc.
What crypto exchange has SafeMoon?
My recommended and the most popular exchange to buy SafeMoon is via PancakeSwap.
To use PancakeSwap, you first need to download the Trust Wallet app, then buy Binance tokens (either BNB or BSC) and add them to the wallet.
Then you visit PancakeSwap through the Trust Wallet app, find the SafeMoon page, and swap Binance to SafeMoon there.
What crypto exchange has Dogecoin?
Kraken, Binance, eToro, and Gemini are Cryptocurrency exchanges where you can safely buy Dogecoin.
Are cryptocurrency exchanges safe?
A common misconception about crypto exchanges is that they aren’t safe.
The truth, however, is a little more complicated. In the past, there have been several high-profile hacking incidents at well-known cryptocurrency trading platforms – and these are only the cases we know of publicly.
That’s why you should consider joining an exchange that meets some of the criteria we highlighted earlier.
Are crypto exchanges regulated?
Although cryptocurrencies are not legal tender in any way there are regulations guiding the exchanges.
Cryptocurrencies and blockchain-related financial services companies are regulated by a number of federal and state agencies, including the SEC (Securities Exchange Commission), CFTC (Commodities Futures Trading Commission), U.S Treasury Department, Federal Reserve among others.
Are crypto exchanges insured?
Crypto exchanges don’t have FDIC insurance (when writing this). But the majority of the exchanges take security as a top priority and do provide additional insurance for your crypto.
In the sense that, if your crypto if it gets stolen from their exchange, you may be compensated or should something happen to your tokens on that platform.
Are crypto exchanges taxable?
Cryptocurrency exchanges may be required to pay taxes, depending on how they classify their business.
There are three different ways an exchange can operate: as a broker-dealer (as if it were a stock brokerage); as an ATS; or by selling cryptocurrency outright.
An exchange operating in any of these capacities will face regulatory requirements for that particular type of operation and must file accordingly with the SEC or other governing body.
For example, Coinbase is registered with FinCEN as a money services business under USA law because transactions involve exchanging fiat currency into Bitcoin and vice versa.
Are crypto exchange fees tax deductible?
Buying and selling of cryptocurrencies are taxable because the IRS identifies crypto as property, not a currency.
As a result, tax rules that apply to property transactions, like selling collectible coins or vintage cars that can also appreciate in value, also apply to Bitcoin, Litecoin, Ethereum, Cardano and other cryptocurrencies.
You’ll need to also consult with an accountant if you’re unclear about tax deductions for buying and selling cryptocurrencies.
Can crypto exchanges be hacked?
Yes, they can! In late 2017 the most popular Japan-based crypto exchange platform – Coincheck was hacked and lost around $533 million worth of NEM tokens to hackers.
Crypto exchanges are secured by two-factor authentication (i.e., a private key). However, this security measure is still not enough as it only makes hacking more difficult, not impossible.
The best way to protect your assets from hackers is by withdrawing all funds (i.e., crypto coins) and storing them in a private wallet that you control the keys for.
Can crypto exchanges be shut down?
Cryptocurrency exchanges are not (yet) regulated in the same way as banks, so there’s no guarantee that they will never be shut down.
However, one of the major advantages of cryptocurrency is its decentralized nature – if a crypto exchange were to go under or get hacked and lose customer funds, it would still have value because other people could start their own crypto exchange.
Some of the most important factors that you should consider before joining a crypto exchange are:
- security and safety
- exchange rate
- charges and fees
Be sure to take into account how safe and private your information will be, as well as how much it’s going to cost you.
Some exchanges may involve hefty fees for withdrawal, trading, or deposits, so keep this in mind when choosing an exchange.
The thing is that you need to remember is that exchanges make money, not just by selling cryptocurrencies for other currencies, but also through the trading fees charged on every trade.
To start, I recommend signing up for at least 3 cryptocurrency exchanges:
- First, sign up for Coinbase. Best place to buy Bitcoin
- Then Binance. Best exchange for buying altcoins and trading
- Lastly KuCoin. Best exchange for next new crypto coins
To start buying and trading on these exchanges -you’ll need to transfer the initial amount to your account after a few verifications. Deposit your desired FIAT currency through PayPal, credit card, or wire transfer.