Since Bitcoin’s emergence in 2009, crypto assets have grown into a $3.05 trillion industry that continues to develop at a rapid pace and gain ground in the financial sector. Seeing an innovation that was initially ignored and criticized by so many turn into a global phenomenon as a wealth generation tool is nothing short of remarkable.
With the stunning evolution of this revolutionary asset class also came an increased interest from traders and investors, and the necessity for proper platforms that could facilitate the buying, selling, or swapping of digital currencies. That’s how crypto exchanges came into existence.
These platforms give users the possibility to explore the market and gain easy access to all kinds of crypto pairs, from popular picks like BTC ETH, or ETH USDT to the most exotic ones.
Since exchanges represent a gateway to crypto trading and investing, it’s important for crypto enthusiasts to know how they work, what they entail, the advantages they provide and the factors one should take into account when selecting one.
The collapse of major crypto exchanges such as Mt. Gox and FTX that have shaken the market to its core in the past also highlights the need for having a good understanding of the topic.
Crypto Exchanges Explained
Although they haven’t been around for long, cryptocurrency exchanges aren’t much different from other types of exchanges that support conventional assets such as stocks or commodities.
They function as online marketplaces where participants can find a vast array of digital currencies that they can sell, purchase, convert, or trade, either for fiat money or for other crypto assets.
Therefore, crypto exchanges act like intermediaries that put buyers and sellers into contact, so they don’t have to do it themselves.
Before crypto exchanges existed, mining, direct peer-to-peer trades on different forums, and private over-the-counter deals were the only ways for people to acquire crypto.
All these methods were cumbersome and complex, so crypto trading was a niche activity that only connoisseurs and tech-savvy individuals could engage in.
Nowadays, with the help of crypto exchanges, anyone can start trading crypto assets with no knowledge of the market, although that’s not advised.
A large user base, a good selection of crypto pairs, partnerships with market makers and a high volume of trades can help these platforms boost liquidity, provide better prices, and ensure fast and seamless transactions.
The majority of crypto exchanges facilitate both crypto to fiat and crypto to crypto transactions, catering to the diverse needs and preferences of traders and investors.
Most also include a variety of services and trading tools like staking, margin and leverage trading, cold wallet custody, charts and technical indicators, futures and options trading, copy trading, portfolio trackers, and so on.
Trading crypto on an exchange implies several simple steps:
- Choosing a reliable crypto exchange platform and setting up an account with them by completing a Know-Your-Customer (KYC) process.
- Funding the account by depositing either fiat or crypto.
- Placing an order involves choosing a specific crypto to buy and deciding on the amount and the type of trade to be executed. The platform’s matching engine will process the order according to requirements.
- Checking to see if the transactions has been completed and the exchange has deducted the correct amounts from each party’s wallet.
Types of Crypto Exchanges
Crypto exchanges can be classified into three main categories, based on their management structure. As such, we have:
Centralized Exchanges (CEX)
These platforms are similar to traditional exchanges in that they are governed by a single entity that is solely responsible for their management. CEX offers great liquidity, fast transactions, and user-friendly interfaces, being the go-to option for many beginners. However, they are also more susceptible to hacks due to storing data on centralized servers.
Decentralized Exchanges (DEX)
In a DEX, transactions are underpinned by blockchain technology, and therefore, the data is distributed across an entire network of users. With no central authority overseeing operations, users have full control of their funds and enjoy greater transparency, privacy, and security.
On the downside, DEXs tend to have lower liquidity and require more technical expertise, being better suited for experienced crypto traders.
Hybrid Exchanges
This third category combines features from both CEX and DEX in order to provide the best trading experience for clients. Hybrid exchanges boast high liquidity, fast speed and enhanced usability, security, and privacy.
Their only shortcoming is they are a newer concept and, therefore, they aren’t as popular as the other two options.
Aspects to Factor in When Selecting a Crypto Exchange
With the number of crypto exchanges increasing considerably in recent years, one has to know how to avoid risks and choose a platform that is truly reliable among the many available options.
So, here are the most important aspects to look out for when vetting crypto exchange platforms.
- Regulatory compliance – One should only trade at exchanges that are licensed in reputable jurisdictions. This ensures that the provider follows Know Your Customer and Anti-Money Laundering standards and complies with industry regulations.
- Security – As with all online services, security should be a top priority for crypto exchanges. Choosing platforms that invest heavily in security and employ stringent measures in this respect guarantees the protection of funds and sensitive data against cyber threats.
- User experience – A platform that is easy to use on any device and provides good customer support is key to ensuring smooth trades.
- Asset selection – While all platforms include popular cryptocurrencies like Bitcoin and Ethereum, pair offering can differ significantly from one provider to the next. Therefore, one has to check if an exchange supports the assets they’re interested in.
- Features – Just as with assets, fee structures also vary among exchanges. The best platforms are transparent about the fees they apply and clearly specify their trading terms and conditions.
Navigating the cryptocurrency market has never been easier, and crypto exchanges play a key role in making digital currencies available to the masses. However, the rising popularity of crypto platforms shouldn’t detract from the importance of adequate research.
Due diligence and careful examination of options are always necessary when searching for a suitable exchange.
