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Exchanges are where you buy and sell cryptocurrencies, so they’re an integral part of the market. But no two are alike and it’s worth doing your research before picking one.
Learn more about the differences between exchanges and how to choose, or compare exchanges to see what’s out there.
Online exchanges are much like their brick-and-mortar counterparts. They let you convert one currency to another. In the case of cryptocurrencies this might be converting fiat currency (USD, EUR, etc.) to a cryptocurrency, or trading one cryptocurrency for another.
To use an exchange, you usually need to do the following:
Exchanges will differ in the following ways:
While each has its own method of doing things, exchanges generally fall into one of three different categories: brokers, trading platforms or direct peer to peer (P2P), which we’ll explain below:
A broker is the most similar to a regular brick-and-mortar store. It’s just like buying cryptocurrency from a cryptocurrency shop. Brokers purchase coins “wholesale” from exchanges, put a price tag on it and then sell it on to their own customers.
Brokers can be a quick and simple option, but they also tend to be one of the more expensive ones.
This is the most widely used option, and what most people refer to when they talk about an exchange.
These let users buy and sell currencies with each other, and will also frequently have charting software and advanced trade functions such as order limits.
By definition, you always pay market rates at an exchange because the market rate is however much you’re paying. The “official” value of a coin is based on an average of the most recent buying and selling prices at dozens of the world’s largest trading platforms.
These P2P (peer to peer) exchanges are like middlemen, connecting buyers and sellers to let people trade however they want. It’s basically a place for people to advertise the coins they’re selling to anyone who wants to buy.
The main advantage is that these let you quickly and anonymously buy or sell coins with almost any kind of trade or payment method you want. The downside is that you’ll often pay above market prices, and it can also be riskier than other options.
To help offset the risks, some will have built-in escrow features and reputation systems to identify reliable and legitimate buyers and sellers.
There are three main types of fees that might be incurred on an exchange.
The best value for money exchange will depend on the currencies you’re trading, your planned trade volume, how frequently you’ll be making withdrawals and the coin prices themselves. For example, you might end up with better value for money at a seemingly expensive exchange that accepts EUR simply because it lets you avoid currency conversion costs.
Exchanges typically have their own specific process of converting fiat currency to cryptocurrency and back, but the general process remains the same. We’ll use a fictitious exchange called LiteExch as an example.
Exchanging cryptocurrency back to fiat is precisely the same as the above process, but with the currencies reversed.
In this scenario, let’s assume that you have 1 BTC that you want to exchange for ETH. Here’s what you need to do if placing a trade on a centralized crypto exchange:
If you want to sell cryptocurrency on an exchange let’s say Bitcoin for the purposes of this example you’ll need to follow these steps:
It’s now time to withdraw those funds from your exchange account, but the exact process you’ll need to follow depends on whether you’ve purchased crypto or fiat currency:
Exchanges come in various shapes and sizes, from those that offer multiple levels of security to exchanges that don’t even ask you to create an account. So when you’re about to choose an exchange, it’s best to look at its features and go from there.
Fees vary widely from exchange to exchange and can pile up if you’re not careful. To find out how much you’ll actually be paying, consider running the numbers on a hypothetical trade before the real thing, with the same payment method, volume, coins and withdrawal.
If an exchange does not publicly post its fees, steer away.
Exchanges accept all sorts of payment methods, from credit and debit cards to bank transfers, but not all exchanges accept all the various payment options. Also note that some exchanges might accept one payment method for withdrawal, but not for deposits.
Make sure your exchange has deposit and withdrawal options that work for you, and make sure to check the fees associated with different methods.
Exchanges may have limits on how much or how little you can deposit, buy and withdraw at a time. These limits will often vary depending on the transaction method as well as your verification level. For example, someone who’s provided notarised proof of identity, address and source of their funds might get unlimited transactions, while someone who’s only shown their driver’s licence might be restricted to €1,000 a week.
See whether the limits work for your plans.
A large exchange might be holding hundreds of millions of dollars worth of cryptocurrency. It’s typical for around 99% of it to be held in offline at any given time, but a successful hacker can still become a multi-millionaire by getting that remaining 1%.
Large exchanges tend to be under almost constant attack, and those without effective digital security don’t last long. You can assume that prominent exchanges have decent electronic security, but you should still read reviews and make sure an exchange is legitimate.
It’s also worth remembering that an exchange which has been hacked in the past isn’t necessarily any less secure today. Instead consider how it responded to the hack, and whether all affected users were fairly compensated for any losses.
Naturally you’ll also want to make sure your preferred coins are available. There’s not much point in signing up for an exchange that doesn’t have what you want.
There’s no one best exchange. It all depends on what your plans are.
But once you know what you want, you can work out what you need and can start comparing exchanges that work for you.
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