Your First Step to Smart Crypto Investments
In this article, we will provide you with a detailed roadmap for choosing the right exchange. You will discover how these platforms operate, how their types compare, and what you should consider.
Do not make rash decisions – crypto exchanges are not created equal. Interest rates per se matter, but it is also crucial to find a secure environment where your funds will be sufficiently protected. At the end of this article, you will find our list of top platforms and their reviews.
Already Familiar With Crypto Exchanges?
If you already have experience using crypto savings accounts, scroll down to our comparison summary.
What Are Crypto Exchanges?
Crypto exchanges act as the go-between for sellers and buyers of crypto. They work with a wide variety of assets, including Bitcoin, fiat, stocks, and commodities. The purpose of an exchange is to match counterparties and accommodate their transactions.
These platforms work 24/7. Users can trade and invest in crypto in a few clicks. Here is how this works.
After registering at an exchange platform and topping up your account, you can start purchasing crypto. For instance, to buy bitcoins worth $1,000, you need to place a request on the platform and wait for it to match you with a seller. It will then facilitate your exchange transaction.
How much BTC you get for your $1,000 will depend on the exchange rate at the time of the purchase. In the end, you will get BTC, and the counterparty will receive your US dollars.
Subsequently, when you decide to sell bitcoins, this scenario will work in reverse. The platform will match you with a buyer and accommodate the transaction. You will get US dollars according to the corresponding exchange rate.
Most platforms process transactions instantly. However, note that selling or buying large volumes may take longer when asset liquidity is insufficient – that is, there isn’t enough movement on the platform.
How Are Bitcoin Exchange Rates Set?
Exchange rates for crypto depend on market forces – supply and demand. For example, when the number of buy orders for ETH exceeds the number of sell orders, its price rises. In the opposite scenario, when the supply exceeds the demand, the asset depreciates. When a lot of users want to sell off their crypto, but there is a lack of buyers, the price is bound to plunge.
How Do Crypto Exchanges Make Money?
All crypto exchanges charge a commission per transaction one way or another. It may take the form of a flat fee or a percentage of the transaction amount.
Additionally, exchanges can modify their exchange rates to widen or narrow down the spread – the gap between the prices for sellers and buyers. This difference constitutes their profit if they offset the same transactions on another exchange.
The number of active traders is the key condition for smooth operation. When there is a lack of participants, liquidity shrinks, and transactions get delayed.
Liquidity on a crypto platform is directly linked to the volumes traded through it. The bigger it is, the more investors and transactions this exchange can accommodate without delays.
Comparing Different Types of Crypto Exchange Platforms
Depending on the way it operates, an exchange may be classified as centralized or decentralized. The type defines its security measures, reliability, and convenience.
Centralized Cryptocurrency Exchanges
Despite the decentralized nature of cryptocurrencies, the most popular exchanges are centralized. This may sound counterintuitive, so let us explain.
To put it simply, users on CeFi exchanges trust the companies that run them rather than blockchain technologies to ensure reliability. Such exchanges run on centralized software managed by a centralized operator.
One of the biggest advantages of CeFi is higher liquidity. On the downside, they are more vulnerable to cyberattacks. Your assets must be stored in the wallet on the exchange, which deprives you of real control until you withdraw them.
Decentralized Crypto Exchanges
Being the antithesis of CeFi, decentralized exchanges give traders full control over their assets. Their coins stay in their personal wallets, while the exchanges merely connect them to buyers and sellers. All transactions take place outside this exchange environment, and trust is guaranteed by the blockchain.
The absence of a central operator is a blessing and a setback. First, users must take care of their own security — protect their wallets and private keys, and perform due diligence before making any transactions. Secondly, liquidity is inferior, so high-volume transactions may be delayed.
Hybrid Crypto Exchanges
Some exchanges are a fusion of CeFi and DeFi. They combine their best sides – usability and security, respectively. The resulting liquidity is still inferior to centralized exchanges, but it is sufficient for the majority of crypto investors.
Some platforms offer to sell you crypto directly for a fee. Typically, these are centralized exchanges fully compliant with regulations in their local jurisdictions. This model enhances protection for the user and makes transactions more convenient. In the event of a hack, affected users may be eligible for compensation.
Key Factors to Consider When Choosing an Exchange
After defining four types of exchanges, we can conclude that security, privacy, liquidity, and asset control are four key characteristics. However, these are not the only things to consider in your search for an ideal crypto exchange. Pay attention to the following.
Security and Reputation
How exactly does the platform protect your assets? Has it ever had any problems with cyber defense? If so, how did it handle them?
If you intend to buy or sell large volumes of crypto, make sure the liquidity levels are sufficient to avoid delays.
How does the exchange stack up against rivals? Will you pay a flat fee or a percentage of the transaction amount? How economical are the conditions?
How much personal and financial data does the exchange collect, keep, and share? Are all transactions anonymous? Usually, users have to jump through a few hoops to maximize security and privacy.
Types of Available Assets
On some exchanges, the choice of assets is relatively limited, as platforms favor coins and tokens with the highest market cap. If you aim to develop a highly diversified portfolio of altcoins, make sure the necessary options will be available.