Today, everybody is talking about cryptocurrencies and the impact that they could potentially have on our economic system. But how do you actually buy, sell, and trade these mysterious assets? The answer is simple: use a crypto exchange.
Crypto exchanges exist all over the world. Many countries are actively encouraging them, seeing the potential that they have to bring economic opportunities. But the way they work is a little different from what you’re used to with traditional currency and banking systems.
You can’t just buy crypto assets from a bank or financial firm. Instead, you have to do it by logging into one of the many cryptocurrency exchanges. They allow you to trade with current owners of cryptocurrency. Kraken, CoinEgg, Gemini, and Binance are all well-known, trusted, and respected platforms that you can use.
Some cryptocurrency exchanges, like Coinbase, have been around longer than others. In the early days of cryptocurrencies, there were very few controls on crypto exchanges, meaning that you could buy or sell how you liked. However, more prominent brands are getting into the fray in recent years, bringing more rules with them. PayPal and Robinhood, for instance, are both now allowing crypto trading on their platforms after a long delay in implementation, but they do not allow certain types of storage.
You can think of a crypto exchange as a platform that allows you to buy a cryptocurrency and trade it with other people. You can buy cryptocurrency with cryptos you already hold - such as Dogecoin or Ethereum - or you can trade it for regular fiat money, such as AUD, USD, and GBP.
Mostly, when you hear about the value of a cryptocurrency going up, it is because it is rising against the USD. However, cryptocurrencies also have exchange rates between themselves. The value of Bitcoin, for instance, can vary in terms of Dogecoin and Litecoin, just like regular fiat currencies can rise and fall in value against others.
Crypto exchanges usually offer wallets. These are just digital deposits where you can keep your money. You can leave it there indefinitely, or you can withdraw it to regular or traditional accounts to use it how you please.
There’s no crypto exchange that is best for everyone. Each offers a slightly different service and fee structure. Some are more geared towards regular retail investors, while others cater to traders and asset managers. Also, you should be aware that some exchanges focus on providing facilities to buy and sell specific coins. So you’ll need to look at the assets that platforms allow you to trade before you sign up.
Exchanges vary considerably. Therefore, it takes a little training and education to select one with the properties that you need. Let’s take a look at some of those properties that make up the different exchanges:
For instance, exchanges vary in their approach to storage. Some exchanges only allow you to keep your coins within your account in their custody. This approach is great for beginners who are only just learning about storage. But, unfortunately, it means relinquishing control over your crypto assets to the platform itself.
Many cryptocurrency enthusiasts prefer to use exchanges that allow you to withdraw funds to a cold wallet. This facility enables the trader to maintain tight control over who has access to their funds and how they allocate them. Robinhood, for instance, was recently criticized for not allowing traders to hold their own crypto through the platform, even though it was a trading option.
Therefore, as a beginner, you may wish to find an exchange that takes care of storage for you - at least initially. After that, as you become more experienced and your holdings grow, you may wish to transition to a more flexible account.
Many platforms also offer their customers educational tools that allow them to identify better cryptocurrency trading opportunities. These platforms teach the basics (and beyond) on topics such as digital assets, blockchain technology, and different coins. Some even provide customers with rewards, depending on how much they learn.
Exchanges differ markedly on the number of coins that they allow you to trade. Some platforms permit you to trade hundreds of different cryptocurrencies, including rare ones, while others restrict you to a few dozen. If you are a trader who needs access to obscure or rare coins, then you’ll want to choose a platform that allows you to trade 200 different currencies or more. By contrast, practically any platform will suffice if you only plan to trade the most popular coins.
Crypto exchanges work by facilitating trades between those who want to buy and those who wish to sell. Unfortunately, on smaller crypto exchanges, the market may not have enough participants to facilitate all trades, making it hard for you to sell your currency at the going rate.
Generally, larger platforms, such as Coinbase, have higher liquidity. Price spreads, therefore, tend to be lower, and the market usually clears. However, if you want to exchange one rare cryptocurrency for another, you may struggle to find someone to trade with immediately.
You’ll also need to consider the fee structure of the crypto exchange. In general, the easier an exchange makes it to buy a cryptocurrency, the higher the fee you pay. Sometimes, higher fees are worthwhile because you get access to more insurance and bigger markets. However, sometimes, they can eat into your returns over the long term.
Fees are usually either fixed or a percentage of your trade. If you plan on making larger trades, then fixed fees typically work out as better value.
Lastly, crypto exchanges differ in the level of security that they offer. For instance, Coinbase and Gemini keep US balances in FDIC-protected bank accounts. Others have insurance policies that run into millions of dollars, protecting individual’s accounts on the exchange from hacking or fraud.
Also, check platforms for the percentage of assets that they hold offline. Usually, these are more secure than those held online and being actively traded, helping to limit customer losses.
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