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What is a Crypto Exchange?

Understanding what is a crypto exchange should be low-hanging fruit for a cryptocurrency enthusiast looking to delve deeper into crypto. Even before your first crypto investment, you’ll need to put in some effort and do your own research to understand the cryptocurrency exchange process.

This article aims to provide the information necessary to familiarize yourself with crypto exchanges and discover some of the best platforms and practices.

What are Cryptocurrency Exchanges

A crypto exchange is a digital currency trading platform where you can invest in cryptocurrencies like Ethereum and Bitcoin. Crypto exchanges have played a crucial role in cryptocurrencies’ advent as an increasingly attractive investment avenue.

Any digital currency investor is likely to use crypto exchanges regardless of their level. Crypto exchanges seek to meet the expectations of both experienced traders with the knowledge of traditional markets and beginner investors who have never bought at a stock exchange before.

Most exchanges provide access to crucial market information like digital asset values, pricing, current trends, volumes, etc. Some of them offer additional features such as staking, spot trading and cold storage.

Trading on these platforms is accessible since they generally offer affordable trading fees. Most allow investors to trade altcoins, which is any alternative digital currency apart from Bitcoin (BTC), and fiat money. The term fiat refers to any government-backed currency. The U.S. dollar is an example of a fiat currency.

How Crypto Exchanges Work

There are two basic methods of buying and selling digital assets on a crypto exchange. The first involves a direct buyout from the exchange itself. In this case, no other investor participates in the crypto transactions. You authorize the transfer of fiat currency from your bank account to your crypto exchange account and convert it into crypto according to the current valuations. The transaction usually incurs additional handling fees when purchasing digital coins directly from the exchange.

In the second method, the exchange only acts as an intermediary platform that enables the meeting of buyers and sellers and facilitates the transactions between them. Traders can submit their offers as an auction or a direct order. Many investors prefer this solution because of the limited role of the exchange and the fact that additional fees are either absent or very low.

Types of Crypto Exchanges

It’s important to understand how trading on crypto exchanges works. The first thing is to create a profile on some of the platforms, such as Binance, which is widely considered one of the most user-friendly crypto exchanges. Most exchanges ask users to complete a KYC (Know Your Customer) process and offer two-factor authentication (2FA) for extra security. 

After creating an account, you add funds to your account using “real money”. You can then use the deposited fiat currency to buy Bitcoin (BTC), Ethereum (ETH), ETFs, and you name it. Your funds should stay in the crypto exchange platform while your cryptocurrencies move to your crypto wallet.

You can now start trading on the crypto market, U.S. dollar to BTC, ETH for BTC… everything goes. However, before you download a mobile app to start crypto trading, let’s review the basic types of cryptocurrency exchanges.

Centralized Exchanges

If you’ve ever heard of crypto exchanges, chances are that you’re likely more familiar with the centralized exchanges. That’s because these are the most common types of exchanges you’re likely to encounter.

Similar to online brokerage platforms, centralized exchanges serve as a third party that assists the trading. Users entrust the exchange to guarantee the safety and security of trading different cryptocurrencies, and to help them find partners to trade their assets.

You might hear from experienced investors that the concept of a centralized exchange is misleading because cryptocurrencies are already decentralized and there is no need to involve a third party.

Decentralized Exchanges

Now that you’re familiar with the concept of centralized exchanges, you should be able to deduct the meaning of decentralized exchanges. Anyway, unlike the former, this type of exchange does not use a third party to mitigate the cryptocurrency trading but uses blockchain technology instead.

This is a rare form of trading bitcoin or other cryptocurrencies since the transfers are executed using smart contracts to perform a peer-to-peer transaction.

Best Cryptocurrency Exchanges for Beginners

The top crypto exchanges also serve as digital asset trading platforms that investors use, some of which trade millions in crypto assets daily. With that said, it shouldn’t come as a surprise that some of these platforms incorporate advanced trading and charting features and may not appear as user-friendly to those who’re still new in the crypto world.

If you’re a beginner, you might be overwhelmed by all the cryptocurrency exchanges that pop out when you google the term. Forbes recommends Gemini, Kraken, Coinbase, and Crypto.com as the best cryptocurrency exchanges for beginners. We’ll cover these in detail below.

As a beginner, you’ll probably choose one exchange to start. However, as you get into crypto, you’ll quickly realize that using one exchange is not enough. Experienced traders usually hold accounts in at least a few exchanges. You choose one because it’s easy to deposit fiat to your account; another one because it offers low purchase and sale commissions; the third one because of the tokens it supports, etc.

How to Choose a Crypto Exchange

Conducting proper research should precede any new activity you take up. Whether shopping for a new air fryer or searching for the best crypto exchange, you must know the basics.

When looking for a crypto exchange that suits your needs and expectations, check what’s available in your country. Many cryptocurrency exchanges only operate in certain countries or U.S. states that may not include your place of residence.

The next important thing is to know what coins are traded at the respective exchange. You’re probably aware that Bitcoin and Ethereum are not the only cryptocurrencies on the market, so if you’re trading rare coins or altcoins like Dogecoin and Litecoin, make sure that your platform of choice supports them.

Another aspect to consider is the platform’s safety, regulatory background, and trading volumes, which refers to how many people use it. Likewise, pay attention to the fee structure since some exchanges charge more in trading fees than others.

Also, check what payment methods are supported, whether you can only make wire transfers, or if it’s possible to use Paypal, credit card, or a debit card. 

Finally, any capital gains you make by trading crypto counts as taxable income. It’s smart to consider whether your chosen exchange makes it easy to file your taxes later. Learning about the way it integrates with popular crypto tax software could serve as a pointer in this respect.

Top Crypto Exchanges in 2022

In the ever-changing crypto world, you must keep up with the trends. What had been a rule in 2019 might not be the norm anymore. Let’s take a look at some of the top cryptocurrency exchanges in 2022.

Binance

Processing multi-billion dollar transaction volumes daily, Binance is one of the most recognizable cryptocurrency exchanges in the world and currently the biggest by trading volume. At the forefront of the market, it surely makes a good choice in many respects.

Binance offers lower taker fees and a wider selection of supported currencies compared to rivals like Coinbase. Note that it has fewer trading pairs and is not available in every country. Binance.US is also unavailable in several states including Vermont, New York, and Texas.

Coinbase

Founded in 2012, US-based Coinbase is one of the oldest crypto exchanges in the world. It’s a centralized exchange boasting an interface that beginners usually find easy to grasp. With a great variety of coins and high liquidity, it’s a suitable choice as your first crypto exchange.

Coinbase also offers zero-commission crypto transfers, an attractive educational program with the possibility to earn tokens, and a simple account top-up.

eToro

eToro is often listed among the best cryptocurrency exchanges, usually recommended for experienced traders. Considering its somewhat higher transaction fees, it’s good to know exactly what you’re investing in on eToro.

It offers a wide range of instruments including forex trading, ETFs, indices, and CFD trading. Notably, the platform incorporates a social element, allowing communication between users. Using eToro, you can follow more experienced users and exchange trading tips.

Gemini

By far one of the most famous cryptocurrency exchanges in America, New York-based crypto exchange Gemini was the first one to collaborate with the New York State Department of Financial Services. The project boasts several years of experience and positive security ratings. Thanks to its high-security features, Gemini usually fits both beginners and experienced users. Bear in mind, though, that it charges one of the highest fees in the industry.

Kraken

Kraken is the world’s largest Bitcoin exchange site by volume and liquidity for many. It offers a range of user-friendly tools optimized for the quick exchange of cryptocurrencies and advanced security systems for certifying individual registered accounts.

It sets different fees depending on the cryptocurrency exchanged and the selected payment method. Kraken is the official cryptocurrency courses provider for the Bloomberg platform, used by many professional traders worldwide.

Crypto.com

Initially launched under Monaco, its original mission was to create a crypto payment card based on the Visa network. After rebranding and changing the domain in 2018, the project became a crypto exchange, whose popularity has steadily increased in recent years, as reflected in the constantly growing number of users.

The trading fees on crypto.com are pretty reasonable if you own the so-called CRO utility token. The CRO token can be staked or used to pay the fees on Crypto.com. The platform ran an aggressive ad campaign to promote the token, resulting in a stunning increase in popularity.

Takeaways

By the end of this read, you’re hopefully familiar with the concept of cryptocurrency exchanges and differentiate between the basic categories. You should also have a clear idea of what platform to use in starting your crypto journey. Good luck trading!

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