A cryptocurrency exchange helps you buy and sell cryptocurrency in exchange for another cryptocurrency or a fiat currency, (currencies such as the dollar, pound, euro, etc.).
Exchanges can be classified by the tradable currency. On this basis, an exchange can be a fiat exchange or a crypto-to-crypto exchange.
Fiat exchanges allow the exchange of government-backed currencies with cryptocurrencies.
Crypto-to-crypto exchange means you can exchange one cryptocurrency with another. The most widely traded crypto pair is Bitcoin vs. Ethereum.
Cryptocurrency exchanges are also classified as:
Traditional cryptocurrency exchanges: These operate like traditional exchanges, where buyers and sellers trade in cryptos based on the prevailing market price. Here, the role of the exchange is like that of a middleman facilitating the transaction.
Cryptocurrency brokers: Just like currency changes, these brokers facilitate buying and selling by customers at prices determined by them, usually the current market price plus a small premium.
Direct trading platforms: These platforms facilitate peer-to-peer trading between buyers and sellers, without an exchange that acts as an intermediary.
For a glimpse into how trading happens, look at how digital currencies are bought on Coinbase. Once you verify your identity on Coinbase, it allows you to buy Bitcoin using either the cash in your bank account or a credit card. Coinbase charges a transaction fee for this.
If you wish to trade using the Bitcoin you bought, it has to be moved to the GDAX trading platform. Bitcoin can be deposited and it will instantly show up in your balance.
While there are numerous considerations to weigh when you choose to invest your money, here are the basic factors to take into account before you choose a cryptocurrency exchange:
Security: You want to choose an exchange that’s legitimate and secure.
Cryptocurrencies supported: Scout around for exchanges that allows trading in all tokens.
Fees and commissions: Check the prices. Transaction charges may eat into your profits.
Mode of payment: Payment modes vary with exchanges and include varied options such as cash, credit cards, wire transfer, payment through PayPal, etc.
Geographic location: Choose an exchange in your country of residence, as legislation and policies governing an exchange vary among countries.
Ease of use: Simpler is better, especially when you’re using a complex financial instrument.
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