To answer what a Crypto Exchange is, we need to know that cryptocurrency is an ever-increasing market, and various currencies keep adding to it. This creates a need for a platform where crypto investors can trade efficiently in many different digital currencies.
On a similar principle to a stock Exchange, a crypto exchange is a digital space allowing users to buy, sell, and trade cryptocurrencies like Bitcoin, Ethereum, Dogecoin, and Pepe.
This digital platform is accessible on desktops and smartphones through the internet and offers an array of features for the user’s convenience.
- Ability to deposit and withdraw fiat money like US dollars, euros, yen, etc.
- Trade cryptocurrencies against each other.
- Trade cryptocurrencies against fiat money.
- Graphs and analytical tools to help users keep track of every activity.
To provide these services, they also charge fees that can vary depending on the type of exchange, trade, and volume.
Also see the list of top 5 crypto exchanges in India.
Note: “Fiat money” means legal tender currency backed by the government, like US dollars, Indian rupees, Japanese yen, etc.
Types of crypto exchange
Centralized Exchange
Similar to the stock exchange, a centralized crypto exchange is the most common type of all, and as the name suggests, it has a central power or single authority that tracks every account and transaction. That’s why they hold custody of digital assets on behalf of the user.
Benefits
- Easy to use even for a beginner, they have a friendly user interface and offer a variety of features for easy sales and purchases.
- High liquidity means there are always buyers and sellers available.
- Regulation by financial institutions and security assurance
Negatives
- This may include various transaction, withdrawal, deposit, and inactivity fees, which are also generally on the higher side.
- Few CEX systems have been hacked in the past, meaning no technology is 100% foolproof.
- Custody of assets is held by the central entity only.
Decentralized Exchange
This crypto exchange recently started gaining traction. It works without any authority interference. DEX uses smart contracts to expedite peer-to-peer trading. These smart contracts set the rules through which it will operate.
Benefits
- Decentralization, Since there is no middleman involved, data is more secure, and users themselves have custody of their digital assets.
- Economical as no intermediary is there to charge fees.
- Anonymity of users is maintained, and transparency of transactions is recorded in the blockchain.
Negatives
- Complicated and do-it-yourself process as new users have to learn and practice several things beforehand.
- Liquidity is lower because the adoption rate is lower than CEX, meaning fewer buyers and sellers.
- Only deals in cryptocurrency, not fiat money.
Hybrid Exchange
A mixture of CEX and DEX incorporates the best of both worlds, bringing the ease of use of CEX and the privacy and security of DEX.
Benefits
- Easy to use and simplicity of CEX while maintaining the privacy of DEX.
Negatives
- New concept, low adoption rate.
What are the crypto exchange feature to consider?
For starters, a simple method is to first go for a centralized crypto exchange, and after gaining knowledge of what a crypto exchange is, and in-hand experience of the crypto market because its a highly volatile market and prices keep fluctuating. only then proceed to deal at an advanced level like a decentralized crypto exchange.
Security and insurance
One of the major aspects to consider when opting for anything in which you are going to invest money is whether the crypto exchange holds a valid license or not. A valid license is a sign of genuineness and following regulations, so if any issues arise, any governing body can step in.
Many crypto exchanges offer insurance in case of theft or hacking, which will recover the money lost by the investor if the situation arises.
Note: Insurance policies vary between different crypto exchanges and require detailed independent research.
Trading fees
This factor is also important because different crypto exchanges have different fees for various activities like transactions, money deposits or withdrawals, and even account inactivity, so it is to be decided how much one can afford these fees.
It’s important to know what you are charged for and how much because it surely will affect the possible outcome of the profits.
Liquidity
The crypto exchange should have a higher number of crypto traders, which will enable them to trade at any point in time.
It is also important because of the highly volatile nature of the crypto market, where low liquidity can make cryptocurrencies, prices rise or fall substantially.
Reputation and reviews
These days, everyone has the habit of checking ratings and reviews of the business they are going to deal with; similarly, one should check these for crypto exchanges as well.
Some may have paid or fake ratings, so the ability to spot and filter that out is also required.
UI and customer support
A simple and user-friendly UI will enable ease of access and higher productivity.
Prompt customer support is also important in cases where someone is having trouble, and their money could be at stake.
Safety precautions to take in Crypto Exchange
- Use 2-factor authentication for your trading account, even for personal accounts on various websites.
- Avoid public WIFI or free VPNs because public WIFI is not secure and free VPNs can track and sell data.
- Don’t try to use third-party software to manipulate trade.
- Store cryptocurrency in a hot or cold wallet, whichever is more convenient.
- Don’t give credentials if someone promises profit by trading on behalf of yourself.
What is a crypto wallet?
A crypto wallet can be in the form of hardware or software that allows users to store passkeys of the cryptocurrency they own.
There are two versions of this passkey, namely
- Private key: This key safeguard all of the crypto assets a person has, if someone gets access to this key, they can take full control of it. So never share it.
- Public key: As the name suggests this key is public like a person’s address, This key is only used to send or receive cryptocurrency.
Types of crypto wallet, in short,
- Custodial: This type of wallet is provided by CEX itself and inherits all its features like custody of keys held by the corporate entity and they also charge fees for the service.
- Non-custodial: Similar to DEX, the storage and custody of passkeys are the responsibility of the user himself.
How crypto exchange is different from crypto wallet?
More and more people want to know the cryptocurrency market and venture into it and want to know various methods and terminology of terms.
Crypto exchange and crypto wallet have many similarities and dissimilarities, but the ultimate goal is the same to facilitate cryptocurrency transactions.
| Topic | Crypto Exchange | Crypto Wallet |
|---|---|---|
| Purpose | Marketplace to buy, sell, and trade digital assets and fiat money. | Software/hardware to store, send, and receive digital assets. |
| Ownership | Centralized: Central authority is the custodian and facilitator of all activities. Decentralized: People themselves are responsible for buying, selling, and trading since no middleman is involved. | Custodial wallet: The entity providing the wallet is the custodian of the digital assets. Non-custodial wallet: People themselves are responsible for storage, sending, and receiving cryptocurrency. |
| Authentication/KYC and regulations | CEX: Yes, it has to be shared with the entity for account creation. DEX: Not required. | CW: Yes, it has to be shared with the provider for wallet creation. NCW: Not required. |
| Fees | CEX: Yes DEX: No | CW: Yes NCW: No |
| Liquidity | CEX: High. DEX: Low to moderate. | CW: Low to moderate. NCW: Low. |
Conclusion
We have covered all the basics of “what is a crypto exchange” and its short comparison with the crypto wallet.
It is advisable to use the crypto wallet and crypto exchange simultaneously, First use basic custodial wallet and CEX as these 3rd party software take care of most of the part, then after gaining experience a person can use advanced options like non-custodial wallet and DEX.
This blog is for educational purposes only, not financial advice.
FAQ
Q: What is a crypto exchange?
A: A crypto exchange is an online platform where you can buy, sell, and trade digital currencies.
Q: How do I choose a reliable crypto exchange?
A: To choose a reliable crypto exchange, consider factors such as its reputation, security measures, supported currencies, user reviews, and trading volume.
Q: Is it safe to store my cryptocurrencies in an exchange?
A: It is generally recommended to store your cryptocurrencies in a personal wallet instead of leaving them on an exchange.
Q: How long does it take to complete a transaction on a cryptocurrency exchange?
A: The transaction time on a cryptocurrency exchange depends on the network congestion and the specific crypto you are trading.
Q: Are there any fees associated with using a crypto exchange?
A: Yes, most crypto exchanges charge fees for trading, depositing, and withdrawing funds. The fees vary between exchanges, so it’s important to review their fee structures before using them.
The post What is a Crypto Exchange? appeared first on Cryptoreach.
