Decades ago, the concept of owning digital money probably sounded weird and unattainable. Nonetheless, as cryptocurrency exploded in popularity in the past years, most have chosen to invest and own this type of digital currency.
And every cryptocurrency investment journey starts with a cryptocurrency exchange platform. Read on to learn more about crypto exchanges and how they work.
What’s a Crypto Exchange
Cryptocurrency exchanges such as are online platforms that facilitate the trading of cryptos as well regular currencies such as Euros and United States (US) Dollars.
It’s said that crypto exchanges first existed because most traditional investment firms didn’t offer crypto trading in their portfolios. Without these exchanges, you’ll need to find another person to trade crypto with and agree on an exchange rate. Yet due to the public’s high awareness of crypto, cryptocurrency exchanges have spawned a mass following.
3 Types of Cryptocurrency Exchanges
There are different kinds of cryptocurrency exchanges available in the market. Each one boasts different features that set them apart from the other. Want to know more about them? Continue reading.
- Centralized Exchanges
Centralized exchanges are said to be the most common type of crypto exchange platform around. They act as a third party between a crypto seller and buyer. Centralized crypto exchanges are often operated and controlled by a company, making them more reliable.
This type of crypto exchange platform tends to have higher liquidity and trade volumes as well as a greater number of trading pairs. If you’re a newbie in crypto, then a centralized crypto exchange is the recommended choice for you. This is because they offer better onboarding and user interface – making it extremely user-friendly.
The main problem with this type is that users are more prone to hacking attacks. Plus, some users may not like to share their private information in the know your customer (KYC) process.
Some of the common centralized exchanges available today include swyftx.com and the like.
- Decentralized Exchanges
With a decentralized exchange, there’s no middleman involved in the process. While centralized exchanges act as brokerages, a decentralized platform is more like a marketplace, allowing users to execute peer-to-peer (P2P) transactions using distributed ledgers or blockchain technology.
Servers for this type of crypt exchange are spread throughout computers located across the globe. So, if one computer is hacked, the network can still run uninterruptedly. This alone attracts many users who fear losing their crypto holding due to a security flaw and vulnerability in centralized exchanges.
It’s said that the only drawback of a decentralized platform is that it often has lower trading volume, small liquidity, lack of customer support, and poor user interface.
- Hybrid Exchanges
Hybrid exchanges are said to be a new generation of crypto trading platforms to provide the best of both worlds. They aim to overcome the limitations of older crypt exchanges by providing greater liquidity and functionality of centralized exchanges together with the better security of decentralized platforms.
Most hybrid exchanges boast fast crypto transactions and trading without compromising their users’ privacy. That said, hybrid platforms are still relatively new in the crypto world. And only time will tell if they’ll be successful in providing the best of both worlds or struggle due to limited scalability and assets and the high costs.
Crypto Exchange vs. Crypto Wallet
Most people think that a crypto exchange is the same as a crypto wallet. While both crypto exchanges and wallets are essential tools to manage your cryptocurrencies, there are key differences between the two.
Crypto wallets are designed to keep your cryptocurrencies safe. Meanwhile, a crypto exchange is a trading hub where you can exchange fiat currencies to digital ones so you can buy and sell crypto currencies based on the current market rates.
That said, most crypto exchanges offer their own crypto wallets, allowing users to start trading crypto as soon as they create their trading account without worrying about getting a digital crypto wallet of their own. Such crypto wallets are known as web-hosted wallets and their incorporated crypto exchange is responsible for their security.
Quick Tip: It’s advised that you use an independent crypto wallet where you can deposit any coins that you don’t actively trade. This is to prevent losing all your digital assets if the crypto exchange is hacked.
Understanding Crypto Exchange Fees
A crypto exchange charges several fees. The type of fees and rates will depend on the platform and their policies. In general, there are two main types of fees charged:
- Exchange Fees
Also known as the service fee, the exchange fee is the main source of money for crypto exchanges. It’s often divided into several fees including trading fees, deposit or withdrawal fees, and account fees.
- Network Fees
These are fees paid to crypto miners who process and secure trading transactions on the blockchain. Most centralized exchanges incur this cost, while some may allow users to pay more in miner fees for a speedier transaction. Meanwhile, users of a decentralized exchange will have to pay this fee themselves since there’s no third-party between them and crypto miners.
Takeaway
And there you have it!
Cryptocurrency exchanges are simply platforms that allow you to trade different cryptocurrencies. The best crypto exchange platform allows easier and simpler crypto buying and selling than it has been before.
