With the origin of Bitcoin in 2009, many other cryptos were developed with time. Today there are more than 1500 digital currencies that exist. After the birth of these new digital assets, what was needed now was a trading platform. Hence, cryptocurrency exchanges were born. In simple terms, crypto exchanges are online platforms where you can exchange one cryptocurrency for another cryptocurrency (or for fiat currency).
Generally, there are the following types of exchanges:
- “Traditional” Cryptocurrency Exchanges: These exchanges are somewhat similar to stock exchanges where buyers and sellers trade based on the current market price of cryptocurrencies (with the exchange playing the middle-man). These type of exchanges generally have a rule of charging a fee. The fee is charged for each transaction. Some of these types of exchanges deal only in cryptocurrency, others allow users to trade fiat currencies like the U.S. dollar for cryptocurrencies like Bitcoin. Coinbase’s GDAX (AKA Coinbase Pro) is an example of this type of exchange, as is Kraken. On the other hand, if the exchange is decentralized, fiat trading is not allowed.
- Cryptocurrency Brokers: In a crypto broker exchange, the buying and selling of cryptocurrencies takes place at a price set by the broker. The exchange is between the broker, buyer, and seller; not just the buyer and seller. Coinbase is an example of this type of exchange. Shapeshift provides a similar service as well. This is the simplest solution for new users. It is possible that you might have to pay slightly higher prices than you do on the exchanges due to the ease of use and the work the broker puts in.
- Direct Trading Platforms: These type of platforms offer direct peer-to-peer trading between buyers and sellers. The direct platforms don’t use a fixed market price. Sellers set their own exchange rate and buyers either find sellers via the platform and perform an Over the Counter (OTC) Exchange, or they denote the rates they are willing to buy for and the platform matches buyers and sellers. Many Decentralized Exchanges follow this path. This type of exchange can be the only solution in some regions. In regions where trading is limited to direct exchange, but where trading isn’t smart contract based (like it is with DEX exchanges), you have to make sure that you do some extra research and ensure you are using a trusted platform and dealing with highly rated users. Also, keep a check on Coinmarketcap to check the prices as you aren’t buying/selling at a fixed market price!
- Cryptocurrency Funds: Funds are pools of professionally managed cryptocurrency assets which allows public buy and hold cryptocurrency via the fund. One such fund is GBTC. Using a fund you can invest in cryptocurrency without having to purchase or store it directly. As a trade-off, you can’t use crypto in a fund as money, these are strictly for investment.
In almost every case a person new to crypto trading will want to use an exchange or broker. A person totally new to the trading world will generally only want to use a direct trading platform when their options are limited (either limited by regulation or limited by coin choice). Meanwhile, while funds might be ideal to some, they tend to have a range of restrictions.
We recommend you to do a detailed research of any type of exchange before investing in it. You need to do your homework and gather all the necessary information about the exchange you have chosen. The market is highly volatile, you have to be prepared to take risks.