Crypto Exchanges: Everything You Need to Know
Here I am watching Bitcoin crawl around 3,700 bucks, Ethereum barely hanging on to the $125 mark and most other altcoins on life support. And just over a year ago, they were all having a party on the Moon, with beer, burgers, high prices and even higher expectations. Yea, we’ve come a long way down but maybe it’s for the better, at least for some of us. Before you stone me to death for that statement, let me explain: the best time hop on the crypto train is when prices are down and… right now there’s a bear market in full swing, aka low prices. So, if you are looking to buy cryptocurrency, you will need a crypto exchange account but you will also need to pay attention to a few other things.
Looking To Hold Cryptocurrency? Here’s What You Need To Know
If you are about to get into Bitcoin or any other altcoin for that matter, you need to know there’s a clear difference between exchanges and brokerages. If you want to buy and Hold (HODL!) your digital currency, you will need to head over to a Bitcoin exchange because that’s the only place where you will gain ownership over the coins. If you are just looking for Bitcoin trading, you can go to a CFD broker where you’ll even get some leverage (in most cases); however, today we will be focusing on buying and selling digital currency at exchanges, not trading it CFD-style. But first things first: let’s see what crypto exchanges actually are.
Crypto Exchanges – A Simple Explanation
A digital currency exchange or cryptocurrency exchange is a platform where users can trade/exchange one cryptocurrency (Bitcoin, Ethereum, Ripple, etc.) for another or for fiat money (USD, EUR, GBP, etc.). Usually, the exchange acts as the market maker (the middle-man) and facilitates the trade between buyer and seller, taking the bid-ask spread in return. Other exchanges charge a fee for their service and in some cases, they take both the spread and a fee.
Some of these exchanges allow only crypto-to-crypto trading and others deal in crypto-to-fiat as well. Usually, the latter requires a lot more documents (proof of residence, IDs) to open an account and this is mostly due to Anti-Money Laundering (AML) and Know Your Client (KYC) rules.
There’s another type of exchange, called a Decentralized Exchange (DEX). Unlike the “traditional” exchanges depicted above, a DEX doesn’t use third-party, centralized software and instead, it facilitates trading through the use of smart contracts. DEXs usually don’t require any type of documents to open an account, in some cases, not even a password or username. Instead, access is granted through a user’s private key, keystore file or through software wallets (MetaMask, Trust Wallet) and hardware wallets such as Ledger.
How To Buy Cryptocurrency at an Exchange
Once you’re all set, with an active account and some fiat money in it, you can go ahead and start buying your first crypto coins. Of course, you need to open the account at a crypto-to-fiat exchange (i.e. one that allows you to buy cryptos with fiat currency). The details of the buying process differ from exchange to exchange but the basic idea is the same: you will need to look for a list of currencies and click on what you want to buy. If you want to buy Bitcoin with US Dollars, look for BTC/USD, if you want to buy Ether with USD, look for ETH/USD – you get the gist. This list can be to the side of the website, to the top or right in your face, in the middle of the screen (as I said, it differs from exchange to exchange).
Look at the price! If you decide you want to buy at market (the order will be filled the fastest), click Buy right then and there and you will buy the coin at the next available (closest) price possible. If you want to buy at a lower price (or higher, your choice), set a Limit order and type in your desired price. The order will be filled when and if there’s a seller at that price.
Once you buy cryptocurrency at an exchange, you become the owner of the coins and are able to use them like you would any other property – of course, with the limitations of the current state of the blockchain (i.e. you cannot pay your taxes with it and you cannot spend them at a merchant that doesn’t accept crypto payments, etc.). What you can do is transfer the coins from the exchange’s wallet your personal one, send them to another person’s crypto wallet, spend them (at accepting merchants), sell them for other coins or exchange them for fiat currency. Your coins, your decision.
The Rise of Crypto Exchanges And Risks Of Using Them
To explain the risks of dealing with exchanges, we have to go back to the 2017 crypto equivalent of the Gold Rush. Back then, having cryptocurrency and watching CoinMarketCap stats was better than any action movie. Every day, every hour the coins were going up and everybody wanted to buy more. This created an unprecedented influx of clients at existing exchanges and in late-2017, many of the big players stopped accepting new clients because they weren’t able to service them properly.
This paved the way for smaller exchanges and even brand new ones. But in the rush to buy crypto, many clients never stopped to see who they are dealing with and this opened the door for scams.
Although not 100% confirmed, there were many rumours that some exchanges claimed to be hacked only to run away with clients’ cryptocurrency. In other words, your Bitcoins are there one day and the next morning, the exchange says “We’ve been hacked! Sorry!” and all your coins are gone. You cannot really verify which “hack” is real and which is made up. On top of that, let’s not forget that exchanges are not regulated, so there’s not much you can do if something bad happens.
Of course, over the years there have been many incidents of exchanges getting hacked – for real – and millions worth of digital currency stolen from their wallets. In some cases, the exchange will cover for the client’s loss (after all, they are the ones who didn’t secure their network properly), but in other cases, the client will take the full loss.
All this comes down to one conclusion: to buy and gain ownership of cryptocurrency, you need an exchange account but you have to get your coins out as soon as possible. Never keep your coins on an exchange longer than you need to. If you are not trading on a day to day basis, you might as well withdraw your crypto possessions and move them to a more secure, personal wallet.
How To Choose A Crypto Exchange
First, you need to decide whether you want to buy cryptocurrency with fiat or if you want to exchange coins that you already own for others. If you want to buy crypto with fiat, you definitely need to find a crypto-to-fiat exchange – duh! Then you need to do something we’ve been saying for ages: read reviews! Learn what others have to say about a certain exchange, don’t just jump in, giving them your personal details and money only to discover afterwards that you are dealing with a known scammer or simply a subpar crypto exchange.
Something else you can do is check the internet for hacks against that exchange. Usually, a simple Google search will show you if that venue was hacked before and how they dealt with the hack. Did they reimburse the clients? Maybe they’ve covered for just part of the loss or maybe they’ve simply shrugged their shoulders. All are important telltale signs that help you understand who you are dealing with.
Another thing to take into consideration is the exchange’s trading volume. This is important because you want to be able to buy and sell fast; on a low volume exchange there simply won’t be a seller when you want to buy or a buyer when you want to sell. Of course, if you are a small time trader/buyer, you won’t run into this type of problems but it’s always better to deal with big exchanges (high volume) than with small-time “players”.
Remember this is not an exhaustive guide on how to choose your first crypto exchange, just a few things that should be on your checklist. There are hundreds of choices, all with pros and cons but fret not, we’re working on a comprehensive guide and new reviews to help you choose the best crypto exchanges. We will rank them following a specific structure, designed to give you the best overview of an exchange, focused on some of the most important features, which we will outline below:
In this category, we will focus on how easy it is to use the website and to find the info that you need, how many languages are available, whether they offer Demo accounts or not and if they have mobile versions of their platforms. Last but not least – how easy it is to use the main trading platform.
Range Of Markets And Volume
This includes two categories: “Range of Markets” refers to how many assets are available to buy and sell at the exchange in question but also if we are dealing with a crypto-to- crypto or crypto-to-fiat exchange. “Volume” ranks exchanges according to how much US Dollar worth of cryptocurrency is moving through them. High volumes are a sign of a healthy company.
Some exchanges are a good choice but they come with high fees. Here we will take a look at trading, inactivity and possibly maintenance fees (where applicable) and will compare them with the industry average. You will decide if the fees are within your acceptable limits.
Deposits And Withdrawals
Here we will rank the exchange according to how long it takes to deposit/withdraw, what are the methods and how much it costs. Crypto deposits/withdrawals are usually straightforward but fiat currency transactions can get a bit hairy so you need to know the conditions before reaching for the pocket.
Here we will list and rank any features that are not commonly encountered or that are specific to the exchange under review. It can be anything from regulation to having their own coin; anything extra and worth mentioning will go in this category.
The exchange will be awarded a max of 20 points for each category which in theory means that it can reach 100/100. However, in practice there’s no perfect exchange so a 100/100 score is like a purple unicorn – you will never see it – but you will get a good idea of how good an exchange is and if it’s a safe option for you. Of course, our reviews, although comprehensive, don’t eliminate the need for you to do some research on your own.
Keep Your Money Safe. No One Else Will Do It For You
If you think the crypto ship has sailed, think twice because, throughout the brief history of the blockchain, we’ve seen wild swings: in August 2013 Bitcoin was valued at $100 and by December same year it was over $1,000 only to drop below $200 by January 2015. So it’s not farfetched to think that another bull run will follow. Full disclaimer: I own a few cryptocurrencies and I am looking to buy more in this bear market but that is not what I am recommending you to do. If you want financial advice, go to a certified financial advisor because I am certainly not one. This is just an opinion.
However, what I do recommend is to do research before buying from a crypto exchange because, as is the case with brokers, there are a few bad apples among exchanges as well. And once you’ve bought your coins, move them ASAP to a crypto wallet. If you need help choosing a reliable wallet, let us know and we will put a list together.