September 19, 2022

Blockchain Basics Cryptocurrency and Tokenomics

What is a Crypto Exchange?

Crypto exchange is an online platform facilitating the trading of cryptocurrencies like Ethereum for other digital or fiat currencies. Learn how it operates, and its...

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Shardeum Content Team

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If you are a newcomer to the crypto space looking to start investing in crypto, ‘what is a crypto exchange?’ is a question you might have. As you may gather from the title, what are crypto exchanges are platforms that allow users to buy, sell, and store cryptocurrency.

If you’re still confused as to what is a crypto exchange, in this post we try to answer your query in detail, and also go over how do crypto exchanges work.

What are Cryptocurrency Exchanges?

A cryptocurrency exchange is a bridge between fiat currency and crypto assets. The medium lets users purchase or sell crypto assets using their fiat currency, or they can also exchange one cryptocurrency for another.

A cryptocurrency exchange works to provide smooth operations in terms of investing and trading in cryptocurrency, along with high levels of accessibility and security. Different types of crypto exchanges may offer helpful features like price discovery, moving average charts, and other tools to help with crypto trades.

What to Look for in a Cryptocurrency Exchange?

Now that we know what is a crypto exchange, it is time to dive deeper into how do crypto exchanges work. Not every platform is equally useful and safe for crypto investments, so you need to check some basic factors before picking a crypto exchange.

These factors would include:

1. Accessibility

Cryptocurrency, although popular, is not completely grasped by every country. Some regions have banned transactions related to crypto assets, while others have imposed restrictions. In many countries, there are severe accessibility issues related to coin offerings and transactions. So it is important to always check if the exchange you’re choosing offers the crypto you want to invest in.

2. Security

One of the most important factors for choosing a crypto exchange is its security. Malware and cyber attacks can result in extreme loss of money, so before trusting any crypto exchange, ensure that it provides a robust security structure, and also insurance to the funds and assets. Two-factor authentication, SSL encryption, and cold storage of crypto assets are some security offerings you should be looking for.

3. Fees

No crypto exchange will facilitate your transactions for free, but the transaction charges do vary from exchange to exchange. Before depositing your funds in any exchange, check the percentage of transaction fees the platform will charge.

Note that some exchanges charge fluctuating amounts depending upon the asset’s price volatility. So, it’s best to understand how much and when a fee will be charged by a crypto exchange before starting to invest through it.

4. Liquidity

Trade volume is the amount of freedom you get to sell your holdings when the market is at its peak. A crypto exchange should have enough trade volume to ensure your holdings are relatively liquid- so it will be able to provide its users with high trade volumes to buy or sell at the right time. The volatility of crypto prices can be tackled with high trade volumes.

5. Coins Offered

Different types of crypto exchanges offer a varied range of coins, and you need to make sure the one you want is there. For instance, Bitcoin and Ethereum are coins that can be found on nearly every exchange. But if you want to invest in coins that are on presale or significantly new yet high-performing altcoins, then there is a scarcity in the number of exchanges that offer such coins.

Being a learner, it is best to invest in big coins like Bitcoin. However, if you are ready to take risks, it is best to start with an exchange that offers a wide variety of coins.

6. Educational Tools Offered

Whether a beginner or a professional trader, every person who puts money into crypto assets requires educational tools to administer the right investments, such as charting tools, price discovery, technical analysis instruments, and more. These should be present on the crypto exchange that you choose.

7. Storage

A crypto exchange that would let you keep your crypto holdings in the wallet that comes with the online account you create can be a safe choice as a beginner. However, once you are a little more experienced, and have learned more regarding crypto storage options along with acquiring more crypto funds, you might want to keep your crypto in your own online or offline wallet. Hence, make sure to choose a crypto exchange that offers multiple storage options.

8. Tax Information

Every country has specific taxation rules related to capital gains. Profits made through crypto investments may come under capital gains, and thus might be taxed. So when starting to invest in crypto, choose a crypto exchange that offers clear information on the tax laws in the region, and also assesses the proper TDS cut on the profit withdrawal.

Different Types of Crypto Exchanges

Depending on the types of crypto exchanges, the platforms may offer buying and selling of crypto only, or some may even offer other products and services related to blockchain and the crypto world. Users must understand the functioning of different crypto exchanges to choose the right one for their purpose.

Based on their functionalities, these are the types of crypto exchanges:

Centralized Exchanges

Centralized crypto exchanges are platforms that are administered by a central authority. These exchanges usually charge higher transaction fees than decentralized exchanges to carry out smooth transactions and proper trading activities.

Decentralized Exchanges

Decentralized exchanges are not controlled by any authority. These platforms are open source and thus allow complete transparency to the users regarding trades carried out.

Traders sometimes lock funds on decentralized exchanges to provide a liquidity pool for others to exchange crypto through.

Global Crypto Exchanges

Several exchanges have grown in size and are now being used globally. They provide advanced trading options to the users and have nearly every important cryptocurrency listed. Binance is a good example of global crypto exchanges.

How do Crypto Exchanges Work?

A crypto exchange usually works simply by matching the orders from buyers and sellers. Whether you want to buy or sell a crypto, the first thing you need to do is sign up on the exchange with an email id and a password. You would need to provide essential financial and personal information next, such as your bank account details and your region, and more. Once you complete the KYC procedure, you might have to wait a while for your account to be confirmed. Then you can begin the actual crypto trading.

How can you be Sure a Crypto Exchange is Legitimate?

Growing crypto scams and money thefts do make you question the legitimacy of a crypto exchange before you start investing. Here are a few steps you can take to be sure about the legitimacy and security of a crypto exchange:

Take a look at online reviews about it.
Ensure that their website is genuine, the company is registered with the necessary authorities, and the domain name is authentic.
Check whether the exchange provided fraud cover to earlier users.
Find out if the exchange has been registered with financial crimes security units or not. If an exchange has gone through proper security procedures and provides right support to the users, it can be considered legitimate and secure.

How to Open a Crypto Exchange Account?

Depending upon how do crypto exchanges work, there are several steps to be followed to open an account on them. Usually for most crypto exchanges, these steps go like this:

The first step is to complete the basic registration process on the exchange, as mentioned above. You’d need an email id for this; some crypto exchanges may also let you register with your phone number.
After completing the registration, users are prompted to add payment options to the account.
The usual last step in every crypto exchange when opening an account is the KYC or ‘Know Your Customer’ part. Here the users have to present their legal documents for verification purposes, and they may have to upload a photograph of themselves as well.

Following these simple steps, an account can be opened on different types of crypto exchanges.

Ready to put your Crypto Knowledge to Work?

Well, we do hope this blog has helped you understand what is a crypto exchange, and how do crypto exchanges work. As the world around us gradually shifts over to the digital path, it’s only natural to be looking for an alternative to fiat currency. Cryptocurrency, with all the control it offers you over your finances, can prove to be just the thing you are looking for.

With the rapid growth of cryptocurrencies and the blockchain technology in general, it is the right time to start thinking about investing in crypto assets. After careful review of crypto exchanges and proper research on different cryptocurrencies, you can put your crypto knowledge to work, and hopefully gain good returns on your trades.

Conclusion

Cryptocurrency exchanges are becoming an important part of investment scenarios currently. More and more people are searching for a good way to earn gains on crypto assets. Keeping in mind all the required security procedures to avoid investment risks as much as possible, crypto trading is definitely something that needs to be administered by the right platform. That’s why taking your time to fully understand the workings of a crypto exchange is important before starting with the investment part.

We wish you good luck as you start your crypto journey!

Frequently Asked Questions (FAQs)

1. What is a Crypto Exchange?

Cryptocurrency exchanges are platforms that allow the storage, purchase, and sale of cryptocurrency. Earlier, the only way to acquire crypto was through mining them or exchanging them for fiat currency from someone who does the mining. Now, there are crypto exchanges that facilitate crypto trades with fiat currencies, and also the swapping of one crypto with another crypto asset.

2. How do Crypto Exchanges Work?

There are several types of crypto exchanges like centralized exchanges, decentralized exchanges, and global ones. These exchanges usually work by matching up buyers with sellers and facilitating P2P (peer-to-peer) trades. You need to register with these exchanges and create an account before participating in crypto trades.

3. How do I Open a Crypto Exchange Account?

The basic steps to open an account on any exchange are pretty easy. You will need to have your personal documents ready, along with your financial details.

Here’s how the steps usually go:

First, register on the crypto exchange and fill in all the details about yourself.
Then add a payment option through your bank account to deposit funds.
Lastly, complete the KYC process in which your legal documents are asked to be uploaded along with a photograph.

This should complete the process of opening a crypto exchange account, after which you simply have to wait for your account to be confirmed so you can start crypto trading.