What is a crypto exchange and why is it needed?
First published on Coinpass.com - Markets blog
There are several ways you can buy cryptocurrency: directly from person to person, through ATM’s, brokerages like Robinhood Markets, via PayPal, or by using a dedicated crypto exchange. There are pros and cons to all methods, and ultimately it comes down to a personal choice, but using a crypto exchange is by far the most popular.
What is a crypto exchange and how does it make money?
A crypto exchange is an intermediary, like a broker, connecting buyers with sellers. Instead of you scouring the internet looking for someone to buy your Bitcoin, or for someone else to sell you Ether, a crypto exchange does all that hard work for you. You just simply tell them what you want to buy, how much you want to buy, and how much you’re willing to spend. Then they will match you up with a seller willing to meet your demands. For doing this work on your behalf they will take a small fee, usually as a percentage of the sale, which is how exchanges make their money. You can buy crypto with fiat money, exchange crypto to fiat, and depending on which coins an exchange offers, you can also trade crypto to crypto.
Much like a brokerage, there are two methods an exchange offers users to buy and sell crypto. You can either use a market order or a limit order. A market order matches buyers (takers) and sellers (makers) at the current price of the specific coin in question. A limit order matches makers and takers at a specified price, for example, the current price of Bitcoin is £23,950.00, but you want to sell when the price hits £25,000.00.
Advantages
The main benefit of an exchange is the convenience. It takes all the stress out of the process, so you can just sit back and watch the crypto roll in. To register with an exchange is simple enough, and part of the process is a KYC check – Know Your Customer. An identity check is done using a driver’s license or passport. That means everyone you are trading with has been vetted which offers greater confidence compared to the gung-ho style of a random person-person trade.
One of the added benefits of exchanges is security. You don’t need to worry about storing your digital assets in private wallets because the exchange will store it for you. In essence, it acts as a custodian for your fiat money and crypto. Most exchanges store the vast majority of the digital assets in cold wallets – offline storage which is safer from online hacks. However, if you would prefer to transfer your crypto into your own private wallet, some exchanges will allow you to do so.
Disadvantages
The main disadvantage is the extra fees you have to pay for the service, on top of the transaction mining fees. Some exchanges also limit which types of coins you can purchase, as well as what methods you can use to deposit your fiat currency. There may also be added fees associated with depositing and withdrawing your fiat currency.
Depending on the jurisdiction, exchanges don’t need to be regulated and there are many that aren’t. However, doing so instils a greater level of confidence in users. In the UK, exchanges must be registered and comply with anti-money laundering laws to be able to operate. The level of security offered by exchanges differs, and hackers are constantly looking to exploit weak security measures. One of the first and highly publicised examples of this was the Mt Gox hack.
Choosing the Right Exchange
There are more than 300 exchanges available worldwide which differ by fees, platform design, ease of use, security, and customer support to name just a few. Choosing the right exchange depends on your specific needs and what your priorities are. There are many scams and fraudulent exchanges that lure unsuspecting investors in, so it’s important to do your own research and find an exchange that you are happy with and comfortable to use.
Coinpass offers the best crypto tokens available on the market with new trading pairs added regularly. It was voted the best UK crypto exchange in 2020 by CityAM, and was one of the first exchanges to be registered for regulation by the Financial Conduct Authority (FCA). You can register an account with Coinpass in less than 5 minutes, and it’s currently offering a free £15.00 bonus after your first £500.00 of crypto trades.
If you're ready to buy your first crypto coin right away click here to begin your foray into the crypto universe.
The views and opinions expressed therein are the authors, and are not intended to be used as advice to trade on the crypto markets.