When cryptocurrencies like Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC), and Ripple (XRP) first appeared, the only way you could lay your hands on them was by mining them or getting into contact with another crypto aficionado willing to sell them directly to you.
As the interest in crypto assets started to grow, people began to look for an easier and more secure way for obtaining virtual currencies. This is how the first digital currency exchanges appeared on the crypto market. Since then, the evolution of these platforms has come a long way and today, their trading volumes go way over million dollars.
As you can guess from the title, this article will be precisely about cryptocurrency exchanges and the operations behind them. We’ll talk a little bit about the different types of cryptocurrency exchanges, how they really work and finish our guide off with a list of the best crypto exchanges.
What Is a Crypto Exchange?
Cryptocurrency exchanges, also known as digital currency exchanges (DCE), are online platforms where you can trade one cryptocurrency for another. There are crypto exchanges that let you exchange Bitcoin or other altcoins for fiat currencies and vice versa, based on the market value of the particular asset.
The best thing about cryptocurrency exchanges is that they are open 365 days per year, 7 days per week, 24 hours per day.
On the crypto market you can find three types of cryptocurrency exchanges:
- Traditional exchange platforms. On this type of crypto exchange, traders can exchange cryptocurrencies based on the current crypto market price. The traditional exchanges act as a middleman and, in almost every case, they charge a transaction fee. Coinbase, Kraken, and Binance are some of the most popular traditional exchanges.
- Direct exchange platforms. These platforms are peer-to-peer online ecosystems where traders can exchange cryptos directly. Direct platforms don’t use the established market price of the currencies and in most cases, the seller sets the exchange rate and waits for someone to accept their offer. Paxful, Localbitcoins, and LocalCoinSwap are some famous direct exchange platforms.
- Digital currency brokers. Crypto brokers are online trading platforms that provide traders with the ability to exchange digital assets at a market price. The trade is done between the traders and the broker, meaning the broker acts as a middleman. Robinhood, TradeStation, and TD Ameritrade are examples of cryptocurrency brokers.
In terms of governance, crypto exchanges can be divided into centralized, decentralized, and hybrid cryptocurrency exchanges.
A centralized exchange (CEX) is the most common type of crypto exchange and involves a trusted third party that acts as an intermediary for the transactions. The user’s assets are temporarily stored on the exchange itself, which grants their security and executes the transactions in real-time. Due to the fact that the assets are stored on the crypto exchange, the owners of the assets cannot misplace their private keys or crypto wallets.
To trade crypto assets without the use of a crypto exchange, users would have to create new crypto wallets and maintain all of their private keys. However, not all cryptocurrencies operate on the same blockchain, so users would have to create individual wallets for every digital currency that they’d like to trade.
Without crypto exchanges, users will have to manage every transaction on their own, every time they want to trade digital currencies – whether it’s transferring assets, selling existing cryptocurrencies, or buying new ones. On top of everything, users would have to maintain their private keys, keep track of their assets, confirm when the exchanges are fulfilled, etc.
Today, centralized exchanges do all this work for you. Users only have to place an order, choose the assets they want to use, and verify that they want the transaction to be carried out. The rest is up to the exchange, which makes sure the assets arrive safely at their final destination.
Some owners of digital assets see the control centralized exchanges have over their assets as a downside, because this can possibly expose their assets to additional risks, such as hacker attacks. However, at the end of the day, your assets would still be liable to attacks if you store them on a third-party wallet or in a desktop wallet that only you have access to.
Coinbase, Kraken, and Binance are only a few of the numerous different centralized exchanges you can find on the crypto market.
A decentralized exchange (DEX) works similarly to a centralized exchange by enabling the same ecosystem for trading digital currencies gainst fiat or cryptocurrencies. However, the main difference is that DEXs don’t have a central authority in charge, plus most of them function as non-custodial exchanges, meaning they grant users direct control over their crypto wallets during the transactions.
The advantage here is that users’ assets have no contact with a third party. Decentralized exchanges don’t maintain users’ wallets or assets directly. The DEX just connects the users who are looking to buy assets with those looking to sell them. The assets are transferred directly between the traders’ crypto wallets or bank accounts.
The number of DEXs for the crypto traders to select from is slightly limited in comparison to the number of centralized exchanges, however, decentralized exchanges can obtain a little bit more of a piece of mind for the careful owners of digital assets. These cryptocurrency exchanges lower the risk of hacker attacks.
However, the risk of hacking attacks might be very low, but it’s much more difficult for attackers to get caught due to the fact that decentralized exchanges don’t use the Know Your Customer (KYC) and Anti Money Laundering (AML) protocols.
Basically, the limitations of the decentralized and centralized cryptocurrency exchanges have led to the development of the hybrid exchange. In fact, the hybrid cryptocurrency exchange combines the best of both worlds and thus solves most of the imperfections of the CEXs and DEXs. Hybrid crypto exchanges acquire the security and anonymity of the decentralized crypto exchanges and the liquidity and usability of the centralized ones.
By using the hybrid exchanges you’ll have complete control over your assets and won’t have to give them to any custodian. Users can trade cryptocurrencies directly from their crypto wallets while staking tokens into a secure smart contract. The hybrid crypto exchange is, without a doubt, the next generation cryptocurrency trading market. Some of the most popular hybrid exchanges are Qurrex, Eidoo, and Legolas.
How Do Crypto Exchanges Work?
Simply put, cryptocurrency exchanges operate similarly to traditional stock exchanges. The only difference is that, on the stock exchange, users trade funds, such as derivatives or shares, to gain some profit from their changing rates. On the other hand, on cryptocurrency exchanges, users buy or sell trading pairs, such as BTC/USD, ETH/BTC, or ETH/USD, in order to gain a profit from the volatile cryptocurrency rates.
The rate of the cryptocurrencies, both tokens, and coins, is placed by the cryptocurrency exchange. The digital currency rate often depends on the actions of the buyers and sellers, together with certain other factors that have an impact on the price of cryptocurrencies.
Different exchanges offer various functions and features. Some of them are only to crypto-to-crypto traders, while others apply to crypto-to-fiat traders too.
In order to start trading cryptocurrency on an online platform, you have to choose the right exchange for you. Next, create an exchange account and crypto wallet – on some exchanges, the crypto wallet will be created automatically after you create an account. The next thing you have to do is transfer an initial amount of money into the account. Some cryptocurrency exchanges don’t accept fiat currencies, such as US dollars or Euros, but there are a bunch of other crypto trading platforms that accept local currencies and payments with debit or credit cards or Paypal. After you obtain the initial amount of assets, you are ready to place a buy or sell order.
Best Cryptocurrency Exchanges
The crypto market is full of different exchanges, some of them have good trading volume, some of them offer only a limited number of coins, and some of them have high transaction fees, so it’s up to you to choose the right one for your needs. Here are some best crypto exchanges in Australia: Swyftx, Binance, and Digital Surge
A Few Words Before You Go…
In the end, the crypto market owеs a big thanks to cryptocurrency exchanges. They make the trading process so much easier and secure, even users that have limited knowledge of crypto exchanges can quickly learn how to use them. Moreover, they are evolving very fast, as you can see with the hybrid exchange that steals the trumping cards of both centralized and decentralized exchanges with remarkable success. So who knows, maybe in the future there will be new digital currency exchanges that will make the life of crypto traders even easier.