Cryptocurrency Exchanges Explained

Cryptocurrency exchanges are online platforms where you can exchange one cryptocurrency for another cryptocurrency (or for fiat currency). In other words, depending on the exchange, it is either like a stock exchange or a currency exchange (at the airport or bank).[1][2]

There are general there are the following types of exchanges (see a list of exchanges):

  1. “Traditional” Cryptocurrency Exchanges: These are the exchanges that are like the traditional stock exchanges where buyers and sellers trade based on the current market price of cryptocurrency (the exchange plays the middleman, as their platform facilitates the exchange between buyers and sellers). These types of trading platforms generally charge a fee for each transaction. Some of these exchanges deal only in cryptocurrency. Others allow users to trade fiat currencies like the U.S. dollar for cryptocurrencies like Bitcoin. Some of these exchanges are derivatives platforms. Others just focus on spot trading, and some do both. Some allow you to place complex orders, and some only allow simple swaps. Coinbase’s Coinbase Pro is an example of this type of exchange, as is Binance. Of exchanges, there are those run by third parties (they are “centralized” exchanges that have a middleman who can do support and correct some problems) and Decentralized Exchanges or DEXs that mimic traditional exchanges like UniSwap (where trading is handled using smart contracts and Automated Market-Making protocols). In general, centralized exchanges will require a lot of info but often allow fiat trading, and DEX exchanges won’t allow fiat trading but require less information.
  2. Cryptocurrency Brokers: These are website-based exchanges that are like the currency exchange at an airport. They allow customers to buy and sell cryptocurrencies at a price set by the broker (generally at the market price plus a small premium). Here the exchange is between the buyer or seller and the broker, not between a buyer and seller (although some lines blur as the exchange may simply be matching orders for you). Coinbase is an example of this type of exchange, and so is Cash App. This is the simplest solution for new users. You’ll generally pay slightly higher prices than you do on traditional exchanges due to the ease of use and the work the broker puts in.
  3. Direct Trading Platforms (OTC and P2P): These platforms offer direct peer-to-peer trading between buyers and sellers. Direct trading platforms of this type don’t use a fixed market price. Sellers set their own exchange rate, and buyers either find sellers via the platform or denote the rates they are willing to buy, and the platform matches buyers and sellers. There are exchanges of this type that deal with very big buyers and sellers (these are called Over the Counter or OTC), and others that deal with smaller transactions (these are called Peer-to-Peer or P2P). This type of exchange can be the only solution in some regions. In regions where trading is limited to direct exchange, make sure to do some extra research and ensure you are using a trusted platform and dealing with highly-rated users. Also, make sure to check market prices on a platform like Coinmarketcap, as you aren’t buying/selling at a fixed market price! For an example of a centralized peer-to-peer exchange that facilitates the exchange of fiat and crypto, see LocalBitcoins.com or Binance.
  4. Cryptocurrency Funds: Funds are pools of professionally managed cryptocurrency assets that people to hold cryptocurrency via a fund. These funds can be private or public. An example of a public 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.

Bottom line: In almost every case, a person new to crypto trading will want to use a traditional crypto exchange or broker. Newcomers 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, they tend to have a range of restrictions, and there is a limited selection.

Which exchange should I use? We highly suggest Coinbase, Cash App, Robinhood, and Binance. These are all simple enough to use and have solid reputations.

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Citations

  1. Best Cryptocurrency Exchanges: The Ultimate Guide
  2. Where Can You Trade Cryptocurrency? List of Crypto Exchanges