Cryptocurrency exchanges are websites where you can buy, sell, or exchange cryptocurrencies for other digital currency or fiat currency like US dollars or Euro. For those that want to trade professionally and have access to sophisticated trading tools, you will likely need to use an exchange that requires ID verification to open an account. If you just want to make the occasional, straightforward trade, there are other platforms that you can use that do not require an account.
Types of crypto exchanges
Retail exchanges are the most widely used type
of exchange, catering to everyone from seasoned traders to newcomers buying
their first Bitcoin. That means one of the primary ways they differentiate
themselves is usability and speed. Retail exchanges typically have intuitive
interfaces to make transactions as seamless as possible. They also tend to be
custodial, meaning they hold users’ private keys for them so that they don’t
have to dig them up and enter them for every transaction. While this adds to
the ease of use, it also means users risk losing their holdings if the exchange
is hacked.
Peer-to-peer (P2P) exchanges facilitate trades
between individuals. Users create public listings of how much cryptocurrency
they’d like to buy or sell, and other users can respond and negotiate terms
with them directly.
Decentralized exchanges are a new type of
non-custodial, crypto-to-crypto exchange we’ve seen emerge recently. Unlike
retail or P2P exchanges, they don’t actually handle funds at all. Instead,
decentralized exchanges use networks and protocols to programmatically transfer
funds between user's wallets for direct wallet-to-wallet trading. This gives
users more privacy and prevents the possibility of their funds being stolen in
a hack of the exchange, since the exchange never actually holds the funds.
Instant exchangers are another type of
non-custodial exchange, but unlike decentralized exchanges, are extremely easy
to use. They typically support a wider variety than retail exchanges and
convert funds immediately. All users need to do is enter the trade they want to
make and the order is filled immediately.
Derivatives exchanges are like futures and
options exist for cryptocurrencies just as they do for traditional financial
assets, and there are exchanges that make them available to all. Derivatives
are appealing to more advanced traders because they give them more extensive
investment options, such as the ability to short a cryptocurrency, with spot
trading, you can only bet on the value going up.
What to look for before joining crypto exchanges
It’s important to do a little homework before you start
trading. Here are a few things you should check before making your first trade.
P2P / Centralized: Is the exchange centralized
or not (this will become important as time goes on).
Function: which of the buying, selling, trading,
exchanging, storing methods do they offer.
Established: Year the company and website
started, became functional.
Volume: Recorded trading activity amounts (daily
and historic).
Pairs: how many active base trading pairs does
each bitcoin exchange offer.
Owners: Who is the owner, founder, CEO and
management of the company/brand/platform.
Location: Where are they based from and any
extended operations.
Fiat: do they accept fiat/crypto or just crypto
to crypto altcoin trading.
Trust Level: based on our survey of thousands of
visitors, how trustworthy is the digital currency exchange in the public eye.
Support: customer service, speed of response and
how fast they deal with arising issues.
Security History: hacks, attacks and cracks
within the crypto exchange history and infrastructure.
Coin Listing Process: how rigorous is each
crypto exchange at listing new coins and the rigidity of the process for
accepting and allowing new ICO/tokens to trade.
KYC/AML Requirements: Know Your Customer /
Anti-Money Laundering are two monster terms that all bitcoin exchange users
need to understand and know as their importance and significance will only
continue to grow despite the decentralization aspect of the blockchain world.
Fees: Transaction fees, wallet storage
hindrances and payment costs associated with using cryptocurrency exchanges.
Reputation: finally, last but certainly not
least, what is the overall feel and presence each exchange gives off. We break
down the aura of each crypto asset trading service and share a score of
confidence.
Today there are a host of platforms to choose from, but not
all exchanges are created equal. This list is based on user reviews as well as
a host of other criteria such as user-friendliness, accessibility, fees, and
security. Here are ten of the best crypto exchanges in no specific order.
3 types of wallets/addresses that most exchanges support:
1. Deposit addresses
2. Hot Wallets
3. Cold Wallets
Deposit addresses
Deposit addresses are the wallets give you to credit your
account. For example, when you set up an account at Binance/Coinbase/whatever
and you fulfill the KYC/AML or whatever you have to do, you have an account at
base level. Of course, your account has 0 funds. But you want to trade! So the
exchange gives you an address where you can deposit whatever crypto you want to
send. That address does not keep the funds. That wallet that the exchange
creates for you, dumps those funds off to their hot wallet.
Hot Wallets
The hot wallet is the ‘collection point’ for any and
everyone that has sent funds to the exchange. They send funds to the deposit
address, then the exchange ‘sweeps’ that deposit address and sends funds to the
‘hot wallet’. This is generally how almost every (centralized) exchange
works. Even the ones that are “scams” generally work on this principle. Some
exchanges use multiple wallets (this is more common with Ethereum), and some
exchanges only use one (Binance).
Cold Wallets
Only a certain amount of people are going to request their
Bitcoin/Ethereum/Litecoin/whatever. So exchanges really only need to keep a
certain amount ‘on hand’ to send funds out to customers. A smart exchange
calculates how much they typically need to send out on a day to day basis and
they use this estimate to manage how much in funds they keep in their hot
wallet. Anything they receive over top of that number is usually sent to
something called a ‘cold wallet’. This wallet is supposed to be offline and the
only funds that they should be receiving should be coming from the exchange’s
hot wallet address(es).
Note: A cold wallet should NOT receive funds
from customers.
So, what are the best crypto exchanges?
It is critical to choose the best cryptocurrency trading platform for your needs because the wrong decision can threaten your investment and cause financial losses. It is also important to note that some crypto exchanges will limit their availability in various regions based on regulations and permissions.