What is a crypto exchange
Let’s start from the basics, the stock market is a centralized marketplace for buying and selling financial instruments like stocks, bonds, and commodities. It includes stock exchanges such as NYSE and NASDAQ for trading stocks, as well as commodities exchanges like NYMEX for trading commodities like gold and silver.
To access the stock market, retail investors need a stock broker, which acts as an intermediary, facilitating transactions between investors and the stock market. These licensed institutions provide services like executing trades, offering investment advice, and providing necessary tools and platforms.
A crypto exchange combines features of both the stock market and a stock broker. Firstly, it creates its own markets, such as BTC/USD, which are exclusive to that particular exchange and somewhat independent from the BTC/USD markets of its competitors. Although these markets are independent from each other, a significant price divergence between exchanges markets can create arbitrage opportunities, which will quickly minimize the price gap / difference between the two.
Arbitrage involves taking advantage of price differences between exchanges. For example, if one exchange offers a lower price for a cryptocurrency, traders can buy it from that exchange and sell it on another exchange where the price is higher, profiting from the price difference.
Second, similar to a stock broker, a crypto exchange also provides the infrastructure for trading within its own markets, as well as education sections, advanced charting tools, staking as a service and unique early investment opportunities for projects backed by the exchange.
Due to the decentralized and international nature of cryptocurrencies, exchanges operate with more freedom and autonomy but any serious centralized exchange with a long-term plan, is and has to follow a conservative KYC (Know Your Customer) and AML (Anti Money Laundering) policy.
What you need to know when choosing an exchange
Choosing an exchange isn’t like rocket science, it’s a fairly simple process as long as you know what your priorities are: Some users may only want to acquire crypto for self-custody while others may be more interested in active day trading, which requires an exchange with higher liquidity and markets or coin pairs.
Regardless of what you are after here are some basic elements to consider when choosing an exchange:
Spread, withdrawal & deposit fees
In order to maximize the amount of crypto you receive, it's crucial to consider the fees involved. Pay attention to the price spread, which represents the difference between the buying (bid) and selling (ask) prices of a cryptocurrency on the exchange. A smaller spread indicates lower trading costs and better liquidity, indicating active participation from buyers and sellers.
Withdrawal fees can be significant, depending on your investment or trading amount. They include on-chain transaction fees, which vary based on the blockchain's congestion, and the exchange's commission for the withdrawal. Checking these fees beforehand is advisable to avoid surprises, especially when dealing with smaller amounts.
While deposit fees are uncommon, they should be considered when starting with a low amount. Bank transfers to exchanges are generally free but may take a day or two to process, potentially impacting the price you receive once funds are credited. Alternatively, using debit/credit cards allows for instant account funding, albeit with a deposit fee of around 2%, subject to currency variations.
When choosing an exchange, it's important to consider the trade-off between centralized exchanges and physical shops in terms of commissions. Centralized exchanges typically offer significantly lower commissions, ranging from around 0.1% to 0.2%, making them a cost-effective option for buying and selling cryptocurrencies.
In contrast, physical shops that offer anonymous crypto purchases (in cash up to 1000$) often charge much higher commissions, averaging around 10%.
Decentralized exchanges, that require no KYC, have a very competitive spread and fees compared to the traditional exchanges with KYC, but you still have to find a way of depositing fiat funds (which can only be through centralized exchanges or physical shops / crypto ATM’s).
While physical shops may provide immediate access to cryptocurrencies, the substantial commission fees can significantly impact the overall transaction cost. On the other hand, centralized exchanges offer competitive commissions, providing a more affordable avenue for crypto trading. Considering your priorities and cost considerations will help you make an informed decision when choosing between centralized exchanges and physical shops.
Reputation plays a crucial role, although it's important to acknowledge that it can be challenging to find an exchange without any faults or instances of ill-intentioned FUD (Fear, Uncertainty, and Doubt) circulating around it. Competitors and disgruntled former customers who may have experienced issues such as blocked accounts or freezes due to suspicious transactions can sometimes spread negative narratives.
However, despite these challenges, it's still valuable to consider the overall reputation of an exchange. Look for exchanges with a track record of reliability, security, and transparency. Research user reviews, industry feedback, and any regulatory compliance records to gain insights into the exchange's credibility. Additionally, consider the exchange's response to past incidents and how they have addressed and resolved customer concerns.
By taking a balanced approach and conducting thorough research, you can form a more informed judgment about an exchange's reputation, allowing you to make a better decision when choosing the right platform to engage in cryptocurrency trading.
Centralized vs Decentralized
Cryptocurrency exchanges can be either governed by some entities or can be completely decentralized, i.e. governed on the blockchain. A cryptocurrency exchange governed by some entity is called a centralized cryptocurrency exchange (CEX). Whereas, an exchange governed over the blockchain is a decentralized crypto exchange (DEX). Both of these exchanges have their advantages and disadvantages.
The majority of crypto trading happens on centralized exchanges and thus the trading volume is very high
They have no lack of liquidity
A lot of exchanges allow you to trade using fiat currencies
You can use various payment methods like bank transfers, debit/credit cards, etc
Various types of trading facilities like margin, futures, etc. are available
Transaction speeds are almost instantaneous
Most of these exchanges are insured in case of cyber-attacks and thus protect the user’s funds
They are under the control of an entity that can halt, slow down, or put withdrawal limits in some cases such as the LUNA crash recently
The governments can ban them anytime, like in China, Russia, etc
You will need to complete your KYC and verify it in order to make proper use of these exchanges.
So no anonymity here
Prone to cyber attacks, hacks, etc
You have to give up control of your private keys
Some of the examples of a centralized crypto exchange are Binance, eToro, Huobi Global. Whereas UniSwap, PancakeSwap, CoinMama, SushiSwap, QuickSwap are some of the most prominent decentralized exchanges.
They are not under the control of either an entity or the government
You are not required to give up your private key to transact on these exchanges
A lot of altcoins are only listed on DEXs and not on CEX
Since these exist over the blockchain in a distributed manner, the risk of cyber attacks, hacks, etc. is minimal
All the transactions are private and anonymous and there is no need for KYC
Governments can not ban them or stop them from operating
They have a very lackluster interface and are not as user-friendly as CEX’s
Need a certain level of expertise in using crypto wallets
They only accept cryptocurrencies and not fiat currency
Low trading volumes and low liquidity
The transactions can be a bit slower than on CEX’s
Top crypto to fiat exchanges
BitStamp (Easiest, No Limits)
Bybit P2P (Anonymity)
Paypal P2p (Convenience, Trustable)
BitStamp (user-friendly + simple)
Bitstamp is one of the most popular crypto-converting to tools because of its low trading fees, easy-to-use service, and the fact that it's plugged into hundreds of crypto casinos, and crypto focused platforms. Their service proves efficient and cheap to the average user.
Although there's only a limited amount of tokens available, they cater to a massive audience. Their license means only a few countries do not allow their services. Making it one of the best options for crypto to fiat withdrawals.
Registering with Binance is a wise choice due to its high liquidity, renowned presence, and strong reputation. As one of the largest cryptocurrency exchanges globally, Binance offers a vast pool of liquidity, ensuring efficient trading with minimal slippage. With a proven track record and commitment to security, Binance has built a trustworthy reputation in the industry. The exchange's inclusive community, diverse range of cryptocurrencies, and continuous innovation further solidify its position as a top choice for traders and investors.
Bybit started their service just a few years ago (2018) but quickly became one of the big names in the crypto trading business. They offer quick and efficient service, and almost every new cryptocurrency hopes to list its token on Bybit.
Their P2P service is one of the more popular options due to its anonymity, no trading fee, and east/safe connection. The main option users opt to take is the "escrow" payment system. Meaning that Bybit plays the middleman. The seller sends their currency to Bybit, and the buyer adds the fiat funds to Bybit. Once both parties make their payments, Bybit automatically distributes the payments.
From 0 fees, constant promotions and affiliate programs, and almost no controversy surrounding the platform, they are the best P2P service in the business.
The only way you wouldn't have heard of PayPal is if you were living under a rock. The popular payment is international, relatively cheap, and extremely convenient. Although they've only offered crypto trading in the last year and a bit, the company is reputable, with a market cap of $78,39 Billion. With such a simple system catering to almost every country on earth, why not use it?
Cex.io is a very well-known crypto exchange with over 4 million users. They include options for staking, and implementing multiple payment methods and haven't experienced any known mass exploitations showing they're cable of preventing hacks. They were happy to oblige with Proof-of-reserves recently as well showing they handle customer funds correctly. Their website is extremely user-friendly, and they include multiple warnings and systems to ensure you handle your funds correctly for withdrawals.
Uphold was not initially created for cryptocurrencies as they're a stock trading platform. But in 2015 they started allowing users to invest into digital currencies such as Bitcoin and Ethereum. Since then they've branched out with over 210 tokens to choose from.
What makes Uphold great is you can sell your crypto and send it right into the newest stocks or even safer investments like precious metals. Overall their system is trustable and their UI is extremely user-friendly.