What are cryptocurrency exchanges? How do they work? What exchanges are out, and how can I use them profitably?
These and related questions are some things that run through the minds of the average new cryptocurrency investor.
In this article, we will be looking at what Cryptocurrency exchanges are, the type of crypto exchanges there are, how to choose a reliable cryptocurrency exchange, and tons of other things you should know concerning exchanges.
What Are Cryptocurrency Exchanges
Cryptocurrency exchanges are financial institutions enabling the buying and selling of cryptocurrencies with fiat or other cryptocurrencies.
The best place to buy crypto for the first time or convert your cryptocurrency to another crypto is a cryptocurrency exchange.
However, individuals can trade cryptocurrencies among themselves in what is considered black markets.
Cryptocurrency exchanges are similar to the traditional stock exchanges that you know.
The only difference is that, whereas traditional stock exchanges facilitate the buying and selling of shares of companies and other financial instruments, crypto exchanges facilitate the trading of cryptocurrencies against another or with fiat money.
The Two Main Categories of Cryptocurrency Exchanges
All cryptocurrency exchanges belong to one of two categories:
- Centralized Exchanges
- Decentralized Exchanges
What Are Centralized Exchanges?
Centralized exchanges maintain custody of the users’ funds while providing an interface for interacting and transacting with their funds.
These exchanges operate like traditional banks that take possession of your cash for custody and are most susceptible to hacks, exit scams, and other nefarious financial crimes notorious with exchanges.
Most exchanges are centralized. Famous examples are KuCoin, Binance, Poloniex, and other top cryptocurrency exchanges.
What are Decentralized Exchanges?
Decentralized exchanges are non-custodial cryptocurrency exchanges that provide a platform where users can trade directly with one another anonymously and trustlessly.
DEX, as they’re known within the crypto space, facilitates what’s called peer-to-peer cryptocurrency trading.
Examples of decentralized exchanges are IDEX, EtherDelta (ForkDelta), etc. These exchanges allow users to trade directly with the funds in their wallet without sacrificing custody and privacy.
Decentralized exchanges are less prone to hacks and other rampant security issues than centralized exchanges.
However, their primary problem is a lack of liquidity and trading volume, due partly to the fact that they’re everything but user-friendly, and there’s so much that needs to be done in terms of development to bring DEX to the current status and volume and liquidity of centralized exchanges.
How Many Exchanges Are There?
According to CoinMarketCap, there are 332 cryptocurrency exchanges at the time of writing this article, and many more are being launched almost every other month.
Sadly, most of these exchanges are going nowhere but down the path of exit scams, bankruptcy, or just plain uselessness.
To save you the stress of evaluating hundreds of exchanges to determine which are safe for you to trade cryptocurrencies, here is a list of the top crypto exchanges you can pick from.
How You Should Use Cryptocurrency Exchanges
Have you ever heard –not your keys, not your coin?
Never “store,” “save,” or “stake” (what other names are there?) your cryptocurrency on any exchanges.
Yes. You heard that right.
Any cryptocurrency you have on an exchange is technically that of the exchanges, and if they decide to walk away right now, they will, and you will never see your funds again.
You do not control the private key to your coins on a crypto exchange. All you have are digits on a PC monitor, and that’s all. If the exchange gets hacked today or the owners decide to exit the scam, that’s the end of the story.
It’s game over for you, and you can kiss your coins goodbye forever, except the SEC and FBI happen to do their magic.
Even that is highly unlikely to bring you in contact with your funds ever again.
So the best chance is never to take any chance. Trust no exchange with your coins. How, then, do we use cryptocurrency exchanges, you will ask?
The only exceptions to the above rule are:
- You are a trader.
- You want to make a transaction.
- There’s no decentralized staking service for the cryptocurrency you want to stake
The Only Reasons to Keep Funds on Cryptocurrency Exchanges
Cryptocurrency traders take advantage of the market’s constant up-and-down movement on cryptocurrency exchanges.
As a result, they need to keep their funds on the exchanges ready to catch profitable signals. Many people do this for a living.
More so, if you are looking to buy or sell a cryptocurrency, you may require the services of these exchanges. The coins you want to trade must first be sent to an exchange and converted to another crypto, or you can buy with your visa or MasterCard.
However, after this one-off transaction, you should transfer the funds to a safe wallet that controls the private key.
Most cryptocurrency exchanges now offer staking services, where you deposit your crypto on their platform and earn passive staking rewards.
As long as your coins remain with them, you don’t own them –and again, you’re at the mercy of the exchange. If they get hacked or decide to call it quits and walk away, your money is gone.
Finally, staking gives investors the right to vote and contribute to the security of a blockchain –exchanges are known to misuse users’ funds for hostile blockchain takeovers and other unauthorized usages, as witnessed in the case of Steem and Justin Sun of Tron.
Summary of What Are Cryptocurrency Exchanges
- Cryptocurrency exchanges are the best place to buy and sell cryptocurrencies.
- Cryptocurrency exchanges are categorized into –centralized and decentralized exchanges.
- There are currently over 300 cryptocurrency exchanges, according to CoinMarketCap, and knowing which to trust may pose a severe challenge.
- You never keep or “store” your cryptocurrencies on an exchange, except if you’re a regular trader.
- Avoid taking on a cryptocurrency exchange if you can stake it any other way –especially directly from your wallet.
- Be prepared to lose any cryptocurrency you have on an exchange. Not that you will certainly lose them, but you shouldn’t be surprised at any turn of events that separates you from your funds forever.
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