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 of the things that run through the mind of the average new cryptocurrency investors.
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 that enable the buying and selling of cryptocurrencies with fiat or with 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 engage in trading cryptocurrencies among themselves in what is considered as black markets.
Cryptocurrency exchanges are similar to the traditional stock exchanges that you know.
The only difference being 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
Basically, all cryptocurrency exchanges belong in one of two categories:
- Centralized Exchanges
- Decentralized Exchanges
What Are Centralized Exchanges?
Centralized exchanges are exchanges that maintain custody of the users’ funds while providing them with 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. Popular 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 in a trustless manner.
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 having to sacrifice custody and privacy.
Decentralized exchanges are less prone to hacks and other security issues that are rampant with centralized exchanges.
However, their major problem is lack of liquidity and trading volume, due partly to the fact that they’re everything but user-friendly and there’s so much that still needs to be done in terms of development to bring DEX to the current status, volume and liquidity of centralized exchanges.
How Many Exchanges are There?
According to CoinMarketCap, there are exactly 332 cryptocurrency exchanges at the time of writing this article and many more are being launched almost every other month.
Sadly, the majority of these exchanges are going nowhere but down the path of exit scam, bankruptcy or just plain uselessness.
To save you the stress of having to evaluate hundreds of exchanges to determine which are safe for you to trade cryptocurrencies we have prepared a list of the top crypto exchanges you can simply pick from —here
How You Should Use Cryptocurrency Exchanges
Have you ever heard –not your keys, not your coin?
Never “store”, “save”, “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 exit-scam, that’s the end of the story.
It’s game over for you and you can kiss your coins good-bye forever, except of course 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 constant up and down movement of the market 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, you the coins you want to trade have to first be sent to an exchange and converted to another crypto or you simply by with your visa or MasterCard.
However, after this one-off transaction, you should transfer the funds to a safe wallet that you control 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 it –and again you’re at the mercy of the exchange. If they get hacked or decide to call it quit 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 serious challenge.
- You never keep or “store” your cryptocurrencies on an exchange, except you’re a regular trader.
- If you can stake any other way –especially directly from your wallet, then avoid staking on a cryptocurrency exchange.
- 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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