What does Cryptocurrency Exchange mean?
A cryptocurrency exchange is any system that operates on the basis of trading cryptocurrencies with other assets. Like a traditional financial exchange, the cryptocurrency exchange’s core operation is to allow for the buying and selling of these digital assets, as well as others.
A cryptocurrency exchange is also known as a digital currency exchange (DCE).
Think about the ways that these new types of exchanges are different from traditional financial exchanges. Cryptocurrencies are inherently unstable in terms of value and sourcing. Cryptocurrencies like bitcoin have been associated with major disruptive events where bitcoin value changed dramatically over a short period of time, or where major exchanges went under due to theft, fraud or other problems.
Cryptocurrency exchanges have to build in protections from some of these events. However, these exchanges do serve as a key vehicle for liquid use of cryptocurrency assets.
Read more on What is cryptocurrency and why do we need it?
In other ways, cryptocurrency exchanges work just like traditional exchanges. On many of these platforms, cryptocurrency buyers and sellers can make limit orders or market orders, and the brokering process works like it would for any other kind of asset. The cryptocurrency exchange helps with the transaction and collects the fees. The difference is the underlying asset – Bitcoin or Ethereum or some other cryptocurrency that does not have the same valuation properties as a national currency.
There are several types of cryptocurrency exchanges:
“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 cryptocurrencies (with the exchange playing the middle-man). These type of trading platforms generally charge a fee for each transaction.
Some of these types of exchanges deal only in cryptocurrency, others allow users to trade fiat currencies like the U.S. dollar for cryptocurrencies like Bitcoin.
Coinbase’s GDAX (AKA Coinbase Pro) is an example of this type of exchange, as is Kraken. There are those run by third parties (they have a middle man who supports and correct some problems) and Decentralized Exchanges or DEXs that mimic traditional exchanges like IDEX (trading is based on smart contracts and not facilitated via a centralized third party’s software for the most part).
Generally, 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.
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. Coinbase is an example of this type of exchange. Shapeshift provides a similar service as well (it lets you swap on a type of token for another).
This is the simplest solution for new users. You’ll generally pay slightly higher prices than you do on the exchanges due to the ease of use and the work the broker puts in.
Direct Trading Platforms
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 and preform an Over the Counter (OTC) Exchange, or they denote the rates they are willing to buy for and the platform matches buyers and sellers.
Many Decentralized Exchanges are of this type (although some are closer to being like traditional exchanges, which is why they are listed in the first category).
This type of exchange can be the only solution in some regions. In regions where trading is limited to direct exchange, but where trading isn’t smart contract based (like it is with DEX exchanges), 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 Coinmarketcap, as you aren’t buying/selling at a fixed market price!
For an example of a decentralized peer-to-peer direct trading platform, see AirSwap.io (here the DEX facilitates direct swaps between users via smart contracts, and thus may require no information). For an example of a centralized peer-to-peer exchange that facilitates the exchange of fiat and crypto, see LocalBitcoins.com.
Funds are pools of professionally managed cryptocurrency assets which allows public buy and hold cryptocurrency via the fund. One such 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.
In almost every case a person new to crypto trading will want to use an 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 to some, they tend to have a range of restrictions. GBTC and ETCG are the only funds open to the public for example.