What Is A Cryptocurrency Exchange?
You may have heard about cryptocurrency and the exchanges where you can buy and trade digital tokens; what exactly are these exchanges? Cryptocurrency exchanges are online platforms where you can exchange one type of cryptocurrency either for another type, or for fiat currency, such as USD. Depending on the exchange, it acts like either a stock exchange, or a currency exchange such as the kind you would find at an airport or bank.
There are several different styles of exchange. In general, there are the types:
“Traditional” Cryptocurrency Exchanges
These are the exchanges that are modeled after traditional stock exchanges, where buyers and sellers trade currency based on the current market price, with the exchange playing the role of middleman. These trading platforms usually charge a fee for each transaction. Depending on the currency, you’ll be able to trade cryptocurrency only, or trade with fiat currencies. Coinbase’s GDAX is a popular traditional exchange, as is Kraken.
Those exchanges that are run by third parties (they have a middleman who runs support and corrects problems) means they’re centralized. Exchanges that focus on peer-to-peer interactions and don’t have a middleman are decentralized. EtherDelta is an example of this type of peer-to-peer exchange.
Direct Trading Platforms
These platforms support direct peer-to-peer trading between buyers and sellers, but don’t involve an exchange platform. These also don’t use a fixed market price: sellers set their own exchange rate, and buyers perform either an Over the Counter (OTC) Exchange, or they denote the rates they’re willing to buy for. The platform matches buyers and sellers. This solution is rarely the best one or easy for newcomers, but in some regions, it’s the only option. If you live in a region where trading is limited to this, conduct research to ensure you’re using a trusted platform, and deal with highly rated users. Also make sure to check Coinmarketcap so you know you aren’t buying or selling at a fixed market price.
These are website-based exchanges that are most like fiat currency exchanges at airports; they allow customers to buy and sell cryptocurrencies whose price is set by the broker. Generally, the price will be market price plus a premium, just like currency exchanges’ rates tend to be higher at airports. These are great for beginners, and Coinbase is a popular, beginner-friendly example of this type of exchange.
These funds are pools of cryptocurrency assets that are professionally managed, and which allow the public to buy and hold cryptocurrency via the fund. An example is GBTC, which is the only fund open to the public. By using a fund, you can invest in cryptocurrency without having to purchase or store it directly yourself.
In most cases, you’ll want to use an exchange or broker to obtain cryptocurrency. It’s often recommended to start with Coinbase/GDAX if you’re new, and take it from there, as these are the most beginner-friendly. With a little exploration and research, you’ll find the right cryptocurrency exchange for you.