A cryptocurrency exchange is an online platform that matches buyers and sellers of digital assets. It’s important to choose a regulated and reliable exchange with low fees and robust security features.
Some exchanges act like brokers (facilitating crypto transactions for a fee), while others operate more like banks by taking deposits and lending them to third parties to profit from interest rates. Check out Cryptsy for more information.
What is a Cryptocurrency Exchange?
Cryptocurrency exchanges facilitate the buying and selling of digital assets. Users can deposit conventional fiat currencies like USD or EUR, and the exchange will then trade them for cryptocurrencies on their platform. Exchanges can be centralized or decentralized, and they offer different trading features to suit user needs.
A cryptocurrency exchange works similar to a broker, allowing you to buy and sell coins at current prices. They can also provide you with storage options for your digital assets that are more secure than keeping them in a wallet on your computer or mobile device.
Cryptocurrency exchanges aren’t regulated to the same extent as securities brokers and investment firms, so proper research is required to make sure you select the right one for your needs. Ensure you’re dealing with a trusted exchange that has adequate security features and is registered as a money transmitter in the US. If not, you may lose the value of your digital assets if the exchange goes under.
Types of Crypto Exchanges
There are several different kinds of crypto exchanges, with varying levels of security and fees. It is important to find one that supports the cryptocurrencies you want to invest in and that meets your needs.
Some offer fiat on-ramps, which allow you to buy crypto with traditional currencies like USD and Euros, and off-ramps, which let you withdraw your crypto back into fiat. These are designed to make it easier for people to access the cryptocurrency market.
Others are decentralized, which means that they are not owned or controlled by a single entity. These offer lower fees but may require more technical expertise to use. They also lack the kind of oversight that you might be used to with regulated financial markets, such as the New York Stock Exchange or Chicago Mercantile Exchange. They are also more vulnerable to hackers. However, they are often more popular with investors who want to minimize their risk exposure.
Fees
Cryptocurrency exchange fees vary but typically depend on the type of cryptocurrency being traded and the fee structure of the platform. Some exchanges charge a flat trading fee on every trade, while others use a combination of maker and taker fees. In general, a taker fee is charged when your buy or sell order matches an existing offer, and the transaction decreases the exchange’s liquidity. A maker fee, on the other hand, is charged when your order doesn’t match an existing offer and adds liquidity to the market.
Many cryptocurrency exchanges offer discounted or tier-based fee schedules that decrease as your average 30-day trading volume increases. For instance, Coinbase offers lower rates for traders who make large trading volumes. Traders who prefer decentralized exchanges should prioritize protocols built on blockchains that offer competitive transaction fees. For example, dYdX’s use of the L2 StarkEx blockchain minimizes the gas fees you pay when trading Hedgies non-fungible tokens (NFTs). Other fees may also be applicable when liquidating your digital assets into fiat currency, including transfer and deposit fees, plus the network’s blockchain gas fees.
Security
Cryptocurrency exchanges use a variety of security measures to protect users from hacker penetrations and other cyber threats. These include encrypting user accounts and digital assets, using firewalls and intrusion detection systems, implementing two-factor authentication (2FA), requiring customers to verify their identity with government-issued documents, conducting regular security audits and assessments, and adhering to established regulatory standards.
However, despite these precautions, hackers can still steal cryptocurrency from an exchange. To do so, they need to obtain the wallet data of a victim, which is stored on the exchange servers. Once they have this information, they can access the victim’s account and transfer money to their own wallets.
To prevent this, you should only store your cryptocurrency on an exchange if you’re actively trading it. Otherwise, it’s best to move your coins to a secure wallet that supports 2FA and has a strong password policy. You can also enable withdrawal whitelists and IP restrictions to enhance your protection.