What are cryptocurrency exchanges?
Cryptocurrency exchanges are online platforms where users can exchange one cryptocurrency for another. The exchange rates are based on the market value of the given assets at that moment in time. Most cryptocurrency exchanges allow for crypto-to-crypto exchange, while some even allow trading fiat for cryptocurrency and the other way around. An important thing to notice is that cryptocurrency exchanges are not cryptocurrency wallets or wallet brokerages. Cryptocurrency wallets and wallet brokerages allow their users to buy and sell a small range of popular cryptocurrencies.
Types of cryptocurrency exchanges
There are four main types of cryptocurrency exchanges:
- Traditional cryptocurrency exchanges
- Cryptocurrency brokers
- Direct trading platforms
- Cryptocurrency funds
Traditional Cryptocurrency Exchanges
Traditional cryptocurrency exchanges are all exchanges that act like the traditional stock exchanges. Users can buy and sell their assets based on supply and demand, which creates market prices. The exchange acts as a middleman in the process and charges trading fees for transacting. While most of these exchanges only exchange cryptocurrency, some allow users to trade fiat currencies for cryptocurrencies.
These exchanges can be centralized and decentralized. Centralized exchanges are run by third parties and hold their user’s keys. They act as support and problem solvers. Decentralized Exchanges (DEXs) operate by trading that is based on smart contracts. There are no centralized third parties, and the wallet keys remain in the hands of its users. While decentralized exchanges sound like a better option, they are often slow and do not support fiat trading.
Cryptocurrency brokers are website-based exchanges that allow its users to buy and sell cryptocurrencies at a price set by the broker rather than the market. This price usually has a premium on the market price. The exchange is between the buyer or seller and the broker acting as the other party. Coinbase and Shapeshift are good examples of cryptocurrency brokers. For the slightly higher price, brokers offer ease of use and convenience in general.
Direct Trading Platforms
Direct trading platforms offer peer-to-peer trading between buyers and sellers, and they don’t use a fixed market price. They let sellers dictate their exchange rate while buyers find sellers they like and perform an over-the-counter exchange. Many decentralized exchanges work this way, but most of them still fall under the traditional exchange category. LocalBitcoin.com is a great example of a centralized peer-to-peer exchange that allows fiat-to-crypto exchange.
Cryptocurrency funds are professionally managed cryptocurrency asset pools. These funds allow users to buy and hold cryptocurrency via their services. GBTC is a prime example of cryptocurrency funds. Cryptocurrency funds let its users invest in cryptocurrency without ever having to purchase or store it by themselves. On the other hand, the bought cryptocurrencies are only there as an investment and cannot be used.
There are many forms of cryptocurrency exchanges, but they all try to achieve the same goal: customer satisfaction. While some focus on the ease of use, others focus on the options that they provide. Crypto-trading beginners will most likely want to use traditional exchanges or brokers.