What is a cryptocurrency exchange?
When asked to list several cryptocurrency exchanges, several individuals will find it easy to develop over ten different entities. However, most do not understand what this entity means and the services they provide.
Therefore, to put in simple and plain terms, a cryptocurrency exchange is a body or platform that allows users to buy, sell, and send cryptocurrencies between one another.
Such entities are also referred to as Digital currency exchanges. The utilization of cryptocurrency exchanges has made accessibility to digital assets relatively easy, affording such assets trading for traditional currencies (fiat currency). There are several exchanges available offering various services, including p2p services; examples include Binance, Remitano, etc.
Now that we understand what a cryptocurrency exchange is.
How does an exchange work?
Exchanges serve as mediums through which buyers and sellers meet to participate in trades daily. In the early days of the crypto space, the acquisition of digital assets was quite complicated. For an investor to acquire cryptocurrencies, they will have to mine their coins or find someone willing to sell their own Crypto. Therefore cryptocurrency exchanges bridged that gap.
There are two main types of cryptocurrency exchanges, and they include;
Decentralized exchanges : as the name implies, there is no single authority who owns or controls the platform.
Centralized exchanges: meaning the platform is owned or controlled by a body.
Take note: Each type of exchange has its pros and cons.
Exchanges function by letting users trade utilizing trading pairs. Trading pairs are currencies (digital or fiat) that users can use to acquire one another.
Example of trading pairs include;
BTC/NGN means that the Nigerian naira can purchase BTC, and BTC can also be sold for the Nigerian naira.
Some trading pairs can also be in the form of two digital currencies, BTC/ETH, which means ETH can be used to buy BTC, and BTC can be sold in return for ETH.
Therefore the second currency indicates what the investor or trader is willing to exchange for the first.
Prices of trading pairs are influenced by the demand and supply of that pair on that exchange. Therefore, it is possible to see disparities in the prices across different exchanges, which open opportunities for cryptocurrency arbitrage.
Choosing a good cryptocurrency exchange
Selecting the cryptocurrency exchange for a trader or investor is not just about just picking from the thousands available worldwide. Therefore before an individual selects a cryptocurrency exchange to make user of, he or she has to take into consideration some factors such as,
- Compatible countries and regions.
- Supported payment channels.
- Transaction fees imposed by the exchanges.
- Coin library.
- Requirements for verification.
- Highly secure.
- Trading features.
Compatible countries and regions
Some exchanges do not offer services to certain locations, except through VPNs, which have a risk also attached to such utilization. Such exchange includes Binance, which was not open to use by China and US citizens. However, US citizens now have the Finance US exchange, created to serve citizens in the United states. Coinbase is also a well-known crypto exchange. However, its services are not open to Nigerian users (utilization requires the use of VPNs).
With all these said, it is important to research the countries in which the cryptocurrency exchange serves.
Supported payment channels
As with compatible countries, some cryptocurrency exchanges accept payments through channels that might not be available to users outside the location. Therefore, most exchanges have payment channels that are designed according to the location of each user.
Therefore, intending investors or traders need to find the payment channels compatible with their cryptocurrency exchange of choice.
Transaction fees
Fees make up a crucial aspect of exchanges, and this is because fees provide revenue to the platform. However, various platforms have their unique fee pattern, with some being cheaper than others.
Therefore, an exchange with fees suitable to the respective individual should be chosen.
Coin library
Several cryptocurrencies worldwide have differing numbers of digital currencies which are provided to their uses. For example, Remitano offers its users the option to invest in over ten different assets, whereas Luno offers just about five digital currencies.
Using an exchange with a limited amount of cryptocurrencies limits the investor or trader from taking full advantage of cryptocurrencies several opportunities.
Therefore, it is advisable to choose exchanges with a larger number of coins in their library.
Requirements for verification
Most crypto exchanges have various verification requirements to be fulfilled by customers, mostly requiring individuals to divulge personal information by filling a KYC (know your customer) form.
Therefore, individuals who are sensitive about giving out private information must make adequate research into exchanges that do not require KYC.
Highly secure and customer support
Security is by far the most important aspect of any cryptocurrency exchange, and this is because an exchange lacking in security can be easily hacked and funds stolen.
Such scenarios bring to light why it is also important to use an exchange that allows users to have their private keys, and this is because whoever holds your private keys controls the funds in your wallet.
In the early years of Bitcoin, a major exchange, Mt Gox, was hacked, and this saw the loss of over $500 million worth in Bitcoin. If an investor still chooses to use an exchange that does not grant users access to their private keys, it is advisable not to trade or store large sums on it. To store large sums of Crypto, it is advised to choose a crypto wallet (hot or cold) which places you in control of your private key.
Customer support is a key factor in the running of an exchange, and this is because they aid clients to solve problems or provide aid. Therefore, it is preferred to choose an exchange that provides adequate support.
Trading features
Exchanges offer users several tools which they can use to maximize their trading or investing experience; for instance, Binance allows users to partake in futures contract trading, IEOs ( on the Binance launchpad). Therefore, this depends on your interest as a trader. However, always make adequate research before choosing an exchange based on its features.
Now that we've discussed at length the factors to consider when choosing a cryptocurrency exchange, an ideal crypto exchange would be one with.
1Affordable and flexible transaction fees.
2An exchange that supports your region and also has the appropriate payment system suitable to you.
3Provides high security to your assets.
4An exchange with several coins, therefore presenting you with options.
5Provides easy and user-friendly verification processes.
6Provides extra trading tools and customer support to users.
We have discussed the function of cryptocurrency exchanges; let us now discuss what cryptocurrency brokerages are.
Cryptocurrency brokerages
To understand the purpose of cryptocurrency brokerages, it is important to comprehend their role in the crypto space.
What is a cryptocurrency brokerage?
A brokerage can be defined as a company or platform that serves as the middleman that brings together a trader or investor and the assets' sellers. Applying this definition to the crypto space places a cryptocurrency brokerage as a platform that serves to bring buyers and sellers together.
How do brokerages work?
As earlier stated, such companies act as middlemen and earn commissions on any sale made on digital assets. There are several types of brokerages, ranging from real estate brokerages to shipping brokerages.
Initially, most crypto brokerages were foreign exchange brokerages and then included brokerage services to Crypto after its advent. However, when using a brokerage to acquire Bitcoin or any other cryptocurrency, traders or investors do not own any cryptocurrency but instead make bets on the prices of the cryptocurrency in question. Such has been explained to protect such investors from experiencing the full effect of market volatility.
Such traders are achieved on brokerages using several tools, known as derivatives, some include;
CFDs
CFDs mean Contracts for difference and entail that investors or traders make either profits or losses based on the difference between the current price and the price at which the contract was first bought.
For instance, investor A expects the Bitcoin price to increase but does not want to experience there full volatility of the Bitcoin market; he then enters a CFD with investor B at the current price of Bitcoin ($56,000), if the price of Bitcoin increases to $60,000, investor B pays investor A the difference between the two prices ($4,000).
Likewise, if the Bitcoin price reduces to $50,000, investor A would have to pay investor B the difference of $6,000, which means investor A has made a loss.
Take note: unlike the Bitcoin futures, CFDs do not have to be settled on a fixed date and can remain open for as long as the terms of the contract permit. Also, when liquidated, the price difference is derived and payments issued.
Cryptocurrency futures contracts
Crypto futures contracts are similar to the earlier discussed CFDs. However, the main difference between the two is that futures contracts have a fixed date of expiration and are more difficult to set up than contracts for difference.
In trading futures contracts, an investor anticipates a digital asset's price movement by a fixed time in the future. If the price is attained by the date given, the individual makes the profit or loss according to the price difference between the initial contact entry price and the current price. To learn more about futures contracts, read this article by Remitano.
Cryptocurrency options
Options are derivatives that are also similar to the above-listed derivatives in how they work. However, the main difference between them is that investors and traders are not bound to buy or sell at a date but can pull out from a contract at will. Doing this places the investor or trader at losing a premium, which is the fee that allows you to make such withdrawals.
Some examples of cryptocurrency brokerages include,
- eToro.
- Plus500.
- Binance.
- Okex.
- Kraken.
Take note: As earlier stated, it is important to research the cryptocurrency exchange or brokerage before use. A guide on how to choose either one has been discussed earlier.
We have discussed at length what cryptocurrency exchanges and cryptocurrency brokerages are; let us now take a look at the differences that exist between these two platforms.
Differences between cryptocurrency exchanges and brokerages
These two platforms offer a similar range of services. However, there are several differences between the two, and they include:
Ownership of assets: as earlier started, when individuals purchase digital assets from a cryptocurrency broker, they now outrightly own the coins. However, when Crypto is bought using an exchange, investors outrightly own the coins.
Regulation: cryptocurrency exchanges are considered not to be completely regulated as cryptocurrency brokerages. Brokerages mostly carry out bets on prices and require the use of contracts that have to be regulated by a governing body.
Registration and trading: for new users to use the features of cryptocurrency exchanges, they might need to fill a KYC form (some exchanges do not require this). However, users can trade without getting fully verified. In comparison, a brokerage will require full identity verification before any trading activity can be started.
Safety: several exchanges are considered safe. However, when compared to a cryptocurrency brokerage, they are not as secure as the brokers.
Fees: Fees on the cryptocurrency exchanges are considered higher when utilized in the short term. However, when individuals purchase cryptocurrencies to hold for a long time using a broker, they pay a fee. While using an exchange doesn't cause additional fees. Learn more about crypto trading fees here.
Take note: some cryptocurrency exchanges also function as brokers and do not charge for hodling assets. An example of such is Binance.
Should you use a cryptocurrency exchange or brokerage?
As clearly stated, these platforms offer similar services for investors. Therefore, choosing which is a better option depends on your aims when going into cryptocurrency trading. Investors not interested in taking the full risks of the crypto space have the choice of utilizing Cryptocurrency brokerages, while traders not worried about volatility can utilize cryptocurrency exchanges.
Conclusion
This article extensively discusses platforms through which investors and traders can participate in cryptocurrency trading. Risks exist in every aspect of the crypto space, therefore, adequate knowledge about the Niche is required before investing. To learn more about cryptocurrency trading, read this post by Remitano.
