As long as you know what you are doing, buying and trading cryptocurrencies can be a great source of extra income. Moreover, you can choose to buy bitcoin and sell it on a regular basis and become a full-time trader.
However, to be successful in your venture, you must choose a cryptocurrency exchange that is reliable, safe, fast, and cost-effective. In this article, we will explore the different types of cryptocurrency exchanges, and lay down their pros and cons.
In addition, we will give you a general overview of the main characteristics a good crypto exchange should possess. After reading this post, you should have acquired sufficient knowledge on how to choose the best exchange for your particular trading and investing styles. Let’s get started.
Types of Cryptocurrency Exchanges
Before we delve into the details of what to look for in a crypto exchange, it might be a good idea to have a quick overview of the different types of crypto trading platforms available on the market today.
Centralized exchanges
The most popular type of cryptocurrency exchange available is centralized exchange (CEX). These platforms offer a great variety of coins, as well as multiple methods of payment, including FIAT, making them convenient for the day trader.
These exchanges match the buy and sell orders of the users and take a commission for providing this service. In addition to spot trading, centralized exchanges often offer additional financial products based on cryptocurrencies such as futures contracts and other speculative instruments.
Centralized exchanges are run by a single company that controls the wallets and accounts on the platform. Consequently, users need to deposit funds on an online wallet before they can trade. This means that when you buy crypto on a centralized exchange, the exchange conserves the custody of your funds until the moment you decide to withdraw your crypto from the platform.
The main advantage of these types of exchanges is their high liquidity and the fact that you can directly withdraw your crypto into FIAT funds. Do note that buying and selling crypto for FIAT will almost always require some kind of KYC procedure.
Decentralized Exchanges
Thanks to the growth of smart contract technology and the DeFi ecosystem, decentralized exchanges (DEX) are becoming increasingly popular with crypto traders. On DEXes, instead of a trusted third-party, the buy and sell orders are matched by smart contracts.
The smart contracts charge a small fee for this service, which is distributed to the users that provide the liquidity for the trading platform. Because there’s no intermediary ensuring the trade, traders get to keep the custody of their funds at all times. All they need to do is to connect a crypto wallet such as Metamask to the platform and they can start trading.
With that said, the caveat is that DEXes do not offer FIAT to crypto trading. Moreover, trading is usually limited to smart-contract tokens such as ERC-20 on Ethereum or BEP20 on the Binance Smart Chain.
Crypto Brokers
Crypto broker platforms are great for beginner investors as they allow you to purchase cryptocurrencies using traditional payment methods. These usually include credit and debit cards, bank transfers, or digital payment processors like PayPal or Skrill.
Another advantage of these platforms is that they don’t require you to deposit funds on an online wallet. Instead, they will directly send you your crypto to your private wallet upon purchase. Worth noting is that these platforms will offer a small selection of coins for purchase and rarely have the option for the user to sell their crypto.
As such, they are great for the sporadic crypto purchaser, but the absence of a trading interface will be suboptimal for day traders.
How to Choose a Cryptocurrency Exchange
When deciding which type of exchange you want to use for your crypto purchases and trading, there are some important characteristics you might want to consider.
Regional Restrictions
Depending on where their headquarters are located, exchanges will limit their services to certain regions. Before you even start creating an account on a cryptocurrency exchange, you should always head on to the terms and services part of their website.
Usually, CEXes and brokers will provide a list of restricted regions where they can’t offer their services due to regulations in the country they are based. In certain cases, only a selection of their services might be restricted, so make sure you read the fine print.
For instance, some exchanges might not offer futures trading in some regions but still provide spot trading. Keep in mind that these restrictions only apply to centralized exchanges. In contrast, anyone in the world can use DEX trading services, as there are no restrictions on who can access their smart contract functionalities.
Payment Limits and Methods
Another important aspect of a cryptocurrency exchange is the selection of payment methods accepted. Always make sure to check all the options that are offered to buy crypto before you decide to use an exchange. For example, if you plan on using your bank account to make crypto purchases, ensure that the exchange supports SEPA or WIRE transfers.
Moreover, make sure you check out the maximum and minimum purchases you can make on that exchange. For instance, if you are planning to purchase large amounts of crypto at regular intervals, look for an exchange with higher purchasing limits.
Withdrawal Limits and Methods
Similar to our previous point, withdrawals are just as, if not more important than payments. Consequently, ensure that the exchange you are about to choose supports acceptable withdrawal limits for your style of trading. Additionally, it should offer a wide array of withdrawal methods, like bank transfers, in the case of CEXes.
Selection of Coins and Market Pairs
Yet another important characteristic you should consider before choosing a crypto exchange is the selection of cryptocurrencies they offer. If you are interested in a particular coin, check whether the exchange offers it and if the liquidity is decent.
Additionally, you should check whether the desired market pair is on offer. For instance, if you wish to trade USDT for ETH, ensure that the market pair USDT/ETH is present on the exchange. Otherwise, you would need to go through needless steps like USDT/BTC, then BTC/ETH, and pay additional fees in the process.
Fees
If you are planning to turn your cryptocurrency trading into a regular thing, you should consider the fees required for each trade. Some exchanges are more expensive than others, so make sure to check the fine print in their “fees and commissions” sections and compare them with each other.
Worth noting is that many crypto exchanges have their proprietary crypto that will grant you discounts on trading fees and withdrawals (BNB for Binance, HT for Huobi, etc.)
Overall Ratings
Finally, when choosing a cryptocurrency exchange, you should check its overall ratings on a third-party review platform like Trustpilot. Here, you will get first-hand testimonials from real users regarding withdrawals times, KYC procedures, and other important insider information.
Conclusion
To be a successful trader or investor in the cryptocurrency market, you need a reliable platform where you can buy and sell your coins. With more than 300 CEXes and hundreds of DEXes, finding the right one can be a challenging task.
Before you engage in your first trade, take the time to consider the type of exchange you want to use. Then, check out all of the aspects we talked about in this article and begin your cryptocurrency adventure.