Beginners Guide

A Complete Guide to Cryptocurrency Exchanges for Beginners

Author: Qadir AK

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Author

Qadir Ak is the founder of Coinpedia. He has over a decade of experience writing about technology and has been covering the blockchain and cryptocurrency space since 2010. He has also interviewed a few prominent experts within the cryptocurrency space.

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So you have heard about cryptocurrencies, especially after the unbelievable market growth it caused worldwide in the last few years and was in news all the time. whichever the crypto may be, the first thing everyone wants is to get knowledge and own it.

So if you’re wondering where to buy cryptocurrency, using a cryptocurrency exchange platform is likely where you’ll start your investment journey. Cryptocurrency exchanges are online platforms used to buy and sell cryptocurrency.

If you’re new to the field, there’s much to learn. However, it’s best to start with the most crucial tip of all Don’t trade with money you can’t afford to lose. It’s easy to get caught up in the earning potential- fast returns and quick profits- but one can get swept away in a matter of seconds. Never borrow money to invest in crypto, and take only as big a risk as you can bear without burning a massive hole in your pocket.

You have that tip to remember as we move on to learn everything about crypto exchanges!

Read on!

What Is A Cryptocurrency Exchange?

Cryptocurrency Exchange or Digital Currency Exchanges (DCE) are financial platforms where investors, millennials, and even amateurs can purchase, store and sell digital assets related to cryptocurrencies such as Bitcoin, Litecoin, and Ethereum.

Crypto exchanges offer users an intuitive, quick, and user-friendly approach to acquiring cryptocurrencies and trading, whether in exchange for fiat currency or other cryptocurrency tokens.

Before we can fully understand cryptocurrency exchanges, we must evaluate the fundamental differences between cryptocurrency exchanges and traditional financial exchanges. At this point, it’s evident that cryptocurrencies are pretty unstable and volatile in terms of market value and sourcing, and the recent surge in Bitcoin price is the greatest example.

Although cryptocurrencies are still minor in comparison to the broader financial industry, coins like Bitcoin have been associated with major disruptive events that changed the FinTech landscape dramatically.

For now, let’s explore the history of cryptocurrency exchanges, where it all started, and what were the first platforms that ruled the early days.

How did Cryptocurrency Exchanges Come Into Existence?

The concept of cryptocurrency exchanges has surfaced ever since the dawn of digital currencies, not with Bitcoin in 2008, but instead with eCash, developed by David Chaum in 1993.

While this concept was introduced 25 years before the unveiling of Bitcoin, the first commercial example of exchange came into existence in 2009, which registered the first Bitcoin to Fiat transaction on October 12, where New Liberty Standard and Sirius exchanged 5.05 BTC for just $5.02 through PayPal. However, such transactions weren’t as simple as with modern crypto exchanges!

The first transaction in 2009 was an unbelievable milestone throughout the entire history of cryptocurrency exchanges and triggered an unprecedented transformation in FinTech. And just within three months of establishing the first cryptocurrency exchange, in February 2010, Bitcoin Market is born.

An anonymous user of BitcoinTalk created an online portal, Bitcoin Market, which allowed person-to-person Bitcoin transactions, which can be purchased and sold using payment services such as PayPal.

How do Crypto Exchanges work?

A cryptocurrency exchange acts as an intermediary – a brokerage firm- between a buyer and a seller of cryptocurrency.

It allows a buyer to make a deposit using various methods, including direct bank transfer, debit or credit cards, etc. Every transaction that uses its services is subject to a fixed commission or fee.

A buyer’s (or investor’s) first step is to find a suitable online exchange. This phase will necessitate researching the platform’s background, reputation, and trading advantages. This is vital as nowadays, several exchanges are failing and filing for bankruptcy. Do an accurate background check!

The second step is to open a trading account, which is a reasonably straightforward process.
Create an account and download the app for the exchange you’ve chosen. It will request some information from you, such as your email address. It will then send a verification email to that address and request KYC information. Verify the address on your email id to complete the KYC process. After that, create a password for the app, and you’re ready to dive into the world of cryptocurrency!

How do Exchanges Make Money?

Now let’s discuss how exchanges make money. Crypto exchanges like Coinbase make profits through different revenue streams, four of which are commissions, listing fees, market making, and fund collection. Let’s start with Commissions.

  • Commission/Trading Fees: The most efficient way of monetizing crypto exchanges (or just about anything in finance) is charging commissions in the market. The commission or trading fees facilitate intermediary services between buyers and sellers such as infrastructure, processing resources, and every minor trade facilitation fee, including electricity. In some cases, commission fees get proportionally lower as the transactional amount increases in volume and liquidity.
  • Listing Fees: With the competition getting tougher and tougher, even in such an infant landscape, emerging exchanges are struggling with low volume and require another source of income for funding in the early days. Thus, many exchanges opt for coin listing services for driving revenues. By organizing Initial Coin Offerings (ICOs), Initial Exchange Offering (IEO), and Security Token Offerings (STOs), exchanges often collect certain percentages of the total funds raised.
  • Market Making: Another significant source of revenue comes from market making or liquidity creation for any given financial instrument. At its core, market creation consists of buying and selling cryptocurrency assets at higher prices than on another exchange. When any trade happens, they swap it on another exchange that offsets the earlier trade and the differences in the profit an exchange makes. This method can yield shockingly high revenue streams if automated.
  • Fund Collection: In fund collection, further revenue streams are achieved by equipping platforms with an IEO module, which lets other enterprises organize the sale of coins. In this method, the exchange serves as a warehouse for people who buy chips before entering an exchange. An example would be much easy for understanding; this is how Kickstarter works. Owners of the crowd receive newly established tokens in exchange for well-established ones like Bitcoin.

How To Deposit Funds In The Exchange?

Step 1: As with any exchange platform, the first step associated with depositing funds will be creating your account. Once you have created one and successfully went through the verification process, you can open the trading view by visiting www.pro.coinbase.com/trade, and from the left-hand column under Wallet Balance, select the Deposit button.

Step 2: In the Currency Type field, select the cryptocurrency you want your account to be funded with and copy account address. This address will be permanently associated with your Coinbase account and will be needed for during funding in the future. Also, be sure to send currencies only supported by Coinbase or the exchange platform of your choice.

Step 3: Finally, open the external wallet you would send from, paste, or enter the unique account address with the exact amount of crypto you wish to send to your Coinbase account for funding and hit the Send button. Also, be sure double checking your account address as funds sent to wrong cryptocurrency wallets may be permanently unrecoverable.

How To Withdraw Funds From The Exchange?

Step 1: Just like funding your Coinbase account, for withdrawing your funds, browse www.pro.coinbase.com/trade or navigate through your dashboard, and from the left-hand column under Wallet Balance, click on the Withdraw option.

Step 2: Now, under the Cryptocurrency Type field, select the cryptocurrency you wish to send and specify your external wallet address. If the wallet is already saved in your address book, enter the first few characters, and select your recipient.

Step 3: As with making any financial transaction, be careful while entering the recipient address as crypto transactions on wrong addresses are irreversible. And finally, enter the amount you wish to withdraw and hit the Withdraw button.

Different Types of Exchanges

Fiat – Crypto Exchanges

These exchanges allow you to buy a cryptocurrency directly using your fiat currency (a government-issued currency like the US dollar or Pound). These are most popular with new users who are yet to explore the crypto market because it offers easy access to the cryptocurrency of their choice without difficulty.

The issue with these exchanges is that they have little support and offer fewer choices of coins. 

Crypto – Crypto Exchanges

These exchanges allow you to trade a cryptocurrency for another cryptocurrency. 

First, you need to buy a cryptocurrency on a fiat-crypto exchange and then transfer it to the wallet of the crypto-crypto exchange. After that, you can trade for the coin which you want to buy in the first place.

This is often used by experienced traders who are actively trading between coins to profit quickly or want to buy smaller less-known coins.

Peer-to-Peer Exchanges

In these exchanges, a buyer is matched with a seller, and they exchange currency at their own agreements. These exchanges match a buyer with several sellers, and the buyer can choose the best price out of the selection.

Also, they usually offer an escrow service( a financial arrangement where the third party holds and regulates the payment of the funds for two parties involved in a given transaction ) to reduce the risk for both buyer and seller.

Also Read: Peer-to-Peer (P2P) Network, The Complete Guide

Brokers

In these exchanges, you can buy cryptocurrencies from brokers directly. The brokers set their own prices, which could be higher or lower than the market price. Be sure to do your research and compare before choosing a broker to purchase from. 

Centralized vs. Decentralized vs. Hybrid Cryptocurrency Exchanges

cryptocurrency exchanges are primarily categorized into centralized and decentralized exchanges, with another being hybrid cryptocurrency exchanges. Let’s run down all three forms of exchanges and understand how they stack against.

Centralized Cryptocurrency Exchanges

Sounds counterintuitive, isn’t it? One of the prime reasons Bitcoin and other cryptos surged in popularity and replaced fiat was because of its decentralized nature. In layman’s terms, Bitcoin could neither be authorized by an intermediary nor could be imposed with jurisdiction or taxation by any government. As much as centralized exchanges may sound absurd, exchanging fiat and cryptocurrencies require serious third-party involvement for making sure that every financial operation runs as intended and any interruption is tackled immediately without downtimes, from developing the visual UI in front-end to optimizing and patching security issues in back-end.

Apart from managing exchange infrastructures, human involvement and opinion are also needed for handling specific issues within the protocol that cannot be automated. The actual crypto you are exchanging might be decentralized, but the platform securely handling your transactions and assets while offering an intuitive and user-friendly environment being centralized is far more common than its decentralized siblings. And you would be surprised knowing that leading cryptocurrency exchanges you know or might be using right now are centralized. Starting from Coinbase itself, popular platforms like Binance, Kraken, Huobi Global, Gemini, and KuCoin are all centralized cryptocurrency exchanges.

Decentralized Cryptocurrency Exchange

Unlike centralized ones, decentralized exchange or DEX are indeed closer towards the true spirit of cryptocurrencies, with no third-party or intermediary being involved in its financial operations. And being an open-source platform where users rely on peer-to-peer transactions, transaction fees and processing times would be much lower.

Decentralized exchanges are distributed just like cryptocurrency itself, thus in theory, breaching its system and laundering few coins from distributed database would be rather harder, if not impossible. This combined benefit of both lowered fees and processing delays with impenetrable security is getting appealing to seasoned users.

However in some cases, especially for beginners, the drawbacks of DEX are far more outreaching than its benefits. For example, the limited support for few national banking institutions; DEX often doesn’t offer quick transactions using Debit cards or traditional financial institutions.

Making options limited for potential new users, many DEX platforms don’t offer transactions using fiat currency at all, with the only option crypto-to-crypto transactions being available for users. On the other hand, your funds aren’t insured, leaving cold wallets as your only option for safekeeping your funds. Most importantly, if anything goes sideways, there isn’t any helpline number, with everything being decentralized.

Hybrid Cryptocurrency Exchange

With centralized exchanges being far away from the principles of cryptocurrency and decentralized exchanges being, you know, decentralized, users and even seasoned investors desperately needed an advanced and well-optimized platform for cryptocurrency exchanges.

Enter Hybrid Cryptocurrency Exchanges, which an attempt to combine the best of both worlds with instant support and funds insurance from centralized cryptocurrency exchanges as well as anonymity, low transaction fees, and faster processing spends from decentralized cryptocurrency exchanges. This lets investors benefit from the convenience of centralized exchanges and freedom of DEX platforms.

While centralized exchanges are yet to adopt principles of hybrid cryptocurrency exchanges in its financial operation, hybrid exchanges are believed to address every shortcoming of centralized and decentralized crypto exchanges.

The adoption of usability and liquidity from centralized exchanges, as well as the anonymity and security of decentralized exchanges, will together lay down the foundation for future financial infrastructure. While economists cannot predict whether hybrid cryptocurrency exchanges will completely replace centralized ones, I believe it would hold its middle-ground for keeping both amateurs and seasoned investors satisfied while serving the broader financial aspect as well.

Finding The Best Crypto Exchange

You now know a lot about cryptocurrency exchanges and how they work. However, consider some important criteria to look out for before choosing an exchange to suit your trading needs. 

  • Reputation : 

Check whether they have been ever hacked or have had issues transferring users’ money. Ensure they have suitable trading tools and if other experienced traders trust them or vouch for them. You can also go through independent users’ comments on sites such as Reddit and BitcoinTalk.

  • Exchange Rates: 

There are different exchange rates for different exchange platforms. These are the conversion rates for fiat currencies. Find those that have reasonable rates to save some money. You can find these fees on the sites’ platforms or other user reviews.

  • Restrictions: 

Some exchanges work only in specific regions or countries. You need to choose one supported by your country to avoid issues with depositing and withdrawing funds, especially if you plan to use a wire transfer.

  • Limitations:

Check for any limitations on trading. Some platforms limit the amount you can trade until you complete the verification process. The highly liquid exchanges are some of the best crypto exchange platforms as many digital coins are available. You can check this info on the exchange’s official websites.

It’s also great to pay attention to the interface of the site- is it easy to understand and navigate?

  • Verification:

Most exchanges will ask you to provide identity proof (Govt issued ID) to exchange crypto on their site. This requires you to upload your identity card and location details. Some might need you to take photos of yourself holding your identity card. 

This verification is critical to preventing fraud. It is a way for the exchange platforms to protect themselves from fraudulent traders who aim to deceive others. Also, the verification protects traders as you only get to interact with verified individuals. It reduces the chances of getting conned.

  • Fees: 

Check the fees in the exchange. You must identify their deposit, trading, and withdrawal fees and look for hidden fees that might not be openly stated. 

Some platforms have unbelievable low fees. Con artists could operate such sites to lure you and get your money. Verified exchanges would have nothing to hide and clearly state their fees on the website.

  • Payment Methods: 

Different exchanges support different payment methods. Some exchanges support debit and credit card transactions, bank wire transfers, PayPal, and others. Check the various options available in the exchange and their fees so you can choose from them. 

  • Customer Support: 

It is imperative to have quick and helpful customer support. An exchange that provides 24/7 chat support is the best since you can be helped out with your transactions at any time. Emails can be helpful only if they are responded to on time.

What are Cryptocurrency pairs?

You will use a trading pair when trading a cryptocurrency on an exchange. 

In most cases, people will be using BTC to trade against, but there are many trading pairs that you could use instead. 

Cryptocurrency trading pairs work by comparing the cost of one cryptocurrency to another.

Offering cryptocurrency or cryptocurrency pairing at this point reflects well for the centralized exchange, as it allows customers to transact for ether tokens. Fewer exchanges sell fiat currency / crypto-currency pairs, which would make, say, USD exchanges for bitcoin. 

Conclusion

Cryptocurrency exchanges have been playing an integral role in popularizing the core concept of cryptocurrency and how it can disrupt the financial sector.

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