Cryptocurrency exchanges are platforms where you can exchange a cryptocurrency for another cryptocurrency. You also exchange it for fiat currency. Depending on the exchange, it is either like a stock exchange or a currency exchange. There are different types of cryptocurrency exchanges as below:
- “Traditional” Cryptocurrency Exchanges:
These exchange are like the traditional stock exchanges where buyers and sellers trade based on the current market price of cryptocurrencies (with the exchange as the middle-man). These exchanges generally charge a fee for transactions. Some of these types of exchanges deal only in cryptocurrency, others allow traders to pay fiat currencies like the U.S. dollar for cryptocurrencies like Bitcoin. Coinbase’s GDAX (AKA Coinbase Pro) is an example of this type of exchange, as is Kraken. There is a middle man who can do support and correct some problems in some exchanges. Others as Decentralized Exchanges or DEXs mimic traditional exchanges like IDEX (trading is based on smart contracts and not facilitated via a centralized third party’s software for the most part). In general centralized exchanges will ask for a lot of info, but often allow fiat trading, and DEX exchanges won’t allow fiat trading, but require less information.
- Cryptocurrency Brokers:
These are exchanges based on website which are like the currency exchange at an airport. They allow customers to purchase and sell cryptocurrencies at a price set by the broker (generally at the market price plus a small premium). Here the exchange is between the buyer or seller and the broker, not between a buyer and seller. Coinbase is an example of this exchanges of exchange and so is Cash App. Shapeshift provides a similar service as well (it lets you swap on type of token for another). This is the simplest way for new users. You’ll generally pay slightly higher prices than you do on the exchanges because of the ease of use and the work the broker puts in.
- Direct Trading Platforms:
These platforms offer direct peer-to-peer trading between trades. This type doesn’t use a fixed market price. Sellers set their own exchange rate and buyers either find sellers via the platform, or they denote the rates they want to buy for and the platform matches them. There are exchanges of this type that deal to very big traders and the average buyer or seller, you’ll likely encounter the second type. Many Decentralized Exchanges can be included in this type (although some are closer to being like traditional exchanges, which is why they are listed in the first category). This type of exchange can be the only way in some regions where trading is limited to direct exchange, but it isn’t smart contract based (like it is with DEX exchanges. First you have to make sure to do some extra research and ensure you are using a right platform and dealing with highly rated users. Also, make sure to check market prices on Coinmarketcap, as you aren’t trading at a fixed market price.
- Cryptocurrency Funds:
Funds are pools of professionally managed cryptocurrency assets allowing public buy and hold cryptocurrency via the fund. One example is GBTC. Using funds you can invest in cryptocurrency without having to buy or store it directly. As a trade-off, you can’t use crypto in a fund as money, these are strictly for investment.
Which exchange should I use?
In regions where Coinbase operates, if you are a newcomer, start with Coinbase/GDAX (Coinbase Pro) and take it from there. Those aren’t the only choices, but Coinbase is beginner friendly and provides the most important of the above types, Traditional and Broker services. But generally exchanges and products mentioned above are good options according to your needs and knowledge.