Final Verdict

If you want to start trading or investing in cryptocurrencies, it’s critical to select the appropriate exchange for your needs. There is a good option for you whether you want the most currencies, the lowest fees, or the easiest experience. All you need is a funded account to buy your first bitcoin, whether it’s through our overall winner Coinbase or a competitor like Binance.

Understanding the Types of Cryptocurrency Exchanges

To choose the best exchange for your needs, it is important to fully understand the types of exchanges.

Centralized Exchange

The centralized exchange is the first and most popular type of exchange. Coinbase, Binance, Kraken, and Gemini are examples of popular exchanges in this category. These are private companies that provide bitcoin trading platforms. The Know Your Customer (or Know Your Client) guideline requires registration and identity for certain transactions.

All of the above exchanges have active trading, significant volumes, and liquidity. Centralized exchanges, on the other hand, are incompatible with the Bitcoin ideology. They run on their own private servers, creating an attack vector. 3 If the company’s servers are hacked, the entire system could be shut down for a period of time. Worse, sensitive information about its users may be made public.

The larger, more well-known centralized exchanges provide by far the smoothest on-ramp for new users, and they even offer some form of insurance in the event that their systems fail. While this is true, when you buy cryptocurrency on these exchanges, it is housed in their custodial wallets rather than your own wallet, which you control.

The insurance given is only valid if the exchange is at fault. If your computer and Coinbase account, for example, were to be hacked, you would lose all of your money and be unable to file a claim for insurance. This is why it is critical to withdraw big sums of money and store them safely.

Decentralized Exchange

Decentralized exchanges function in the same way as Bitcoin. There is no central point of control in a decentralized exchange. Instead, think of it as a server, except that each computer on the server is distributed around the globe, and each computer that makes up one part of the server is controlled by a single person. If one of these computers fails, the network will continue to function since there are enough additional computers to keep the network working.

This is in stark contrast to a single corporation operating a single server in a single location. Attacking something that is dispersed and decentralized in this way is far more difficult, making such attempts implausible and likely futile.

Because of this decentralization, these types of exchanges are not subject to the restrictions of any regulatory authority, as the system is not controlled by a single person or group. Individuals who engage come and go, therefore a government or regulatory body can’t realistically pursue any one person or group. This means that those who trade on the site are not required to reveal their identities and are free to utilize the network in any way they see fit, whether legal or illegal.

What Is a Cryptocurrency Exchange? How Does It Work?

An online marketplace where users can buy, sell, and trade bitcoin is known as a cryptocurrency exchange. Users can deposit fiat currency (such as US dollars) and use those funds to purchase cryptocurrencies on a cryptocurrency exchange, which works similarly to an online brokerage. Users can also swap their cryptocurrency for other cryptocurrencies, and some exchanges allow users to earn interest on their bitcoin holdings.

How Do You Buy Cryptocurrency?

Most centralized exchanges allow you to buy cryptocurrencies with funds from your bank account, credit card, or debit card. The funds can then be exchanged for the cryptocurrency of your choice. While some exchanges simply offer a simple “Buy Now” transaction that only allows you to place a market order, others allow you to place more complicated order types such as limit and stop orders.

When you buy bitcoin, the exchange usually takes custody of it, and most exchanges hold it in offline “cold storage” for safekeeping. Most exchanges allow you to transfer cryptocurrency to your “hot” or “cold” wallet, along with the private keys for that cryptocurrency, if you want to take custody of it yourself.